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Derivatives (Tables)
 6 Months Ended
Jun. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Schedule of Derivatives Instruments Statements of Financial Performance and Financial Position, Location
The following table presents the primary underlying risk exposure, gross notional amount, and estimated fair value of the Company’s derivatives, excluding embedded derivatives, held at:
 
 
 
 
June 30, 2019
 
December 31, 2018
 
 
Primary Underlying Risk Exposure
 
Gross
Notional
Amount
 
Estimated Fair Value
 
Gross
Notional
Amount
 
Estimated Fair Value
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
 
 
(In millions)
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest rate
 
$
2,315

 
$
2,590

 
$
3

 
$
2,446

 
$
2,197

 
$
2

Foreign currency swaps
 
Foreign currency exchange rate
 
1,182

 
41

 
5

 
1,233

 
54

 
—

Foreign currency forwards
 
Foreign currency exchange rate
 
2,412

 
28

 
8

 
2,140

 
28

 
18

Subtotal
 
 
 
5,909

 
2,659

 
16

 
5,819

 
2,279

 
20

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest rate
 
3,792

 
184

 
8

 
3,515

 
143

 
1

Interest rate forwards
 
Interest rate
 
2,855

 
39

 
19

 
3,022

 
—

 
216

Foreign currency swaps
 
Foreign currency exchange rate
 
35,457

 
1,937

 
1,444

 
35,931

 
1,796

 
1,831

Subtotal
 
 
 
42,104

 
2,160

 
1,471

 
42,468

 
1,939

 
2,048

NIFO hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forwards
 
Foreign currency exchange rate
 
509

 
5

 
7

 
960

 
4

 
27

Currency options
 
Foreign currency exchange rate
 
3,500

 
18

 
88

 
5,137

 
3

 
202

Subtotal
 
 
 
4,009

 
23

 
95

 
6,097

 
7

 
229

Total qualifying hedges
 
52,022

 
4,842

 
1,582

 
54,384

 
4,225

 
2,297

Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest rate
 
54,465

 
2,617

 
166

 
54,891

 
1,796

 
175

Interest rate floors
 
Interest rate
 
12,701

 
186

 
—

 
12,701

 
102

 
—

Interest rate caps
 
Interest rate
 
52,388

 
30

 
2

 
54,575

 
154

 
1

Interest rate futures
 
Interest rate
 
1,786

 
—

 
—

 
2,353

 
1

 
3

Interest rate options
 
Interest rate
 
30,780

 
932

 
—

 
26,690

 
416

 
—

Interest rate forwards
 
Interest rate
 
235

 
6

 
3

 
234

 
1

 
15

Interest rate total return swaps
 
Interest rate
 
1,048

 
65

 
—

 
1,048

 
33

 
2

Synthetic GICs
 
Interest rate
 
27,219

 
—

 
—

 
25,700

 
—

 
—

Foreign currency swaps
 
Foreign currency exchange rate
 
12,860

 
833

 
466

 
11,388

 
884

 
458

Foreign currency forwards
 
Foreign currency exchange rate
 
14,320

 
108

 
228

 
13,417

 
198

 
213

Currency futures
 
Foreign currency exchange rate
 
883

 
—

 
6

 
847

 
4

 
—

Currency options
 
Foreign currency exchange rate
 
1,920

 
1

 
—

 
2,040

 
7

 
—

Credit default swaps — purchased
 
Credit
 
2,483

 
17

 
74

 
1,903

 
25

 
39

Credit default swaps — written
 
Credit
 
12,340

 
257

 
1

 
11,391

 
95

 
13

Equity futures
 
Equity market
 
3,946

 
4

 
22

 
2,992

 
13

 
77

Equity index options
 
Equity market
 
27,763

 
692

 
666

 
27,707

 
884

 
550

Equity variance swaps
 
Equity market
 
2,173

 
41

 
94

 
2,269

 
40

 
87

Equity total return swaps
 
Equity market
 
769

 
—

 
13

 
929

 
91

 
—

Total non-designated or nonqualifying derivatives
 
260,079

 
5,789

 
1,741

 
253,075

 
4,744

 
1,633

Total
 
 
 
$
312,101

 
$
10,631

 
$
3,323

 
$
307,459

 
$
8,969

 
$
3,930
Components of Net Derivatives Gains (Losses)
 
 
Three Months Ended June 30, 2019
 
 
Net Investment Income
 
Net Investment Gains (Losses)
 
Net Derivative Gains (Losses)
 
Policyholder Benefits and Claims
 
Interest Credited to Policyholder Account Balances
 
Other Expenses
 
OCI
 
 
(In millions)
Gain (Loss) on Fair Value Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
$
(1
)
 
$
—

 
$
—

 
$
205

 
$
—

 
$
—

 
N/A

Hedged items
 
2

 
—

 
—

 
(206
)
 
—

 
—

 
N/A

Foreign currency exchange rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
10

 
59

 
—

 
—

 
—

 
—

 
N/A

Hedged items
 
(11
)
 
(54
)
 
—

 
—

 
—

 
—

 
N/A

Amount excluded from the assessment of hedge effectiveness
 
—

 
(22
)
 
—

 
—

 
—

 
—

 
N/A

Subtotal
 
—

 
(17
)
 
—

 
(1
)
 
—

 
—

 
N/A

Gain (Loss) on Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives: (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
$
358

Amount of gains (losses) reclassified from AOCI into income
 
6

 
4

 
—

 
—

 
—

 
—

 
(10
)
Foreign currency exchange rate derivatives: (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
300

Amount of gains (losses) reclassified from AOCI into income
 
(1
)
 
83

 
—

 
—

 
—

 
1

 
(83
)
Foreign currency transaction gains (losses) on hedged items
 
—

 
(90
)
 
—

 
—

 
—

 
—

 
—

Credit derivatives: (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
—

Amount of gains (losses) reclassified from AOCI into income
 
—

 
(1
)
 
—

 
—

 
—

 
—

 
1

Subtotal
 
5

 
(4
)
 
—

 
—

 
—

 
1

 
566

Gain (Loss) on NIFO Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange rate derivatives (1)

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(37
)
Non-derivative hedging instruments

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(7
)
Subtotal
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(44
)
Gain (Loss) on Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives (1)
 
(1
)
 
—

 
857

 
12

 
—

 
—

 
N/A

Foreign currency exchange rate derivatives (1)
 
—

 
—

 
136

 
(4
)
 
—

 
—

 
N/A

Credit derivatives — purchased (1)
 
—

 
—

 
(5
)
 
—

 
—

 
—

 
N/A

Credit derivatives — written (1)
 
—

 
—

 
50

 
—

 
—

 
—

 
N/A

Equity derivatives (1)
 
—

 
—

 
(182
)
 
(30
)
 
—

 
—

 
N/A

Foreign currency transaction gains (losses) on hedged items
 
—

 
—

 
(111
)
 
—

 
—

 
—

 
N/A

Subtotal
 
(1
)
 
—

 
745

 
(22
)
 
—

 
—

 
N/A

Earned income on derivatives
 
60

 
—

 
125

 
33

 
(36
)
 
—

 
—

Embedded derivatives (2)
 
N/A

 
N/A

 
(146
)
 
—

 
N/A

 
N/A

 
N/A

Total
 
$
64

 
$
(21
)
 
$
724

 
$
10

 
$
(36
)
 
$
1

 
$
522

 
 
Three Months Ended June 30, 2018
 
 
Net Investment Income
 
Net Investment Gains (Losses)
 
Net Derivative Gains (Losses)
 
Policyholder Benefits and Claims
 
Interest Credited to Policyholder Account Balances
 
Other Expenses
 
OCI
 
 
(In millions)
Gain (Loss) on Fair Value Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
$
—

 
$
—

 
$
(68
)
 
$
—

 
$
—

 
$
—

 
N/A

Hedged items
 
—

 
—

 
70

 
—

 
—

 
—

 
N/A

Foreign currency exchange rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
—

 
—

 
(57
)
 
—

 
—

 
—

 
N/A

Hedged items
 
—

 
—

 
51

 
—

 
—

 
—

 
N/A

Amount excluded from the assessment of hedge effectiveness
 
—

 
—

 
(12
)
 
—

 
—

 
—

 
N/A

Subtotal
 
—

 
—

 
(16
)
 
—

 
—

 
—

 
N/A

Gain (Loss) on Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives: (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
$
(57
)
Amount of gains (losses) reclassified from AOCI into income
 
6

 
—

 
(1
)
 
—

 
—

 
1

 
(6
)
Foreign currency exchange rate derivatives: (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
198

Amount of gains (losses) reclassified from AOCI into income
 
(1
)
 
—

 
(475
)
 
—

 
—

 
—

 
476

Foreign currency transaction gains (losses) on hedged items
 
—

 
—

 
478

 
—

 
—

 
—

 
—

Credit derivatives: (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
—

Amount of gains (losses) reclassified from AOCI into income
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Subtotal
 
5

 
—

 
2

 
—

 
—

 
1

 
611

Gain (Loss) on NIFO Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange rate derivatives (1)

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
81

Non-derivative hedging instruments

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
—

Subtotal
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
81

Gain (Loss) on Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives (1)
 
—

 
—

 
(75
)
 
(5
)
 
—

 
—

 
N/A

Foreign currency exchange rate derivatives (1)
 
