Derivative Instruments

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

5. DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

The Company utilizes various derivatives instruments and strategies to manage its risk. Commonly used derivative instruments include, but are not necessarily limited to:

•Interest rate contracts: futures, swaps, forwards, options, caps and floors

•Equity contracts: futures, options and total return swaps

•Foreign exchange contracts: futures, options, forwards and swaps

•Credit contracts: single and index reference credit default swaps

Other types of financial contracts that the Company accounts for as derivatives are:

• To-be-announced (“TBA”) forward contracts, loan commitments, embedded derivatives and synthetic guaranteed investment contracts (“GICs”).

For detailed information on these contracts and the related strategies, see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Primary Risks Managed by Derivatives

The table below provides a summary of the gross notional amount and fair value of derivatives contracts by the primary underlying risks, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlying risks. The fair value amounts below represent the value of derivative contracts prior to taking into account the netting effects of master netting agreements and cash collateral. This netting impact results in total derivative assets of $3,184 million and $867 million as of March 31, 2020 and December 31, 2019, respectively, and total derivative liabilities of $904 million and $831 million as of March 31, 2020 and December 31, 2019, respectively, reflected in the Unaudited Interim Consolidated Statements of Financial Position.

Primary Underlying Risk /Instrument Type	March 31, 2020							December 31, 2019
			Fair Value							Fair Value
	Gross Notional		Assets		Liabilities			Gross Notional		Assets		Liabilities
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	3,232	$	1,239	$	(106	)	$	3,257	$	628	$	(73	)
Interest Rate Forwards	205		51		0			205		4		(1		)
Foreign Currency
Foreign Currency Forwards	1,442		79		(3		)	1,461		22		(57		)
Currency/Interest Rate
Foreign Currency Swaps	23,188		3,795		(60		)	22,746		1,467		(302		)
Total Derivatives Designated as Hedge Accounting Instruments	$	28,067	$	5,164	$	(169	)	$	27,669	$	2,121	$	(433	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps	$	152,646	$	22,455	$	(11,144	)	$	141,162	$	10,249	$	(4,861	)
Interest Rate Futures	18,595		42		(132		)	17,095		4		(38		)
Interest Rate Options	16,343		2,102		(328		)	16,496		339		(238		)
Interest Rate Forwards	2,821		82		0			2,218		18		(3		)
Foreign Currency
Foreign Currency Forwards	27,940		458		(163		)	26,604		208		(214		)
Foreign Currency Options	0		0		0			0		0		0
Currency/Interest Rate
Foreign Currency Swaps	13,107		1,409		(397		)	13,874		740		(345		)
Credit
Credit Default Swaps	1,659		2		(29		)	798		21		0
Equity
Equity Futures	4,804		18		(1		)	1,802		0		(3		)
Equity Options	28,769		428		(546		)	32,657		679		(765		)
Total Return Swaps	23,241		2,903		(376		)	18,218		6		(636		)
Other
Other(1)	1,257		0		0			1,258		0		0
Synthetic GICs	80,984		1		0			80,009		1		0
Total Derivatives Not Qualifying as Hedge Accounting Instruments	$	372,166	$	29,900	$	(13,116	)	$	352,191	$	12,265	$	(7,103	)
Total Derivatives(2)(3)	$	400,233	$	35,064	$	(13,285	)	$	379,860	$	14,386	$	(7,536	)

__________

(1) “Other” primarily includes derivative contracts used to improve the balance of the Company’s tail longevity and mortality risk. Under these contracts, the Company’s gains (losses) are capped at the notional amount.

(2) Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks. The fair value of these embedded derivatives was a net liability of $28,769 million and $14,035 million as of March 31, 2020 and December 31, 2019, respectively, primarily included in “Future policy benefits.”

(3) Recorded in “Other invested assets” and “Other liabilities” on the Unaudited Interim Consolidated Statements of Financial Position.

As of March 31, 2020, the following amounts were recorded on the Unaudited Interim Consolidated Statements of Financial Position related to the carrying amount of the hedged assets (liabilities) and cumulative basis adjustments included in the carrying amount for fair value hedges.

