Derivative Instruments

6 Months Ended

Jun. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Note 5. Derivative Instruments

The Company enters into derivative instruments to manage risk, primarily equity, interest rate, credit, foreign currency and market volatility. The derivative instruments are to hedge fixed indexed annuity products that guarantee the return of principal to the policyholders and credit interest based on a percentage of the gain in a specified market index. To hedge against adverse changes in equity indices, the Company entered into contracts to buy equity indexed options.

The following is a summary of the asset derivatives not designated as hedges embedded in our FIA product as of June 30, 2022, and December 31, 2021:  

		June 30, 2022					December 31, 2021
	Location in the
(In thousands, except number of contracts)	Consolidated
Derivatives Not Designated	Statement of	Notional		Number of	Estimated		Notional		Number of	Estimated
as Hedging Instruments	Balance Sheets	Amount		Contracts	Fair Value		Amount		Contracts	Fair Value
Equity-indexed options	Derivatives	$	648,853	521	$	5,376	$	526,096	482	$	23,766
Equity-indexed embedded derivatives	Deposit-type contracts		645,766	5,139		107,281		525,548	4,205		123,692

At June 30, 2022, the value of the embedded derivative considers all amounts projected to be paid in excess of the minimum guarantee (the amounts payable without any indexation increases) over future periods. The host contract reflects the minimum guaranteed values.

Due to Federal Reserve rate increases, our securities positions resulted in unrealized losses at June 30, 2022,  and December 31, 2021, reported in accumulated other comprehensive income on the balance sheet. The embedded derivative related to the asset portfolio belonging to the third-party reinsurers offset these unrealized gains. The unrealized losses as of June 30, 2022, were $2.9 million compared to unrealized gains of $0.2 million as of December 31, 2021.

The following table summarizes the impact of those embedded derivatives related to the funds withheld provision where the total return on the asset portfolio is passed through to the third-party-reinsurers:

	June 30, 2022						December 31, 2021
(In thousands)	Book Value		Market Value		Total Return		Book Value		Market Value		Total Return
Portfolio	Assets		Assets		Swap Value		Assets		Assets		Swap Value
American Republic Insurance Company	$	110,646	$	107,843	$	2,803	$	74,983	$	74,670	$	313
Crestline Re SP1		267,896		271,291		(3,395)		228,560		228,450		110
Ironbound		165,940		163,608		2,332		154,867		155,755		(888)
Ascendent Re		58,156		57,444		712		56,246		56,078		168
US Alliance		47,427		46,936		491		46,221		46,085		136
Total	$	650,065	$	647,122	$	2,943	$	560,877	$	561,038	$	(161)

Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained unrealized losses of approximately and $2.9 million as of June 30, 2022, and unrealized gains of $0.2 million as of December 31, 2021, respectively. The terms of the contracts with the third-party reinsurers provide that the changes in unrealized gains on the portfolios accrue to the third-party reinsurers. Accordingly, the change in unrealized gains on the assets held by American Life were offset by gains in the embedded derivative of $3.1 million and a loss in the embedded derivative of $0.4 million as of June 30, 2022, and 2021, respectively. We account for this unrealized gain (loss) pass-through by recording an equivalent realized gain or (loss) on our Consolidated Statements of Comprehensive Loss and in amounts payable to our third-party reinsurers on the Consolidated Balance Sheets.