—

 
—

 
(1
)
 
(5
)
 
—

 
—

 
N/A

Credit derivatives — purchased (1)
 
—

 
—

 
14

 
—

 
—

 
—

 
N/A

Credit derivatives — written (1)
 
—

 
—

 
(35
)
 
—

 
—

 
—

 
N/A

Equity derivatives (1)
 
—

 
—

 
(174
)
 
(33
)
 
—

 
—

 
N/A

Foreign currency transaction gains (losses) on hedged items
 
—

 
—

 
(58
)
 
—

 
—

 
—

 
N/A

Subtotal
 
—

 
—

 
(329
)
 
(43
)
 
—

 
—

 
N/A

Earned income on derivatives
 
93

 
—

 
133

 
3

 
(28
)
 
(4
)
 
—

Embedded derivatives (2)
 
N/A

 
N/A

 
151

 
—

 
N/A

 
N/A

 
N/A

Total
 
$
98

 
$
—

 
$
(59
)
 
$
(40
)
 
$
(28
)
 
$
(3
)
 
$
692


 
 
Six Months Ended June 30, 2019
 
 
Net Investment Income
 
Net Investment Gains (Losses)
 
Net Derivative Gains (Losses)
 
Policyholder Benefits and Claims
 
Interest Credited to Policyholder Account Balances
 
Other Expenses
 
OCI
 
 
(In millions)
Gain (Loss) on Fair Value Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
$
(4
)
 
$
—

 
$
—

 
$
332

 
$
—

 
$
—

 
N/A

Hedged items
 
5

 
—

 
—

 
(334
)
 
—

 
—

 
N/A

Foreign currency exchange rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
(20
)
 
45

 
—

 
—

 
—

 
—

 
N/A

Hedged items
 
18

 
(42
)
 
—

 
—

 
—

 
—

 
N/A

Amount excluded from the assessment of hedge effectiveness
 
—

 
(38
)
 
—

 
—

 
—

 
—

 
N/A

Subtotal
 
(1
)

(35
)

—


(2
)
 
—

 
—

 
N/A

Gain (Loss) on Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
$
610

Amount of gains (losses) reclassified from AOCI into income
 
11

 
(2
)
 
—

 
—

 
—

 
1

 
(10
)
Foreign currency exchange rate derivatives: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
59

Amount of gains (losses) reclassified from AOCI into income
 
(3
)
 
108

 
—

 
—

 
—

 
1

 
(106
)
Foreign currency transaction gains (losses) on hedged items
 
—

 
(125
)
 
—

 
—

 
—

 
—

 
—

Credit derivatives: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
—

Amount of gains (losses) reclassified from AOCI into income
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Subtotal
 
8

 
(19
)
 
—

 
—

 
—

 
2

 
553

Gain (Loss) on NIFO Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange rate derivatives (1)
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(43
)
Non-derivative hedging instruments
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(7
)
Subtotal
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(50
)
Gain (Loss) on Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives (1)
 
(2
)
 
—

 
1,266

 
31

 
—

 
—

 
N/A

Foreign currency exchange rate derivatives (1)
 
—

 
—

 
(6
)
 
(1
)
 
—

 
—

 
N/A

Credit derivatives — purchased (1)
 
—

 
—

 
(20
)
 
—

 
—

 
—

 
N/A

Credit derivatives — written (1)
 
—

 
—

 
186

 
—

 
—

 
—

 
N/A

Equity derivatives (1)
 
—

 
—

 
(849
)
 
(126
)
 
—

 
—

 
N/A

Foreign currency transaction gains (losses) on hedged items
 
—

 
—

 
(29
)
 
—

 
—

 
—

 
N/A

Subtotal
 
(2
)
 
—

 
548

 
(96
)
 
—

 
—

 
N/A

Earned income on derivatives
 
116

 
—

 
244

 
65

 
(68
)
 
—

 
—

Embedded derivatives (2)
 
N/A

 
N/A

 
47

 
—

 
N/A

 
N/A

 
N/A

Total
 
$
121

 
$
(54
)
 
$
839

 
$
(33
)
 
$
(68
)
 
$
2

 
$
503


 
 
Six Months Ended June 30, 2018
 
 
Net Investment Income
 
Net Investment Gains (Losses)
 
Net Derivative Gains (Losses)
 
Policyholder Benefits and Claims
 
Interest Credited to Policyholder Account Balances
 
Other Expenses
 
OCI
 
 
(In millions)
Gain (Loss) on Fair Value Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
$
—

 
$
—

 
$
(278
)
 
$
—

 
$
—

 
$
—

 
N/A

Hedged items
 
—

 
—

 
280

 
—

 
—

 
—

 
N/A

Foreign currency exchange rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
—

 
—

 
113

 
—

 
—

 
—

 
N/A

Hedged items
 
—

 
—

 
(108
)
 
—

 
—

 
—

 
N/A

Amount excluded from the assessment of hedge effectiveness
 
—

 
—

 
(20
)
 
—

 
—

 
—

 
N/A

Subtotal
 
—

 
—

 
(13
)
 
—

 
—

 
—

 
N/A

Gain (Loss) on Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
$
(334
)
Amount of gains (losses) reclassified from AOCI into income
 
10

 
—

 
20

 
—

 
—

 
1

 
(31
)
Foreign currency exchange rate derivatives: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
123

Amount of gains (losses) reclassified from AOCI into income
 
(1
)
 
—

 
(336
)
 
—

 
—

 
1

 
336

Foreign currency transaction gains (losses) on hedged items
 
—

 
—

 
340

 
—

 
—

 
—

 
—

Credit derivatives: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
—

Amount of gains (losses) reclassified from AOCI into income
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Subtotal
 
9

 
—

 
24

 
—

 
—

 
2

 
94

Gain (Loss) on NIFO Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange rate derivatives (1)
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(76
)
Non-derivative hedging instruments
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
—

Subtotal
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(76
)
Gain (Loss) on Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives (1)
 
4

 
—

 
(310
)
 
(12
)
 
—

 
—

 
N/A

Foreign currency exchange rate derivatives (1)
 
—

 
—

 
386

 
(3
)
 
—

 
—

 
N/A

Credit derivatives — purchased (1)
 
—

 
—

 
11

 
—

 
—

 
—

 
N/A

Credit derivatives — written (1)
 
—

 
—

 
(79
)
 
—

 
—

 
—

 
N/A

Equity derivatives (1)
 
1

 
—

 
(76
)
 
(21
)
 
—

 
—

 
N/A

Foreign currency transaction gains (losses) on hedged items
 
—

 
—

 
(107
)
 
—

 
—

 
—

 
N/A

Subtotal
 
5

 
—

 
(175
)
 
(36
)
 
—

 
—

 
N/A

Earned income on derivatives
 
174

 
—

 
266

 
5

 
(51
)
 
(6
)
 
—

Embedded derivatives (2)
 
N/A

 
N/A

 
188

 
—

 
N/A

 
N/A

 
N/A

Total
 
$
188

 
$
—

 
$
290

 
$
(31
)
 
$
(51
)
 
$
(4
)
 
$
18

__________________
(1)
Excludes earned income on derivatives.
(2)
The valuation of guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses) in connection with this adjustment were ($13) million and ($75) million for the three months and six months ended June 30, 2019, respectively, and ($25) million and ($5) million for the three months and six months ended June 30, 2018, respectively.
Net derivatives gains (losses) recognized on fair value derivatives and the related hedged items
The following table presents the balance sheet classification, carrying amount and cumulative fair value hedging adjustments for items designated and qualifying as hedged items in fair value hedges:
 
 
June 30, 2019
Balance Sheet Line Item
 
Carrying Amount
 of the Hedged
Assets/(Liabilities)
 
Cumulative Amount
of Fair Value Hedging Adjustments
Included in the Carrying Amount of Hedged
Assets/(Liabilities) (1)
 
 
(In millions)
Fixed maturity securities AFS
 
$
2,613

 
$
(1
)
Mortgage loans
 
$
1,096

 
$
6

Future policy benefits
 
$
(4,286
)
 
$
(873
)
Policyholder account balances
 
$
(74
)
 
$
—

__________________
(1)
Includes ($1) million of hedging adjustments on discontinued hedging relationships.
Schedule of estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps
The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps at:
 
 
June 30, 2019
 
December 31, 2018
Rating Agency Designation of Referenced
Credit Obligations (1)
 
Estimated
Fair Value
of Credit
Default
Swaps
 
Maximum
Amount of Future
Payments under
Credit Default
Swaps
 
Weighted
Average
Years to
Maturity (2)
 
Estimated
Fair Value
of Credit
Default
Swaps
 
Maximum
Amount of Future
Payments under
Credit Default
Swaps
 
Weighted
Average
Years to
Maturity (2)
 
 
(Dollars in millions)
Aaa/Aa/A
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps (3)
 
$
5

 
$
386

 
1.5

 
$
4

 
$
354

 
1.7

Credit default swaps referencing indices
 
38

 
2,504

 
2.4

 
28

 
2,154

 
2.5

Subtotal
 
43

 
2,890

 
2.3

 
32

 
2,508

 
2.4

Baa
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps (3)
 
3

 
368

 
1.3

 
3

 
482

 
1.5

Credit default swaps referencing indices
 
185

 
8,742

 
5.1

 
40

 
8,056

 
5.0

Subtotal
 
188

 
9,110

 
4.9

 
43

 
8,538

 
4.8

Ba
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps (3)
 