	March 31, 2020						December 31, 2019
Balance Sheet Line Item in which Hedged Item is Recorded	Carrying Amount of the Hedged Assets (Liabilities)			Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities)(1)			Carrying Amount of the Hedged Assets (Liabilities)			Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities)(1)
	(in millions)
Fixed maturities, available-for-sale, at fair value	$	371		$	92		$	389		$	64
Commercial mortgage and other loans	$	23		$	2		$	23		$	2
Policyholders’ account balances	$	(1,712	)	$	(430	)	$	(1,376	)	$	(107	)
Future policy benefits	$	(961	)	$	(450	)	$	(676	)	$	(172	)

__________

(1) There were no material fair value hedging adjustments for hedged assets and liabilities for which hedge accounting has been discontinued.

Most of the Company’s derivatives do not qualify for hedge accounting for various reasons. For example: (i) derivatives that economically hedge embedded derivatives do not qualify for hedge accounting because changes in the fair value of the embedded derivatives are already recorded in net income; (ii) derivatives that are utilized as macro hedges of the Company’s exposure to various risks typically do not qualify for hedge accounting because they do not meet the criteria required under portfolio hedge accounting rules; and (iii) synthetic GICs, which are product standalone derivatives, do not qualify as hedging instruments under hedge accounting rules.

Offsetting Assets and Liabilities

The following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables), and repurchase and reverse repurchase agreements that are offset in the Unaudited Interim Consolidated Statements of Financial Position, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the Unaudited Interim Consolidated Statements of Financial Position.

	March 31, 2020
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in millions)
Offsetting of Financial Assets:
Derivatives(1)	$	34,905	$	(31,880	)	$	3,025	$	(2,109	)	$	916
Securities purchased under agreement to resell	325		0			325		(325		)	0
Total assets	$	35,230	$	(31,880	)	$	3,350	$	(2,434	)	$	916
Offsetting of Financial Liabilities:
Derivatives(1)	$	13,259	$	(12,381	)	$	878	$	(9	)	$	869
Securities sold under agreement to repurchase	10,557		0			10,557		(10,557		)	0
Total liabilities	$	23,816	$	(12,381	)	$	11,435	$	(10,566	)	$	869

	December 31, 2019
	Gross Amounts of Recognized Financial Instruments		Gross Amounts Offset in the Statements of Financial Position			Net Amounts Presented in the Statements of Financial Position		Financial Instruments/ Collateral(1)			Net Amount
	(in millions)
Offsetting of Financial Assets:
Derivatives(1)	$	14,303	$	(13,519	)	$	784	$	(607	)	$	177
Securities purchased under agreement to resell	1,012		0			1,012		(1,012		)	0
Total assets	$	15,315	$	(13,519	)	$	1,796	$	(1,619	)	$	177
Offsetting of Financial Liabilities:
Derivatives(1)	$	7,528	$	(6,705	)	$	823	$	(244	)	$	579
Securities sold under agreement to repurchase	9,681		0			9,681		(9,681		)	0
Total liabilities	$	17,209	$	(6,705	)	$	10,504	$	(9,925	)	$	579

__________

(1)

Amounts exclude the excess of collateral received/pledged from/to the counterparty.

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above, see “—Counterparty Credit Risk” below. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.

Cash Flow, Fair Value and Net Investment Hedges

The primary derivative instruments used by the Company in its fair value, cash flow and net investment hedge accounting relationships are interest rate swaps, currency swaps and currency forwards. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, or equity derivatives in any of its fair value, cash flow or net investment hedge accounting relationships.

The following table provides the financial statement classification and impact of derivatives used in qualifying and non-qualifying hedge relationships, including the offset of the hedged item in fair value hedge relationships.

