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Derivatives
 9 Months Ended
Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments 5. Derivatives
Accounting for Derivatives
See Note 1 of the Notes to the Consolidated Financial Statements included in the 2019 Annual Report for a description of the Company’s accounting policies for derivatives and Note 8 for information about the fair value hierarchy for derivatives.
Derivative Strategies
Types of Derivative Instruments and Derivative Strategies
The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to minimize its exposure to various market risks. Commonly used derivative instruments include, but are not necessarily limited to:
•Interest rate derivatives: swaps, caps, swaptions and forwards;
•Foreign currency exchange rate derivatives: forwards and swaps;
•Equity derivatives: options, total return swaps and variance swaps; and
•Credit derivatives: single and index reference credit default swaps.
For detailed information on these contracts and the related strategies, see Note 7 of the Notes to the Consolidated Financial Statements included in the 2019 Annual Report.
Primary Risks Managed by Derivatives
The primary underlying risk exposure, gross notional amount and estimated fair value of derivatives held were as follows at:
September 30, 2020December 31, 2019
Primary Underlying Risk ExposureGross
Notional
Amount		Estimated Fair ValueGross
Notional
Amount		Estimated Fair Value
AssetsLiabilitiesAssetsLiabilities
(In millions)
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate forwardsInterest rate$330 $90 $— $420 $22 $— 
Foreign currency swapsForeign currency exchange rate2,808 314 19 2,765 190 27 
Total qualifying hedges3,138 404 19 3,185 212 27 
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate swapsInterest rate3,015 707 24 7,559 878 29 
Interest rate capsInterest rate2,350 1 — 3,350 2 — 
Interest rate optionsInterest rate 22,570 1,481 178 29,750 782 187 
Interest rate forwardsInterest rate7,332 1,179 24 5,418 94 114 
Foreign currency swapsForeign currency exchange rate1,002 141 16 1,051 96 15 
Foreign currency forwardsForeign currency exchange rate157 — 2 138 — 1 
Credit default swaps — purchasedCredit18 — — 18 — — 
Credit default swaps — writtenCredit1,793 27 1 1,635 36 — 
Equity index optionsEquity market37,493 815 995 51,509 850 1,728 
Equity variance swapsEquity market1,098 13 22 2,136 69 69 
Equity total return swapsEquity market12,997 63 222 7,723 2 367 
Total non-designated or non-qualifying derivatives
89,825 4,427 1,484 110,287 2,809 2,510 
Embedded derivatives:
Ceded guaranteed minimum income benefits
OtherN/A321 — N/A217 — 
Direct index-linked annuitiesOtherN/A— 2,256 N/A— 2,253 
Direct guaranteed minimum benefits
OtherN/A— 3,853 N/A— 1,656 
Assumed index-linked annuitiesOtherN/A— 340 N/A— 339 
Total embedded derivativesN/A321 6,449 N/A217 4,248 
Total$92,963 $5,152 $7,952 $113,472 $3,238 $6,785 
Based on gross notional amounts, a substantial portion of the Company’s derivatives was not designated or did not qualify as part of a hedging relationship at both September 30, 2020 and December 31, 2019. The Company’s use of derivatives includes (i) derivatives that serve as macro hedges of the Company’s exposure to various risks and generally do not qualify for hedge accounting because they do not meet the criteria required under portfolio hedging rules; (ii) derivatives that economically hedge insurance liabilities and generally do not qualify for hedge accounting because they do not meet the criteria of being “highly effective” as outlined in ASC 815; (iii) derivatives that economically hedge embedded derivatives that do not qualify for hedge accounting because the changes in estimated fair value of the embedded derivatives are already recorded in net income; and (iv) written credit default swaps that are used to create synthetic credit investments and that do not qualify for hedge accounting because they do not involve a hedging relationship.