—

 
10

 
1.0

 
—

 
15

 
2.0

Credit default swaps referencing indices
 
—

 
—

 
—

 
—

 
—

 
—

Subtotal
 
—

 
10

 
1.0

 
—

 
15

 
2.0

B
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps (3)
 
—

 
—

 
—

 
—

 
—

 
—

Credit default swaps referencing indices
 
25

 
330

 
5.0

 
7

 
330

 
5.0

Subtotal
 
25

 
330

 
5.0

 
7

 
330

 
5.0

Total
 
$
256

 
$
12,340

 
4.3

 
$
82

 
$
11,391

 
4.3

__________________
(1)
The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s Investors Service (“Moody’s”), S&P Global Ratings (“S&P”) and Fitch Ratings. If no rating is available from a rating agency, then an internally developed rating is used.
(2)
The weighted average years to maturity of the credit default swaps is calculated based on weighted average gross notional amounts.
(3)
Single name credit default swaps may be referenced to the credit of corporations, foreign governments, or municipals.
Estimated Fair Value of Derivative Assets and Liabilities after Master Netting Agreements and Cash Collateral
The estimated fair values of the Company’s net derivative assets and net derivative liabilities after the application of master netting agreements and collateral were as follows at:
 
 
June 30, 2019
 
December 31, 2018
Derivatives Subject to a Master Netting Arrangement or a Similar Arrangement 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
(In millions)
Gross estimated fair value of derivatives:
 
 
 
 
 
 
 
 
OTC-bilateral (1)
 
$
10,134

 
$
3,224

 
$
8,805

 
$
3,758

OTC-cleared (1)
 
588

 
32

 
245

 
33

Exchange-traded
 
4

 
28

 
18

 
80

Total gross estimated fair value of derivatives presented on the interim condensed consolidated balance sheets (1)
 
10,726

 
3,284

 
9,068

 
3,871

Gross amounts not offset on the interim condensed consolidated balance sheets:
 
 
 
 
 
 
 
 
Gross estimated fair value of derivatives: (2)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(2,453
)
 
(2,453
)
 
(2,570
)
 
(2,570
)
OTC-cleared
 
(12
)
 
(12
)
 
(25
)
 
(25
)
Exchange-traded
 
—

 
—

 
(1
)
 
(1
)
Cash collateral: (3), (4)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(4,476
)
 
—

 
(4,709
)
 
—

OTC-cleared
 
(540
)
 
(4
)
 
(145
)
 
—

Exchange-traded
 
—

 
(15
)
 
—

 
(57
)
Securities collateral: (5)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(3,002
)
 
(738
)
 
(1,266
)
 
(1,134
)
OTC-cleared
 
—

 
(10
)
 
—

 
(8
)
Exchange-traded
 
—

 
(13
)
 
—

 
(7
)
Net amount after application of master netting agreements and collateral
 
$
243

 
$
39

 
$
352

 
$
69

__________________
(1)
At June 30, 2019 and December 31, 2018, derivative assets included income or (expense) accruals reported in accrued investment income or in other liabilities of $95 million and $99 million, respectively, and derivative liabilities included (income) or expense accruals reported in accrued investment income or in other liabilities of ($39) million and ($59) million, respectively.
(2)
Estimated fair value of derivatives is limited to the amount that is subject to set-off and includes income or expense accruals.
(3)
Cash collateral received by the Company for OTC-bilateral and OTC-cleared derivatives is included in cash and cash equivalents, short-term investments or in fixed maturity securities AFS, and the obligation to return it is included in payables for collateral under securities loaned and other transactions on the balance sheet.
(4)
The receivable for the return of cash collateral provided by the Company is inclusive of initial margin on exchange-traded and OTC-cleared derivatives and is included in premiums, reinsurance and other receivables on the balance sheet. The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements. At June 30, 2019 and December 31, 2018, the Company received excess cash collateral of $221 million and $135 million, respectively, and provided excess cash collateral of $274 million and $226 million, respectively, which is not included in the table above due to the foregoing limitation.
(5)
Securities collateral received by the Company is held in separate custodial accounts and is not recorded on the balance sheet. Subject to certain constraints, the Company is permitted by contract to sell or re-pledge this collateral, but at June 30, 2019, none of the collateral had been sold or re-pledged. Securities collateral pledged by the Company is reported in fixed maturity securities AFS on the balance sheet. Subject to certain constraints, the counterparties are permitted by contract to sell or re-pledge this collateral. The amount of securities collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements and cash collateral. At June 30, 2019 and December 31, 2018, the Company received excess securities collateral with an estimated fair value of $153 million and $70 million, respectively, for its OTC-bilateral derivatives, which are not included in the table above due to the foregoing limitation. At June 30, 2019 and December 31, 2018, the Company provided excess securities collateral with an estimated fair value of $104 million and $212 million, respectively, for its OTC-bilateral derivatives, and $730 million and $601 million, respectively, for its OTC-cleared derivatives, and $126 million and $90 million, respectively, for its exchange-traded derivatives, which are not included in the table above due to the foregoing limitation.
Estimated Fair Value of Derivative Assets and Liabilities after Master Netting Agreements and Cash Collateral
The estimated fair values of the Company’s net derivative assets and net derivative liabilities after the application of master netting agreements and collateral were as follows at:
 
 
June 30, 2019
 
December 31, 2018
Derivatives Subject to a Master Netting Arrangement or a Similar Arrangement 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
(In millions)
Gross estimated fair value of derivatives:
 
 
 
 
 
 
 
 
OTC-bilateral (1)
 
$
10,134

 
$
3,224

 
$
8,805

 
$
3,758

OTC-cleared (1)
 
588

 
32

 
245

 
33

Exchange-traded
 
4

 
28

 
18

 
80

Total gross estimated fair value of derivatives presented on the interim condensed consolidated balance sheets (1)
 
10,726

 
3,284

 
9,068

 
3,871

Gross amounts not offset on the interim condensed consolidated balance sheets:
 
 
 
 
 
 
 
 
Gross estimated fair value of derivatives: (2)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(2,453
)
 
(2,453
)
 
(2,570
)
 
(2,570
)
OTC-cleared
 
(12
)
 
(12
)
 
(25
)
 
(25
)
Exchange-traded
 
—

 
—

 
(1
)
 
(1
)
Cash collateral: (3), (4)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(4,476
)
 
—

 
(4,709
)
 
—

OTC-cleared
 
(540
)
 
(4
)
 
(145
)
 
—

Exchange-traded
 
—

 
(15
)
 
—

 
(57
)
Securities collateral: (5)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(3,002
)
 
(738
)
 
(1,266
)
 
(1,134
)
OTC-cleared
 
—

 
(10
)
 
—

 
(8
)
Exchange-traded
 
—

 
(13
)
 
—

 
(7
)
Net amount after application of master netting agreements and collateral
 
$
243

 
$
39

 
$
352

 
$
69

__________________
(1)
At June 30, 2019 and December 31, 2018, derivative assets included income or (expense) accruals reported in accrued investment income or in other liabilities of $95 million and $99 million, respectively, and derivative liabilities included (income) or expense accruals reported in accrued investment income or in other liabilities of ($39) million and ($59) million, respectively.
(2)
Estimated fair value of derivatives is limited to the amount that is subject to set-off and includes income or expense accruals.
(3)
Cash collateral received by the Company for OTC-bilateral and OTC-cleared derivatives is included in cash and cash equivalents, short-term investments or in fixed maturity securities AFS, and the obligation to return it is included in payables for collateral under securities loaned and other transactions on the balance sheet.
(4)
The receivable for the return of cash collateral provided by the Company is inclusive of initial margin on exchange-traded and OTC-cleared derivatives and is included in premiums, reinsurance and other receivables on the balance sheet. The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements. At June 30, 2019 and December 31, 2018, the Company received excess cash collateral of $221 million and $135 million, respectively, and provided excess cash collateral of $274 million and $226 million, respectively, which is not included in the table above due to the foregoing limitation.
(5)
Securities collateral received by the Company is held in separate custodial accounts and is not recorded on the balance sheet. Subject to certain constraints, the Company is permitted by contract to sell or re-pledge this collateral, but at June 30, 2019, none of the collateral had been sold or re-pledged. Securities collateral pledged by the Company is reported in fixed maturity securities AFS on the balance sheet. Subject to certain constraints, the counterparties are permitted by contract to sell or re-pledge this collateral. The amount of securities collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements and cash collateral. At June 30, 2019 and December 31, 2018, the Company received excess securities collateral with an estimated fair value of $153 million and $70 million, respectively, for its OTC-bilateral derivatives, which are not included in the table above due to the foregoing limitation. At June 30, 2019 and December 31, 2018, the Company provided excess securities collateral with an estimated fair value of $104 million and $212 million, respectively, for its OTC-bilateral derivatives, and $730 million and $601 million, respectively, for its OTC-cleared derivatives, and $126 million and $90 million, respectively, for its exchange-traded derivatives, which are not included in the table above due to the foregoing limitation.
Derivative Instruments, Gain (Loss) [Line Items]  
Derivative Instruments and Hedging Activities Disclosure [Text Block] 7. Derivatives
Accounting for Derivatives
Freestanding Derivatives
Freestanding derivatives are carried on the Company’s balance sheet either as assets within other invested assets or as liabilities within other liabilities at estimated fair value. The Company does not offset the estimated fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement.
Accruals on derivatives are generally recorded in accrued investment income or within other liabilities. However, accruals that are not scheduled to settle within one year are included with the derivative’s carrying value in other invested assets or other liabilities.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the estimated fair value of the derivative are reported in net derivative gains (losses) except as follows:
Statement of Operations Presentation:
Derivative:
Policyholder benefits and claims
•
Economic hedges of variable annuity guarantees included in future policy benefits
Net investment income
•
Economic hedges of equity method investments in joint ventures
 