	Three Months Ended March 31, 2020
	Realized Investment Gains (Losses)			Net Investment Income			Other Income (Loss)			Interest Expense		Interest Credited to Policyholders’ Account Balances			Policyholders’ Benefits			AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Gains (losses) on derivatives designated as hedge instruments:
Interest Rate	$	(30	)	$	(2	)	$	0		$	0	$	324		$	280		$	0
Currency	2			0			0			0		0			0			0
Total gains (losses) on derivatives designated as hedge instruments	(28		)	(2		)	0			0		324			280			0
Gains (losses) on the hedged item:
Interest Rate	30			5			0			0		(322		)	(278		)	0
Currency	(1		)	0			0			0		0			0			0
Total gains (losses) on hedged item	29			5			0			0		(322		)	(278		)	0
Total gains (losses) on fair value hedges net of hedged item	1			3			0			0		2			2			0
Cash flow hedges
Interest Rate	(1		)	0			0			0		0			0			52
Currency	1			0			0			0		0			0			102
Currency/Interest Rate	18			79			291			0		0			0			2,200
Total gains (losses) on cash flow hedges	18			79			291			0		0			0			2,354
Net investment hedges
Currency	0			0			0			0		0			0			13
Currency/Interest Rate	0			0			0			0		0			0			0
Total gains (losses) on net investment hedges	0			0			0			0		0			0			13
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	9,224			0			0			0		0			0			0
Currency	333			0			(7		)	0		0			0			0
Currency/Interest Rate	816			0			2			0		0			0			0
Credit	(41		)	0			0			0		0			0			0
Equity	5,436			0			0			0		0			0			0
Other	0			0			0			0		0			0			0
Embedded Derivatives	(14,295		)	0			0			0		0			0			0
Total gains (losses) on derivatives not qualifying as hedge accounting instruments	1,473			0			(5		)	0		0			0			0
Total	$	1,492		$	82		$	286		$	0	$	2		$	2		$	2,367

	Three Months Ended March 31, 2019
	Realized Investment Gains (Losses)			Net Investment Income			Other Income (Loss)			Interest Expense		Interest Credited to Policyholders’ Account Balances			Policyholders’ Benefits			AOCI(1)
	(in millions)
Derivatives Designated as Hedge Accounting Instruments:
Fair value hedges
Gains (losses) on derivatives designated as hedge instruments:
Interest Rate	$	(5	)	$	(2	)	$	0		$	0	$	68		$	51		$	0
Currency	(1		)	0			0			0		0			0			0
Total gains (losses) on derivatives designated as hedge instruments	(6		)	(2		)	0			0		68			51			0
Gains (losses) on the hedged item:
Interest Rate	2			5			0			0		(66		)	(46		)	0
Currency	1			1			0			0		0			0			0
Total gains (losses) on hedged item	3			6			0			0		(66		)	(46		)	0
Total gains (losses) on fair value hedges net of hedged item	(3		)	4			0			0		2			5			0
Cash flow hedges
Interest Rate	(1		)	0			0			0		0			0			23
Currency	1			0			0			0		0			0			(9		)
Currency/Interest Rate	(8		)	68			(45		)	0		0			0			(58		)
Total gains (losses) on cash flow hedges	(8		)	68			(45		)	0		0			0			(44		)
Net investment hedges
Currency	0			0			0			0		0			0			1
Currency/Interest Rate	0			0			0			0		0			0			0
Total gains (losses) on net investment hedges	0			0			0			0		0			0			1
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	1,389			0			0			0		0			0			0
Currency	(39		)	0			4			0		0			0			0
Currency/Interest Rate	184			0			0			0		0			0			0
Credit	69			0			0			0		0			0			0
Equity	(1,811		)	0			0			0		0			0			0
Other	0			0			0			0		0			0			0
Embedded Derivatives	(812		)	0			0			0		0			0			0
Total gains (losses) on derivatives not qualifying as hedge accounting instruments	(1,020		)	0			4			0		0			0			0
Total	$	(1,031	)	$	72		$	(41	)	$	0	$	2		$	5		$	(43	)

_________

(1)

Net change in AOCI.

Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:  

	(in millions)
Balance, December 31, 2019	$	832
Amount recorded in AOCI
Interest Rate	51
Currency	103
Currency/Interest Rate	2,588
Total amount recorded in AOCI	2,742
Amount reclassified from AOCI to income
Interest Rate	1
Currency	(1		)
Currency/Interest Rate	(388		)
Total amount reclassified from AOCI to income	(388		)
Balance, March 31, 2020	$	3,186

The changes in fair value of cash flow hedges are deferred in AOCI and are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Consolidated Statements of Comprehensive Income; these amounts are then reclassified to earnings when the hedged item affects earnings. Using March 31, 2020 values, it is estimated that a pre-tax gain of approximately $354 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending March 31, 2021.