The amount and location of gains (losses), including earned income, recognized for derivatives and gains (losses) pertaining to hedged items presented in net derivative gains (losses) were as follows:
Net Derivative Gains (Losses) Recognized for DerivativesNet Derivative Gains (Losses) Recognized for Hedged ItemsNet Investment IncomeAmount of Gains (Losses) Deferred in AOCI
(In millions)
Three Months Ended September 30, 2020
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives$— $— $1 $(1)
Foreign currency exchange rate derivatives10 (3)8 (184)
Total cash flow hedges10 (3)9 (185)
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives(435)— — — 
Foreign currency exchange rate derivatives(50)(3)— — 
Credit derivatives4 — — — 
Equity derivatives(752)— — — 
Embedded derivatives(628)— — — 
Total non-qualifying hedges(1,861)(3)— — 
Total$(1,851)$(6)$9 $(185)
Three Months Ended September 30, 2019
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives$— $— $1 $51 
Foreign currency exchange rate derivatives— — 9 109 
Total cash flow hedges— — 10 160 
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives1,657 — — — 
Foreign currency exchange rate derivatives49 (3)— — 
Credit derivatives2 — — — 
Equity derivatives(18)— — — 
Embedded derivatives(630)— — — 
Total non-qualifying hedges1,060 (3)— — 
Total$1,060 $(3)$10 $160 
Net Derivative Gains (Losses) Recognized for DerivativesNet Derivative Gains (Losses) Recognized for Hedged ItemsNet Investment IncomeAmount of Gains (Losses) Deferred in AOCI
(In millions)
Nine Months Ended September 30, 2020
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives$1 $— $2 $92 
Foreign currency exchange rate derivatives13 (6)29 143 
Total cash flow hedges14 (6)31 235 
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives4,321 — — — 
Foreign currency exchange rate derivatives57 (12)— — 
Credit derivatives1 — — — 
Equity derivatives(393)— — — 
Embedded derivatives(1,590)— — — 
Total non-qualifying hedges2,396 (12)— — 
Total$2,410 $(18)$31 $235 
Nine Months Ended September 30, 2019
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives$28 $— $2 $51 
Foreign currency exchange rate derivatives19 (23)26 150 
Total cash flow hedges47 (23)28 201 
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives2,906 — — — 
Foreign currency exchange rate derivatives71 (6)— — 
Credit derivatives32 — — — 
Equity derivatives(1,808)— — — 
Embedded derivatives(1,316)— — — 
Total non-qualifying hedges(115)(6)— — 
Total$(68)$(29)$28 $201 
At September 30, 2020 and December 31, 2019, the balance in AOCI associated with cash flow hedges was $464 million and $245 million, respectively.
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. 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 estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps were as follows at:
September 30, 2020December 31, 2019
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$8 $879 2.5$11 $615 2.5
Baa18 914 5.525 1,020 5.1
Total$26 $1,793 4.0$36 $1,635 4.1
_______________
(1)The Company has written credit protection on both single name and index references. The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s, S&P and Fitch. 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.
Counterparty Credit Risk
The Company may be exposed to credit-related losses in the event of counterparty nonperformance on derivative instruments. Generally, the credit exposure is the fair value at the reporting date less any collateral received from the counterparty.
The Company manages its credit risk by: (i) entering into derivative transactions with creditworthy counterparties governed by master netting agreements; (ii) trading through regulated exchanges and central clearing counterparties; (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.
See Note 6 for a description of the impact of credit risk on the valuation of derivatives.
The estimated fair values of net derivative assets and net derivative liabilities after the application of master netting agreements and collateral were as follows at:
Gross Amounts Not Offset on the Consolidated Balance Sheets
Gross Amount RecognizedFinancial Instruments (1)Collateral Received/Pledged (2)Net AmountSecurities Collateral Received/Pledged (3)Net Amount After Securities Collateral
(In millions)
September 30, 2020
Derivative assets$4,861 $(1,068)$(3,159)$634 $(625)$9 
Derivative liabilities $1,495 $(1,068)$— $427 $(426)$1 
December 31, 2019
Derivative assets$3,062 $(1,458)$(1,115)$489 $(488)$1 
Derivative liabilities $2,522 $(1,458)$— $1,064 $(1,061)$3 
_______________
(1)Represents amounts subject to an enforceable master netting agreement or similar agreement.
(2)The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreement.
(3)Securities collateral received from counterparties is not reported on the consolidated balance sheets and may not be sold or re-pledged unless the counterparty is in default. Amounts do not include excess of collateral pledged or received.
The Company’s collateral arrangements generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the amount owed by that counterparty reaches a minimum transfer amount. Certain of these arrangements also include credit-contingent provisions which permit the party with positive fair value to terminate the derivative at the current fair value or demand immediate full collateralization from the party in a net liability position, in the event that the financial strength or credit rating of the party in a net liability position falls below a certain level.
The aggregate estimated fair values of derivatives in a net liability position containing such credit-contingent provisions and the aggregate estimated fair value of assets posted as collateral for such instruments were as follows at:
September 30, 2020December 31, 2019
(In millions)
Estimated fair value of derivatives in a net liability position (1)$427 $1,064 
Estimated Fair Value of Collateral Provided (2):
Fixed maturity securities$691 $1,473 
_______________
(1)After taking into consideration the existence of netting agreements.
(2)Substantially all of the Company’s collateral arrangements provide for daily posting of collateral for the full value of the derivative contract. As a result, if the credit-contingent provisions of derivative contracts in a net liability position were triggered, minimal additional assets would be required to be posted as collateral or needed to settle the instruments immediately.