•
Derivatives held within Unit-linked investments
Hedge Accounting
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge. Hedge designation and financial statement presentation of changes in estimated fair value of the hedging derivatives are as follows:
•
Fair value hedge - a hedge of the estimated fair value of a recognized asset or liability - in the same line item as the earnings effect of the hedged item. The carrying value of the hedged recognized asset or liability is adjusted for changes in its estimated fair value due to the hedged risk.
•
Cash flow hedge - a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability - in OCI and reclassified into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
•
Net investment in a foreign operation (“NIFO”) hedge - in OCI, consistent with the translation adjustment for the hedged net investment in the foreign operation.
The changes in estimated fair values of the hedging derivatives are exclusive of any accruals that are separately reported on the statement of operations within interest income or interest expense to match the location of the hedged item. Accruals on derivatives in net investment hedges are recognized in OCI.
In its hedge documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and at least quarterly throughout the life of the designated hedging relationship. Assessments of hedge effectiveness are also subject to interpretation and estimation and different interpretations or estimates may have a material effect on the amount reported in net income.
The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item; (ii) the derivative expires, is sold, terminated, or exercised; (iii) it is no longer probable that the hedged forecasted transaction will occur; or (iv) the derivative is de-designated as a hedging instrument.
When hedge accounting is discontinued because it is determined that the derivative is not highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item, the derivative continues to be carried on the balance sheet at its estimated fair value, with changes in estimated fair value recognized in net derivative gains (losses). The carrying value of the hedged recognized asset or liability under a fair value hedge is no longer adjusted for changes in its estimated fair value due to the hedged risk, and the cumulative adjustment to its carrying value is amortized into income over the remaining life of the hedged item. Provided the hedged forecasted transaction is still probable of occurring, the changes in estimated fair value of derivatives recorded in OCI related to discontinued cash flow hedges are released into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
When hedge accounting is discontinued because it is no longer probable that the forecasted transactions will occur on the anticipated date or within two months of that date, the derivative continues to be carried on the balance sheet at its estimated fair value, with changes in estimated fair value recognized currently in net derivative gains (losses). Deferred gains and losses of a derivative recorded in OCI pursuant to the discontinued cash flow hedge of a forecasted transaction that is no longer probable of occurring are recognized immediately in net investment gains (losses).
In all other situations in which hedge accounting is discontinued, the derivative is carried at its estimated fair value on the balance sheet, with changes in its estimated fair value recognized in the current period as net derivative gains (losses).
Embedded Derivatives
The Company sold variable annuities and issues certain insurance products and investment contracts and is a party to certain reinsurance agreements that have embedded derivatives. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated. The embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative if:
•
the combined instrument is not accounted for in its entirety at estimated fair value with changes in estimated fair value recorded in earnings;
•
the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract; and
•
a separate instrument with the same terms as the embedded derivative would qualify as a derivative instrument.
Such embedded derivatives are carried on the balance sheet at estimated fair value with the host contract and changes in their estimated fair value are generally reported in net derivative gains (losses). If the Company is unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income. Additionally, the Company may elect to carry an entire contract on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income if that contract contains an embedded derivative that requires bifurcation. At inception, the Company attributes to the embedded derivative a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits. Any additional fees represent “excess” fees and are reported in universal life and investment-type product policy fees.
See Note 8 for information about the fair value hierarchy for derivatives.
Derivative Strategies
The Company is exposed to various risks relating to its ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. The Company uses a variety of strategies to manage these risks, including the use of derivatives.
Derivatives are financial instruments with values derived from interest rates, foreign currency exchange rates, credit spreads and/or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter (“OTC”) market. Certain of the Company’s OTC derivatives are cleared and settled through central clearing counterparties (“OTC-cleared”), while others are bilateral contracts between two counterparties (“OTC-bilateral”). The types of derivatives the Company uses include swaps, forwards, futures and option contracts. To a lesser extent, the Company uses credit default swaps and structured interest rate swaps to synthetically replicate investment risks and returns which are not readily available in the cash markets.
Interest Rate Derivatives
The Company uses a variety of interest rate derivatives to reduce its exposure to changes in interest rates, including interest rate swaps, interest rate total return swaps, caps, floors, swaptions, futures and forwards.
Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). In an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional amount. The Company utilizes interest rate swaps in fair value, cash flow and nonqualifying hedging relationships.
The Company uses structured interest rate swaps to synthetically create investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and a cash instrument such as a U.S. government and agency, or other fixed maturity securities AFS. Structured interest rate swaps are included in interest rate swaps and are not designated as hedging instruments.
Interest rate total return swaps are swaps whereby the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of an asset or a market index and a benchmark interest rate, calculated by reference to an agreed notional amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by the counterparty at each due date. Interest rate total return swaps are used by the Company to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). The Company utilizes interest rate total return swaps in nonqualifying hedging relationships.
The Company purchases interest rate caps primarily to protect its floating rate liabilities against rises in interest rates above a specified level, and against interest rate exposure arising from mismatches between assets and liabilities, and interest rate floors primarily to protect its minimum rate guarantee liabilities against declines in interest rates below a specified level. In certain instances, the Company locks in the economic impact of existing purchased caps and floors by entering into offsetting written caps and floors. The Company utilizes interest rate caps and floors in nonqualifying hedging relationships.
In exchange-traded interest rate (Treasury and swap) futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of interest rate securities, to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts and to pledge initial margin based on futures exchange requirements. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded interest rate (Treasury and swap) futures are used primarily to hedge mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets, to hedge against changes in value of securities the Company owns or anticipates acquiring, to hedge against changes in interest rates on anticipated liability issuances by replicating Treasury or swap curve performance, and to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. The Company utilizes exchange-traded interest rate futures in nonqualifying hedging relationships.
Swaptions are used by the Company to hedge interest rate risk associated with the Company’s long-term liabilities and invested assets. A swaption is an option to enter into a swap with a forward starting effective date. In certain instances, the Company locks in the economic impact of existing purchased swaptions by entering into offsetting written swaptions. The Company pays a premium for purchased swaptions and receives a premium for written swaptions. The Company utilizes swaptions in nonqualifying hedging relationships. Swaptions are included in interest rate options.
The Company enters into interest rate forwards to buy and sell securities. The price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. The Company utilizes interest rate forwards in cash flow and nonqualifying hedging relationships.
A synthetic guaranteed interest contract (“GIC”) is a contract that simulates the performance of a traditional GIC through the use of financial instruments. Under a synthetic GIC, the contractholder owns the underlying assets. The Company guarantees a rate of return on those assets for a premium. Synthetic GICs are not designated as hedging instruments.
Foreign Currency Exchange Rate Derivatives
The Company uses foreign currency exchange rate derivatives, including foreign currency swaps, foreign currency forwards, currency options and exchange-traded currency futures, to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. The Company also uses foreign currency derivatives to hedge the foreign currency exchange rate risk associated with certain of its net investments in foreign operations.
In a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a fixed exchange rate, generally set at inception, calculated by reference to an agreed upon notional amount. The notional amount of each currency is exchanged at the inception and termination of the currency swap by each party. The Company utilizes foreign currency swaps in fair value, cash flow and nonqualifying hedging relationships.
In a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. The Company utilizes foreign currency forwards in fair value, NIFO hedges and nonqualifying hedging relationships.
The Company enters into currency options that give it the right, but not the obligation, to sell the foreign currency amount in exchange for a functional currency amount within a limited time at a contracted price. The contracts may also be net settled in cash, based on differentials in the foreign currency exchange rate and the strike price. The Company uses currency options to hedge against the foreign currency exposure inherent in certain of its variable annuity products. The Company also uses currency options as an economic hedge of foreign currency exposure related to the Company’s non-U.S. subsidiaries. The Company utilizes currency options in NIFO hedges and nonqualifying hedging relationships.
To a lesser extent, the Company uses exchange-traded currency futures to hedge currency mismatches between assets and liabilities, and to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. The Company utilizes exchange-traded currency futures in nonqualifying hedging relationships.
Credit Derivatives
The Company enters into purchased credit default swaps to hedge against credit-related changes in the value of its investments. In a credit default swap transaction, the Company agrees with another party to pay, at specified intervals, a premium to hedge credit risk. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the delivery of par quantities of the referenced investment equal to the specified swap notional amount in exchange for the payment of cash amounts by the counterparty equal to the par value of the investment surrendered. Credit events vary by type of issuer but typically include bankruptcy, failure to pay debt obligations and involuntary restructuring for corporate obligors, as well as repudiation, moratorium or governmental intervention for sovereign obligors. In each case, payout on a credit default swap is triggered only after the Credit Derivatives Determinations Committee of the International Swaps and Derivatives Association, Inc. (“ISDA”) deems that a credit event has occurred. The Company utilizes credit default swaps in nonqualifying hedging relationships.
The Company enters into written credit default swaps to synthetically create credit investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and one or more cash instruments, such as U.S. government and agency, or other fixed maturity securities AFS. These credit default swaps are not designated as hedging instruments.
The Company enters into forwards to lock in the price to be paid for forward purchases of certain securities. The price is agreed upon at the time of the contract and payment for the contract is made at a specified future date. When the primary purpose of entering into these transactions is to hedge against the risk of changes in purchase price due to changes in credit spreads, the Company designates these transactions as credit forwards. The Company utilizes credit forwards in cash flow hedging relationships.
Equity Derivatives
The Company uses a variety of equity derivatives to reduce its exposure to equity market risk, including equity index options, equity variance swaps, exchange-traded equity futures and equity total return swaps.
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. To hedge against adverse changes in equity indices, the Company enters into contracts to sell the underlying equity index within a limited time at a contracted price. The contracts will be net settled in cash based on differentials in the indices at the time of exercise and the strike price. Certain of these contracts may also contain settlement provisions linked to interest rates. In certain instances, the Company may enter into a combination of transactions to hedge adverse changes in equity indices within a pre-determined range through the purchase and sale of options. The Company utilizes equity index options in nonqualifying hedging relationships.
Equity variance swaps are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. In an equity variance swap, the Company agrees with another party to exchange amounts in the future, based on changes in equity volatility over a defined period. The Company utilizes equity variance swaps in nonqualifying hedging relationships.
In exchange-traded equity futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of equity securities, to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts and to pledge initial margin based on futures exchange requirements. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded equity futures are used primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. The Company utilizes exchange-traded equity futures in nonqualifying hedging relationships.
In an equity total return swap, the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of an asset or a market index and a benchmark interest rate, calculated by reference to an agreed notional amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract based on the terms of the swap. The Company uses equity total return swaps to hedge its equity market guarantees in certain of its insurance products. Equity total return swaps can be used as hedges or to synthetically create investments. The Company utilizes equity total return swaps in nonqualifying hedging relationships.
Primary Risks Managed by Derivatives
The following table presents the primary underlying risk exposure, gross notional amount, and estimated fair value of the Company’s derivatives, excluding embedded derivatives, held at:
 
