Derivative Instruments

9 Months Ended

Sep. 30, 2022

Derivative Instruments

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 September 30, 2022, and December 31, 2021:  

		September 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	$	869,504	594	$	11,840	$	526,096	482	$	23,766
Equity-indexed embedded derivatives	Deposit-type contracts		729,352	5,689		120,835		525,548	4,205		123,692

At September 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 September 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 losses. The unrealized losses as of September 30, 2022, were $14.4 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 FW provision where the total return on the asset portfolio is passed through to the third-party reinsurers:

	September 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	$	137,868	$	132,715	$	5,153	$	74,983	$	74,670	$	313
Crestline Re SP1		293,483		292,013		1,470		228,560		228,450		110
Ironbound		162,941		157,655		5,286		154,867		155,755		(888)
Ascendent Re		56,405		55,013		1,392		56,246		56,078		168
SRC4		21,947		21,947		-
US Alliance		47,202		46,064		1,138		46,221		46,085		136
Total	$	719,846	$	705,407	$	14,439	$	560,877	$	561,038	$	(161)

Assets carried as investments on American Life’s financial statements for the third-party reinsurers contained cumulative unrealized losses of approximately $14.4 million as of September 30, 2022, and cumulative 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 losses on the assets held by American Life were offset by gains in the embedded derivative of $14.6 million and a gain in the embedded derivative of $0.9 million as of September 30, 2022, and 2021, respectively. We account for this unrealized (loss) pass-through by recording an equivalent realized gain on our Consolidated Statements of Comprehensive Loss and in amounts payable to our third-party reinsurers on the Consolidated Balance Sheets.