Derivative Instruments

6 Months Ended

Jun. 30, 2023

Derivative Instruments

Derivative Instruments

Note 4. Derivative Instruments

The Company enters into derivative instruments to manage risk, primarily equity, interest rate, credit, foreign currency and market volatility. Some of these 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 derivatives not designated as hedges and embedded derivatives in our FIA product as of June 30, 2023 and December 31, 2022:  

		June 30, 2023					December 31, 2022
(In thousands, except number of contracts)	Location in the
Derivatives Not Designated	Consolidated	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	$	911,030	668	$	36,700	$	831,657	595	$	15,592
Equity-indexed embedded derivatives	Deposit-type contracts		866,847	7,095		142,800		782,997	6,131		111,618

At June 30, 2023, 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 price changes in the capital markets, our securities positions resulted in increased unrealized losses at June 30, 2023, compared to December 31, 2022, 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 June 30, 2023 were $14.4 million compared to unrealized losses of $10.5 million as of December 31, 2022.

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, 2023						December 31, 2022
(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	$	170,992	$	163,894	$	7,098	$	150,413	$	143,952	$	6,461
Crestline Re SP1		447,113		446,708		405		354,806		356,374		(1,568)
Ironbound		164,611		159,116		5,495		159,644		154,477		5,167
Ascendent Re		64,479		62,626		1,853		56,064		54,790		1,274
SRC4		152,401		152,828		(427)		61,646		62,516		(870)
Total	$	999,596	$	985,172	$	14,424	$	782,573	$	772,109	$	10,464

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 June 30, 2023, and cumulative unrealized losses of $10.5 million as of December 31, 2022, respectively. The terms of the contracts with the third-party reinsurers provide that the changes in unrealized gains or losses 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 $3.9 million and a gain in the embedded derivative of $2.9 million for the six months ended June 30, 2023 and 2022, 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.