 
 
 
June 30, 2019
 
December 31, 2018
 
 
Primary Underlying Risk Exposure
 
Gross
Notional
Amount
 
Estimated Fair Value
 
Gross
Notional
Amount
 
Estimated Fair Value
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
 
 
(In millions)
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest rate
 
$
2,315

 
$
2,590

 
$
3

 
$
2,446

 
$
2,197

 
$
2

Foreign currency swaps
 
Foreign currency exchange rate
 
1,182

 
41

 
5

 
1,233

 
54

 
—

Foreign currency forwards
 
Foreign currency exchange rate
 
2,412

 
28

 
8

 
2,140

 
28

 
18

Subtotal
 
 
 
5,909

 
2,659

 
16

 
5,819

 
2,279

 
20

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest rate
 
3,792

 
184

 
8

 
3,515

 
143

 
1

Interest rate forwards
 
Interest rate
 
2,855

 
39

 
19

 
3,022

 
—

 
216

Foreign currency swaps
 
Foreign currency exchange rate
 
35,457

 
1,937

 
1,444

 
35,931

 
1,796

 
1,831

Subtotal
 
 
 
42,104

 
2,160

 
1,471

 
42,468

 
1,939

 
2,048

NIFO hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forwards
 
Foreign currency exchange rate
 
509

 
5

 
7

 
960

 
4

 
27

Currency options
 
Foreign currency exchange rate
 
3,500

 
18

 
88

 
5,137

 
3

 
202

Subtotal
 
 
 
4,009

 
23

 
95

 
6,097

 
7

 
229

Total qualifying hedges
 
52,022

 
4,842

 
1,582

 
54,384

 
4,225

 
2,297

Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest rate
 
54,465

 
2,617

 
166

 
54,891

 
1,796

 
175

Interest rate floors
 
Interest rate
 
12,701

 
186

 
—

 
12,701

 
102

 
—

Interest rate caps
 
Interest rate
 
52,388

 
30

 
2

 
54,575

 
154

 
1

Interest rate futures
 
Interest rate
 
1,786

 
—

 
—

 
2,353

 
1

 
3

Interest rate options
 
Interest rate
 
30,780

 
932

 
—

 
26,690

 
416

 
—

Interest rate forwards
 
Interest rate
 
235

 
6

 
3

 
234

 
1

 
15

Interest rate total return swaps
 
Interest rate
 
1,048

 
65

 
—

 
1,048

 
33

 
2

Synthetic GICs
 
Interest rate
 
27,219

 
—

 
—

 
25,700

 
—

 
—

Foreign currency swaps
 
Foreign currency exchange rate
 
12,860

 
833

 
466

 
11,388

 
884

 
458

Foreign currency forwards
 
Foreign currency exchange rate
 
14,320

 
108

 
228

 
13,417

 
198

 
213

Currency futures
 
Foreign currency exchange rate
 
883

 
—

 
6

 
847

 
4

 
—

Currency options
 
Foreign currency exchange rate
 
1,920

 
1

 
—

 
2,040

 
7

 
—

Credit default swaps — purchased
 
Credit
 
2,483

 
17

 
74

 
1,903

 
25

 
39

Credit default swaps — written
 
Credit
 
12,340

 
257

 
1

 
11,391

 
95

 
13

Equity futures
 
Equity market
 
3,946

 
4

 
22

 
2,992

 
13

 
77

Equity index options
 
Equity market
 
27,763

 
692

 
666

 
27,707

 
884

 
550

Equity variance swaps
 
Equity market
 
2,173

 
41

 
94

 
2,269

 
40

 
87

Equity total return swaps
 
Equity market
 
769

 
—

 
13

 
929

 
91

 
—

Total non-designated or nonqualifying derivatives
 
260,079

 
5,789

 
1,741

 
253,075

 
4,744

 
1,633

Total
 
 
 
$
312,101

 
$
10,631

 
$
3,323

 
$
307,459

 
$
8,969

 
$
3,930


Based on gross notional amounts, a substantial portion of the Company’s derivatives was not designated or did not qualify as part of a hedging relationship at both June 30, 2019 and December 31, 2018. The Company’s use of derivatives includes (i) derivatives that serve as macro hedges of the Company’s exposure to various risks and that generally do not qualify for hedge accounting due to the criteria required under the portfolio hedging rules; (ii) derivatives that economically hedge insurance liabilities that contain mortality or morbidity risk and that generally do not qualify for hedge accounting because the lack of these risks in the derivatives cannot support an expectation of a highly effective hedging relationship; (iii) derivatives that economically hedge embedded derivatives that do not qualify for hedge accounting because the changes in estimated fair value of the embedded derivatives are already recorded in net income; and (iv) written credit default swaps and interest rate swaps that are used to synthetically create investments and that do not qualify for hedge accounting because they do not involve a hedging relationship. For these nonqualified derivatives, changes in market factors can lead to the recognition of fair value changes on the statement of operations without an offsetting gain or loss recognized in earnings for the item being hedged.
The Effects of Derivatives on the Interim Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
The following table presents the consolidated financial statement location and amount of gain (loss) recognized on fair value, cash flow, NIFO, nonqualifying hedging relationships and embedded derivatives:
 
 
Three Months Ended June 30, 2019
 
 
Net Investment Income
 
Net Investment Gains (Losses)
 
Net Derivative Gains (Losses)
 
Policyholder Benefits and Claims
 
Interest Credited to Policyholder Account Balances
 
Other Expenses
 
OCI
 
 
(In millions)
Gain (Loss) on Fair Value Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
$
(1
)
 
$
—

 
$
—

 
$
205

 
$
—

 
$
—

 
N/A

Hedged items
 
2

 
—

 
—

 
(206
)
 
—

 
—

 
N/A

Foreign currency exchange rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
10

 
59

 
—

 
—

 
—

 
—

 
N/A

Hedged items
 
(11
)
 
(54
)
 
—

 
—

 
—

 
—

 
N/A

Amount excluded from the assessment of hedge effectiveness
 
—

 
(22
)
 
—

 
—

 
—

 
—

 
N/A

Subtotal
 
—

 
(17
)
 
—

 
(1
)
 
—

 
—

 
N/A

Gain (Loss) on Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives: (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
$
358

Amount of gains (losses) reclassified from AOCI into income
 
6

 
4

 
—

 
—

 
—

 
—

 
(10
)
Foreign currency exchange rate derivatives: (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
300

Amount of gains (losses) reclassified from AOCI into income
 
(1
)
 
83

 
—

 
—

 
—

 
1

 
(83
)
Foreign currency transaction gains (losses) on hedged items
 
—

 
(90
)
 
—

 
—

 
—

 
—

 
—

Credit derivatives: (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
—

Amount of gains (losses) reclassified from AOCI into income
 
—

 
(1
)
 
—

 
—

 
—

 
—

 
1

Subtotal
 
5

 
(4
)
 
—

 
—

 
—

 
1

 
566

Gain (Loss) on NIFO Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange rate derivatives (1)