The exposures the Company is hedging with these qualifying cash flow hedges include the variability of future cash flows from forecasted transactions denominated in foreign currencies, the purchases of invested assets, and the receipt or payment of variable interest on existing financial instruments. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is 10 years.

There were no material amounts reclassified from AOCI into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging. In addition, there were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.

For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment within AOCI were $549 million and $536 million as of March 31, 2020 and December 31, 2019, respectively.

Credit Derivatives

The following table provides a summary of the notional and fair value of written credit protection. The Company’s maximum amount at risk under these credit derivatives, assuming the value of the underlying referenced securities become worthless, is equal to the notional amounts. These credit derivatives have maturities of less than 1 year and less than 27 years for single name and index references, respectively.

	March 31, 2020
	NAIC Rating Designation of Underlying Credit Obligation(1)
	NAIC 1				NAIC 2				NAIC 3					NAIC 4				NAIC 5				NAIC 6					Total
	Gross Notional		Fair Value		Gross Notional		Fair Value		Gross Notional		Fair Value			Gross Notional		Fair Value		Gross Notional		Fair Value		Gross Notional		Fair Value			Gross Notional		Fair Value
	(in millions)
Single name reference(2)	$	48	$	0	$	48	$	0	$	4	$	0		$	0	$	0	$	0	$	0	$	0	$	0		$	100	$	0
Index reference(2)	49		0		0		0		790		(8		)	0		0		0		0		483		(20		)	1,322		(28		)
Total	$	97	$	0	$	48	$	0	$	794	$	(8	)	$	0	$	0	$	0	$	0	$	483	$	(20	)	$	1,422	$	(28	)

	December 31, 2019
	NAIC Rating Designation of Underlying Credit Obligation(1)
	NAIC 1				NAIC 2				NAIC 3				NAIC 4				NAIC 5				NAIC 6				Total
	Gross Notional		Fair Value		Gross Notional		Fair Value		Gross Notional		Fair Value		Gross Notional		Fair Value		Gross Notional		Fair Value		Gross Notional		Fair Value		Gross Notional		Fair Value
	(in millions)
Single name reference(2)	$	36	$	0	$	60	$	1	$	4	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	100	$	1
Index reference(2)	50		0		0		0		570		13		0		0		0		0		72		7		692		20
Total	$	86	$	0	$	60	$	1	$	574	$	13	$	0	$	0	$	0	$	0	$	72	$	7	$	792	$	21

_________

(1) The NAIC rating designations are based on availability and the lowest ratings among Moody's Investors Service, Inc. ("Moody's"), Standard & Poor’s Rating Services (“S&P”) and Fitch Ratings Inc. (“Fitch”). If no rating is available from a rating agency, a NAIC 6 rating is used.

(2) Single name CDS may reference to the credit of corporate debt, sovereign debt, and structured finance. Index references NAIC designations are based on the lowest rated single name reference included in the index.

In addition to writing credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of March 31, 2020 and December 31, 2019, the Company had $237 million and $6 million of outstanding notional amounts and reported at fair value as an asset of $1 million and $0 million, respectively.

Counterparty Credit Risk

The Company is exposed to losses in the event of non-performance by counterparties to financial derivative transactions with a positive fair value. The Company manages credit risk by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreements, as applicable; (ii) trading through central clearing and over-the-counter (“OTC”) parties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single party credit exposures which are subject to periodic management review.

Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a liability position. In addition, certain of the Company’s derivative agreements contain credit-risk related contingent features; if the credit rating of one of the parties to the derivative agreement is to fall below a certain level, the party with positive fair value could request termination at the then fair value or demand immediate full collateralization from the party whose credit rating fell and is in a net liability position.

As of March 31, 2020, there were no net liability derivative positions with counterparties with credit risk-related contingent features. All derivatives have been appropriately collateralized by the Company or the counterparty in accordance with the terms of the derivative agreements.