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(37
)
Non-derivative hedging instruments

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(7
)
Subtotal
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(44
)
Gain (Loss) on Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives (1)
 
(1
)
 
—

 
857

 
12

 
—

 
—

 
N/A

Foreign currency exchange rate derivatives (1)
 
—

 
—

 
136

 
(4
)
 
—

 
—

 
N/A

Credit derivatives — purchased (1)
 
—

 
—

 
(5
)
 
—

 
—

 
—

 
N/A

Credit derivatives — written (1)
 
—

 
—

 
50

 
—

 
—

 
—

 
N/A

Equity derivatives (1)
 
—

 
—

 
(182
)
 
(30
)
 
—

 
—

 
N/A

Foreign currency transaction gains (losses) on hedged items
 
—

 
—

 
(111
)
 
—

 
—

 
—

 
N/A

Subtotal
 
(1
)
 
—

 
745

 
(22
)
 
—

 
—

 
N/A

Earned income on derivatives
 
60

 
—

 
125

 
33

 
(36
)
 
—

 
—

Embedded derivatives (2)
 
N/A

 
N/A

 
(146
)
 
—

 
N/A

 
N/A

 
N/A

Total
 
$
64

 
$
(21
)
 
$
724

 
$
10

 
$
(36
)
 
$
1

 
$
522

 
 
Three Months Ended June 30, 2018
 
 
Net Investment Income
 
Net Investment Gains (Losses)
 
Net Derivative Gains (Losses)
 
Policyholder Benefits and Claims
 
Interest Credited to Policyholder Account Balances
 
Other Expenses
 
OCI
 
 
(In millions)
Gain (Loss) on Fair Value Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
$
—

 
$
—

 
$
(68
)
 
$
—

 
$
—

 
$
—

 
N/A

Hedged items
 
—

 
—

 
70

 
—

 
—

 
—

 
N/A

Foreign currency exchange rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
—

 
—

 
(57
)
 
—

 
—

 
—

 
N/A

Hedged items
 
—

 
—

 
51

 
—

 
—

 
—

 
N/A

Amount excluded from the assessment of hedge effectiveness
 
—

 
—

 
(12
)
 
—

 
—

 
—

 
N/A

Subtotal
 
—

 
—

 
(16
)
 
—

 
—

 
—

 
N/A

Gain (Loss) on Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives: (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
$
(57
)
Amount of gains (losses) reclassified from AOCI into income
 
6

 
—

 
(1
)
 
—

 
—

 
1

 
(6
)
Foreign currency exchange rate derivatives: (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
198

Amount of gains (losses) reclassified from AOCI into income
 
(1
)
 
—

 
(475
)
 
—

 
—

 
—

 
476

Foreign currency transaction gains (losses) on hedged items
 
—

 
—

 
478

 
—

 
—

 
—

 
—

Credit derivatives: (1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
—

Amount of gains (losses) reclassified from AOCI into income
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Subtotal
 
5

 
—

 
2

 
—

 
—

 
1

 
611

Gain (Loss) on NIFO Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange rate derivatives (1)

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
81

Non-derivative hedging instruments

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
—

Subtotal
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
81

Gain (Loss) on Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives (1)
 
—

 
—

 
(75
)
 
(5
)
 
—

 
—

 
N/A

Foreign currency exchange rate derivatives (1)
 
—

 
—

 
(1
)
 
(5
)
 
—

 
—

 
N/A

Credit derivatives — purchased (1)
 
—

 
—

 
14

 
—

 
—

 
—

 
N/A

Credit derivatives — written (1)
 
—

 
—

 
(35
)
 
—

 
—

 
—

 
N/A

Equity derivatives (1)
 
—

 
—

 
(174
)
 
(33
)
 
—

 
—

 
N/A

Foreign currency transaction gains (losses) on hedged items
 
—

 
—

 
(58
)
 
—

 
—

 
—

 
N/A

Subtotal
 
—

 
—

 
(329
)
 
(43
)
 
—

 
—

 
N/A

Earned income on derivatives
 
93

 
—

 
133

 
3

 
(28
)
 
(4
)
 
—

Embedded derivatives (2)
 
N/A

 
N/A

 
151

 
—

 
N/A

 
N/A

 
N/A

Total
 
$
98

 
$
—

 
$
(59
)
 
$
(40
)
 
$
(28
)
 
$
(3
)
 
$
692


 
 
Six Months Ended June 30, 2019
 
 
Net Investment Income
 
Net Investment Gains (Losses)
 
Net Derivative Gains (Losses)
 
Policyholder Benefits and Claims
 
Interest Credited to Policyholder Account Balances
 
Other Expenses
 
OCI
 
 
(In millions)
Gain (Loss) on Fair Value Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
$
(4
)
 
$
—

 
$
—

 
$
332

 
$
—

 
$
—

 
N/A

Hedged items
 
5

 
—

 
—

 
(334
)
 
—

 
—

 
N/A

Foreign currency exchange rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
(20
)
 
45

 
—

 
—

 
—

 
—

 
N/A

Hedged items
 
18

 
(42
)
 
—

 
—

 
—

 
—

 
N/A

Amount excluded from the assessment of hedge effectiveness
 
—

 
(38
)
 
—

 
—

 
—

 
—

 
N/A

Subtotal
 
(1
)

(35
)

—


(2
)
 
—

 
—

 
N/A

Gain (Loss) on Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
$
610

Amount of gains (losses) reclassified from AOCI into income
 
11

 
(2
)
 
—

 
—

 
—

 
1

 
(10
)
Foreign currency exchange rate derivatives: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
59

Amount of gains (losses) reclassified from AOCI into income
 
(3
)
 
108

 
—

 
—

 
—

 
1

 
(106
)
Foreign currency transaction gains (losses) on hedged items
 
—

 
(125
)
 
—

 
—

 
—

 
—

 
—

Credit derivatives: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
—

Amount of gains (losses) reclassified from AOCI into income
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Subtotal
 
8

 
(19
)
 
—

 
—

 
—

 
2

 
553

Gain (Loss) on NIFO Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange rate derivatives (1)
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(43
)
Non-derivative hedging instruments
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(7
)
Subtotal
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(50
)
Gain (Loss) on Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives (1)
 
(2
)
 
—

 
1,266

 
31

 
—

 
—

 
N/A

Foreign currency exchange rate derivatives (1)
 
—

 
—

 
(6
)
 
(1
)
 
—

 
—

 
N/A

Credit derivatives — purchased (1)
 
—

 
—

 
(20
)
 
—

 
—

 
—

 
N/A

Credit derivatives — written (1)
 
—

 
—

 
186

 
—

 
—

 
—

 
N/A

Equity derivatives (1)
 
—

 
—

 
(849
)
 
(126
)
 
—

 
—

 
N/A

Foreign currency transaction gains (losses) on hedged items
 
—

 
—

 
(29
)
 
—

 
—

 
—

 
N/A

Subtotal
 
(2
)
 
—

 
548

 
(96
)
 
—

 
—

 
N/A

Earned income on derivatives
 
116

 
—

 
244

 
65

 
(68
)
 
—

 
—

Embedded derivatives (2)
 
N/A

 
N/A

 
47

 
—

 
N/A

 
N/A

 
N/A

Total
 
$
121

 
$
(54
)
 
$
839

 
$
(33
)
 
$
(68
)
 
$
2

 
$
503


 
 
Six Months Ended June 30, 2018
 
 
Net Investment Income
 
Net Investment Gains (Losses)
 
Net Derivative Gains (Losses)
 
Policyholder Benefits and Claims
 
Interest Credited to Policyholder Account Balances
 
Other Expenses
 
OCI
 
 
(In millions)
Gain (Loss) on Fair Value Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
$
—

 
$
—

 
$
(278
)
 
$
—

 
$
—

 
$
—

 
N/A

Hedged items
 
—

 
—

 
280

 
—

 
—

 
—

 
N/A

Foreign currency exchange rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments (1)
 
—

 
—

 
113

 
—

 
—

 
—

 
N/A

Hedged items
 
—

 
—

 
(108
)
 
—

 
—

 
—

 
N/A

Amount excluded from the assessment of hedge effectiveness
 
—

 
—

 
(20
)
 
—

 
—

 
—

 
N/A

Subtotal
 
—

 
—

 
(13
)
 
—

 
—

 
—

 
N/A

Gain (Loss) on Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
$
(334
)
Amount of gains (losses) reclassified from AOCI into income
 
10

 
—

 
20

 
—

 
—

 
1

 
(31
)
Foreign currency exchange rate derivatives: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
123

Amount of gains (losses) reclassified from AOCI into income
 
(1
)
 
—

 
(336
)
 
—

 
—

 
1

 
336

Foreign currency transaction gains (losses) on hedged items
 
—

 
—

 
340

 
—

 
—

 
—

 
—

Credit derivatives: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gains (losses) deferred in AOCI
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
—

Amount of gains (losses) reclassified from AOCI into income
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Subtotal
 
9

 
—

 
24

 
—

 
—

 
2

 
94

Gain (Loss) on NIFO Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange rate derivatives (1)
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(76
)
Non-derivative hedging instruments
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
—

Subtotal
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
(76
)
Gain (Loss) on Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives (1)
 
4

 
—

 
(310
)
 
(12
)
 
—

 
—

 
N/A

Foreign currency exchange rate derivatives (1)
 
—

 
—

 
386

 
(3
)
 
—

 
—

 
N/A

Credit derivatives — purchased (1)
 
—

 
—

 
11

 
—

 
—

 
—

 
N/A

Credit derivatives — written (1)
 
—

 
—

 
(79
)
 
—

 
—

 
—

 
N/A

Equity derivatives (1)
 
1

 
—

 
(76
)
 
(21
)
 
—

 
—

 
N/A

Foreign currency transaction gains (losses) on hedged items
 
—

 
—

 
(107
)
 
—

 
—

 
—

 
N/A

Subtotal
 
5

 
—

 
(175
)
 
(36
)
 
—

 
—

 
N/A

Earned income on derivatives
 
174

 
—

 
266

 
5

 
(51
)
 
(6
)
 
—

Embedded derivatives (2)
 
N/A

 
N/A

 
188

 
—

 
N/A

 
N/A

 
N/A

Total
 
$
188

 
$
—

 
$
290

 
$
(31
)
 
$
(51
)
 
$
(4
)
 
$
18

__________________
(1)
Excludes earned income on derivatives.
(2)
The valuation of guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses) in connection with this adjustment were ($13) million and ($75) million for the three months and six months ended June 30, 2019, respectively, and ($25) million and ($5) million for the three months and six months ended June 30, 2018, respectively.
Fair Value Hedges
The Company designates and accounts for the following as fair value hedges when they have met the requirements of fair value hedging: (i) interest rate swaps to convert fixed rate assets and liabilities to floating rate assets and liabilities; (ii) foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated assets and liabilities; and (iii) foreign currency forwards to hedge the foreign currency fair value exposure of foreign currency denominated investments.
The following table presents the balance sheet classification, carrying amount and cumulative fair value hedging adjustments for items designated and qualifying as hedged items in fair value hedges:
 
 
June 30, 2019
Balance Sheet Line Item
 
Carrying Amount
 of the Hedged
Assets/(Liabilities)
 
Cumulative Amount
of Fair Value Hedging Adjustments
Included in the Carrying Amount of Hedged
Assets/(Liabilities) (1)
 
 
(In millions)
Fixed maturity securities AFS
 
$
2,613

 
$
(1
)
Mortgage loans
 
$
1,096

 
$
6

Future policy benefits
 
$
(4,286
)
 
$
(873
)
Policyholder account balances
 
$
(74
)
 
$
—

__________________
(1)
Includes ($1) million of hedging adjustments on discontinued hedging relationships.
For the Company’s foreign currency forwards, the change in the estimated fair value of the derivative related to the changes in the difference between the spot price and the forward price is excluded from the assessment of hedge effectiveness. The Company has elected to record changes in estimated fair value of excluded components in earnings. For all other derivatives, all components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Cash Flow Hedges
The Company designates and accounts for the following as cash flow hedges when they have met the requirements of cash flow hedging: (i) interest rate swaps to convert floating rate assets and liabilities to fixed rate assets and liabilities; (ii) foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated assets and liabilities; (iii) interest rate forwards and credit forwards to lock in the price to be paid for forward purchases of investments; (iv) interest rate swaps and interest rate forwards to hedge the forecasted purchases of fixed-rate investments; and (v) interest rate swaps and interest rate forwards to hedge forecasted fixed-rate borrowings.
In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions were no longer probable of occurring. Because certain of the forecasted transactions also were not probable of occurring within two months of the anticipated date, the Company reclassified amounts from AOCI into net investment gains (losses). These amounts were $57 million and $58 million for the three months and six months ended June 30, 2019, respectively, and $6 million for both the three months and six months ended June 30, 2018.
At June 30, 2019 and December 31, 2018, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions did not exceed nine years and four years, respectively.
At June 30, 2019 and December 31, 2018, the balance in AOCI associated with cash flow hedges was $2.7 billion and $2.1 billion, respectively.
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
At June 30, 2019, the Company expected to reclassify $115 million of deferred net gains (losses) on derivatives in AOCI to earnings within the next 12 months.
NIFO Hedges
The Company uses foreign currency exchange rate derivatives, which may include foreign currency forwards and currency options, to hedge portions of its net investments in foreign operations against adverse movements in exchange rates. The Company also designates a portion of its foreign-denominated debt as a non-derivative hedging instrument of its net investments in foreign operations. The Company assesses hedge effectiveness of its derivatives based upon the change in forward rates and assesses
its non-derivative hedging instruments based on changes in spot rates. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
When net investments in foreign operations are sold or substantially liquidated, the amounts in AOCI are reclassified to the statement of operations.
At June 30, 2019 and December 31, 2018, the cumulative foreign currency translation gain (loss) recorded in AOCI related to NIFO hedges was $134 million and $184 million, respectively. At June 30, 2019 and December 31, 2018, the carrying amount of debt designated as a non-derivative hedging instrument was $390 million and $0, respectively. See Note 10 for additional information on foreign-denominated debt.
Credit Derivatives
In connection with synthetically created credit investment transactions, the Company writes credit default swaps for which it receives a premium to insure credit risk. Such credit derivatives are included within the nonqualifying derivatives and derivatives for purposes other than hedging table. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the Company paying the counterparty the specified swap notional amount in exchange for the delivery of par quantities of the referenced credit obligation. The Company’s maximum amount at risk, assuming the value of all referenced credit obligations is zero, was $12.3 billion and $11.4 billion at June 30, 2019 and December 31, 2018, respectively. The Company can terminate these contracts at any time through cash settlement with the counterparty at an amount equal to the then current estimated fair value of the credit default swaps. At June 30, 2019 and December 31, 2018, the Company would have received $256 million and $82 million, respectively, to terminate all of these contracts.
The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps at:
 
 
June 30, 2019
 
December 31, 2018
Rating Agency Designation of Referenced
Credit Obligations (1)
 
Estimated
Fair Value
of Credit
Default
Swaps
 
Maximum
Amount of Future
Payments under
Credit Default
Swaps
 
Weighted
Average
Years to
Maturity (2)
 
Estimated
Fair Value
of Credit
Default
Swaps
 
Maximum
Amount of Future
Payments under
Credit Default
Swaps
 
Weighted
Average
Years to
Maturity (2)
 
 
(Dollars in millions)
Aaa/Aa/A
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps (3)
 
$
5

 
$
386

 
1.5

 
$
4

 
$
354

 
1.7

Credit default swaps referencing indices
 
38

 
2,504

 
2.4

 
28

 
2,154

 
2.5

Subtotal
 
43

 
2,890

 
2.3

 
32

 
2,508

 
2.4

Baa
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps (3)
 
3

 
368

 
1.3

 
3

 
482

 
1.5

Credit default swaps referencing indices
 
185

 
8,742

 
5.1

 
40

 
8,056

 
5.0

Subtotal
 
188

 
9,110

 
4.9

 
43

 
8,538

 
4.8

Ba
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps (3)
 
—

 
10

 
1.0

 
—

 
15

 
2.0

Credit default swaps referencing indices
 
—

 
—

 
—

 
—

 
—

 
—

Subtotal
 
—

 
10

 
1.0

 
—

 
15

 
2.0

B
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps (3)
 
—

 
—

 
—

 
—

 
—

 
—

Credit default swaps referencing indices
 
25

 
330

 
5.0

 
7

 
330

 
5.0

Subtotal
 
25

 
330

 
5.0

 
7

 
330

 
5.0

Total
 
$
256

 
$
12,340

 
4.3

 
$
82

 
$
11,391

 
4.3

__________________
(1)
The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s Investors Service (“Moody’s”), S&P Global Ratings (“S&P”) and Fitch Ratings. If no rating is available from a rating agency, then an internally developed rating is used.
(2)
The weighted average years to maturity of the credit default swaps is calculated based on weighted average gross notional amounts.
(3)
Single name credit default swaps may be referenced to the credit of corporations, foreign governments, or municipals.
Credit Risk on Freestanding Derivatives
The Company may be exposed to credit-related losses in the event of nonperformance by its counterparties to derivatives. Generally, the current credit exposure of the Company’s derivatives is limited to the net positive estimated fair value of derivatives at the reporting date after taking into consideration the existence of master netting or similar agreements and any collateral received pursuant to such agreements.
The Company manages its credit risk related to derivatives by entering into transactions with creditworthy counterparties and establishing and monitoring exposure limits. The Company’s OTC-bilateral derivative transactions are governed by ISDA Master Agreements which provide for legally enforceable set-off and close-out netting of exposures to specific counterparties in the event of early termination of a transaction, which includes, but is not limited to, events of default and bankruptcy. In the event of an early termination, the Company is permitted to set off receivables from the counterparty against payables to the same counterparty arising out of all included transactions. Substantially all of the Company’s ISDA Master Agreements also include Credit Support Annex provisions which require both the pledging and accepting of collateral in connection with its OTC-bilateral derivatives.
The Company’s OTC-cleared derivatives are effected through central clearing counterparties and its exchange-traded derivatives are effected through regulated exchanges. Such positions are marked to market and margined on a daily basis (both initial margin and variation margin), and the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivatives.
See Note 8 for a description of the impact of credit risk on the valuation of derivatives.
The estimated fair values of the Company’s net derivative assets and net derivative liabilities after the application of master netting agreements and collateral were as follows at:
 
 
June 30, 2019
 
December 31, 2018
Derivatives Subject to a Master Netting Arrangement or a Similar Arrangement 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
(In millions)
Gross estimated fair value of derivatives:
 
 
 
 
 
 
 
 
OTC-bilateral (1)
 
$
10,134

 
$
3,224

 
$
8,805

 
$
3,758

OTC-cleared (1)
 
588

 
32

 
245

 
33

Exchange-traded
 
4

 
28

 
18

 
80

Total gross estimated fair value of derivatives presented on the interim condensed consolidated balance sheets (1)
 
10,726

 
3,284

 
9,068

 
3,871

Gross amounts not offset on the interim condensed consolidated balance sheets:
 
 
 
 
 
 
 
 
Gross estimated fair value of derivatives: (2)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(2,453
)
 
(2,453
)
 
(2,570
)
 
(2,570
)
OTC-cleared
 
(12
)
 
(12
)
 
(25
)
 
(25
)
Exchange-traded
 
—

 
—

 
(1
)
 
(1
)
Cash collateral: (3), (4)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(4,476
)
 
—

 
(4,709
)
 
—

OTC-cleared
 
(540
)
 
(4
)
 
(145
)
 
—

Exchange-traded
 
—

 
(15
)
 
—

 
(57
)
Securities collateral: (5)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(3,002
)
 
(738
)
 
(1,266
)
 
(1,134
)
OTC-cleared
 
—

 
(10
)
 
—

 
(8
)
Exchange-traded
 
—

 
(13
)
 
—

 
(7
)
Net amount after application of master netting agreements and collateral
 
$
243

 
$
39

 
$
352

 
$
69

__________________
(1)
At June 30, 2019 and December 31, 2018, derivative assets included income or (expense) accruals reported in accrued investment income or in other liabilities of $95 million and $99 million, respectively, and derivative liabilities included (income) or expense accruals reported in accrued investment income or in other liabilities of ($39) million and ($59) million, respectively.
(2)
Estimated fair value of derivatives is limited to the amount that is subject to set-off and includes income or expense accruals.
(3)
Cash collateral received by the Company for OTC-bilateral and OTC-cleared derivatives is included in cash and cash equivalents, short-term investments or in fixed maturity securities AFS, and the obligation to return it is included in payables for collateral under securities loaned and other transactions on the balance sheet.
(4)
The receivable for the return of cash collateral provided by the Company is inclusive of initial margin on exchange-traded and OTC-cleared derivatives and is included in premiums, reinsurance and other receivables on the balance sheet. The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements. At June 30, 2019 and December 31, 2018, the Company received excess cash collateral of $221 million and $135 million, respectively, and provided excess cash collateral of $274 million and $226 million, respectively, which is not included in the table above due to the foregoing limitation.
(5)
Securities collateral received by the Company is held in separate custodial accounts and is not recorded on the balance sheet. Subject to certain constraints, the Company is permitted by contract to sell or re-pledge this collateral, but at June 30, 2019, none of the collateral had been sold or re-pledged. Securities collateral pledged by the Company is reported in fixed maturity securities AFS on the balance sheet. Subject to certain constraints, the counterparties are permitted by contract to sell or re-pledge this collateral. The amount of securities collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements and cash collateral. At June 30, 2019 and December 31, 2018, the Company received excess securities collateral with an estimated fair value of $153 million and $70 million, respectively, for its OTC-bilateral derivatives, which are not included in the table above due to the foregoing limitation. At June 30, 2019 and December 31, 2018, the Company provided excess securities collateral with an estimated fair value of $104 million and $212 million, respectively, for its OTC-bilateral derivatives, and $730 million and $601 million, respectively, for its OTC-cleared derivatives, and $126 million and $90 million, respectively, for its exchange-traded derivatives, which are not included in the table above due to the foregoing limitation.
The Company’s collateral arrangements for its OTC-bilateral derivatives generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the collateral amount owed by that counterparty reaches a minimum transfer amount. Substantially all of the Company’s netting agreements for derivatives contain provisions that require both the Company and the counterparty to maintain a specific investment grade credit rating from each of Moody’s and S&P. If a party’s credit or financial strength rating, as applicable, were to fall below that specific investment grade credit rating, that party would be in violation of these provisions, and the other party to the derivatives could terminate the transactions and demand immediate settlement and payment based on such party’s reasonable valuation of the derivatives. A small number of these arrangements also include credit-contingent provisions that include a threshold above which collateral must be posted. Such agreements provide for a reduction of these thresholds (on a sliding scale that converges toward zero) in the event of downgrades in the credit ratings of MetLife, Inc. and/or the counterparty. At June 30, 2019, the amount of collateral not provided by the Company due to the existence of these thresholds was $15 million.
The following table presents the estimated fair value of the Company’s OTC-bilateral derivatives that were in a net liability position after considering the effect of netting agreements, together with the estimated fair value and balance sheet location of the collateral pledged. OTC-bilateral derivatives that are not subject to collateral agreements are excluded from this table.
 
 
June 30, 2019
 
December 31, 2018
 
 
Derivatives
Subject to
Credit-
Contingent
Provisions
 
Derivatives
Not Subject
to Credit-
Contingent
Provisions
 
Total
 
Derivatives
Subject to
Credit-
Contingent
Provisions
 
Derivatives
Not Subject
to Credit-
Contingent
Provisions
 
Total
 
 
(In millions)
Estimated Fair Value of Derivatives in a Net Liability Position (1)
 
$
757

 
$
14

 
$
771

 
$
1,148

 
$
40

 
$
1,188

Estimated Fair Value of Collateral Provided:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities AFS
 
$
822

 
$
—

 
$
822

 
$
1,218

 
$
9

 
$
1,227

Cash
 
$
—

 
$
—

 
$
—

 
$
6

 
$
—

 
$
6

__________________
(1)
After taking into consideration the existence of netting agreements.
Embedded Derivatives
The Company issues certain products or purchases certain investments that contain embedded derivatives that are required to be separated from their host contracts and accounted for as freestanding derivatives. These host contracts principally include: variable annuities with guaranteed minimum benefits, including GMWBs, GMABs and certain GMIBs; ceded reinsurance of guaranteed minimum benefits related to certain GMIBs; assumed reinsurance of guaranteed minimum benefits related to GMWBs and GMABs; funds withheld on ceded reinsurance and fixed annuities with equity-indexed returns.
The following table presents the estimated fair value and balance sheet location of the Company’s embedded derivatives that have been separated from their host contracts at:
 
 
Balance Sheet Location
 
June 30, 2019
 
December 31, 2018
 
 
 
 
(In millions)
Embedded derivatives within asset host contracts:
 
 
 
 
 
 
Ceded guaranteed minimum benefits
 
Premiums, reinsurance and other receivables
 
$
75

 
$
71

Embedded derivatives within liability host contracts:
 
 
 
 
 
 
Direct guaranteed minimum benefits
 
Policyholder account balances
 
$
323

 
$
298

Assumed guaranteed minimum benefits
 
Policyholder account balances
 
441

 
495

Funds withheld on ceded reinsurance
 
Other liabilities
 
39

 
(41
)
Fixed annuities with equity indexed returns
 
Policyholder account balances
 
107

 
58

Embedded derivatives within liability host contracts
 
$
910

 
$
810
Schedule of Derivative Instruments
 
 
June 30, 2019
 
December 31, 2018
 
 
Derivatives
Subject to
Credit-
Contingent
Provisions
 
Derivatives
Not Subject
to Credit-
Contingent
Provisions
 
Total
 
Derivatives
Subject to
Credit-
Contingent
Provisions
 
Derivatives
Not Subject
to Credit-
Contingent
Provisions
 
Total
 
 
(In millions)
Estimated Fair Value of Derivatives in a Net Liability Position (1)
 
$
757

 
$
14

 
$
771

 
$
1,148

 
$
40

 
$
1,188

Estimated Fair Value of Collateral Provided:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities AFS
 
$
822

 
$
—

 
$
822

 
$
1,218

 
$
9

 
$
1,227

Cash
 
$
—

 
$
—

 
$
—

 
$
6

 
$
—

 
$
6

__________________
(1)
After taking into consideration the existence of netting agreements.
Embedded Derivative Financial Instruments [Member]  
Derivative Instruments, Gain (Loss) [Line Items]  
Schedule of Derivative Instruments
The following table presents the estimated fair value and balance sheet location of the Company’s embedded derivatives that have been separated from their host contracts at:
 
 
Balance Sheet Location
 
June 30, 2019
 
December 31, 2018
 
 
 
 
(In millions)
Embedded derivatives within asset host contracts:
 
 
 
 
 
 
Ceded guaranteed minimum benefits
 
Premiums, reinsurance and other receivables
 
$
75

 
$
71

Embedded derivatives within liability host contracts:
 
 
 
 
 
 
Direct guaranteed minimum benefits
 
Policyholder account balances
 
$
323

 
$
298

Assumed guaranteed minimum benefits
 
Policyholder account balances
 
441

 
495

Funds withheld on ceded reinsurance
 
Other liabilities
 
39

 
(41
)
Fixed annuities with equity indexed returns
 
Policyholder account balances
 
107

 
58

Embedded derivatives within liability host contracts
 
$
910

 
$
810