DERIVATIVES

The Company uses derivatives as part of its overall asset/liability risk management primarily to reduce exposures to equity market and interest rate risks. Derivative hedging strategies are designed to reduce these risks from an economic perspective and are all executed within the framework of a “Derivative Use Plan” approved by applicable states’ insurance law. Derivatives are generally not accounted for using hedge accounting, with the exception of Treasury Inflation-Protected Securities (“TIPS”), which is discussed further below. Operation of these hedging programs is based on models involving numerous estimates and assumptions, including, among others, mortality, lapse, surrender and withdrawal rates, election rates, fund performance, market volatility and interest rates. A wide range of derivative contracts are used in these hedging programs, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, bond and bond-index total return swaps, swaptions, variance swaps and equity options, credit and foreign exchange derivatives, as well as bond and repo transactions to support the hedging. The derivative contracts are collectively managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in capital markets. In addition, as part of its hedging strategy, the Company targets an asset level for all variable annuity products at or above a CTE98 level under most economic scenarios (CTE is a statistical measure of tail risk which quantifies the total asset requirement to sustain a loss if an event outside a given probability level has occurred. CTE98 denotes the financial resources a company would need to cover the average of the worst 2% of scenarios.)

Derivatives utilized to hedge exposure to Variable Annuities with Guarantee Features

The Company has issued and continues to offer variable annuity products with GMxB features. The risk associated with the GMDB feature is that under-performance of the financial markets could result in GMDB benefits, in the event of death, being higher than what accumulated policyholders’ account balances would support. The risk associated with the GMIB feature is that under-performance of the financial markets could result in the present value of GMIB, in the event of annuitization, being higher than what accumulated policyholders’ account balances would support, taking into account the relationship between current annuity purchase rates and the GMIB guaranteed annuity purchase rates. The risk associated with products that have a GMxB derivative features liability is that under-performance of the financial markets could result in the GMxB derivative features’ benefits being higher than what accumulated policyholders’ account balances would support.

For GMxB features, the Company retains certain risks including basis, credit spread and some volatility risk and risk associated with actual versus expected actuarial assumptions for mortality, lapse and surrender, withdrawal and policyholder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMxB features that result from financial markets movements. A portion of exposure to realized equity volatility is hedged using equity options and variance swaps and a portion of exposure to credit risk is hedged using total return swaps on fixed income indices. Additionally, the Company is party to total return swaps for which the reference U.S. Treasury securities are contemporaneously purchased from the market and sold to the swap counterparty. As these transactions result in a transfer of control of the U.S. Treasury securities to the swap counterparty, the Company derecognizes these securities with consequent gain or loss from the sale. The Company has also purchased reinsurance contracts to mitigate the risks associated with GMDB features and the impact of potential market fluctuations on future policyholder elections of GMIB features contained in certain annuity contracts issued by the Company.

Derivatives utilized to hedge crediting rate exposure on SCS, SIO, MSO and IUL products/investment options

The Company hedges crediting rates in the Structured Capital Strategies (“SCS”) variable annuity, Structured Investment Option in the EQUI-VEST variable annuity series (“SIO”), Market Stabilizer Option (“MSO”) in the variable life insurance products and Indexed Universal Life (“IUL”) insurance products. These products permit the contract owner to participate in the performance of an index, ETF or commodity price movement up to a cap for a set period of time. They also contain a protection feature, in which the Company will absorb, up to a certain percentage, the loss of value in an index, ETF or commodity price, which varies by product segment.

In order to support the returns associated with these features, the Company enters into derivative contracts whose payouts, in combination with fixed income investments, emulate those of the index, ETF or commodity price, subject to caps and buffers, thereby substantially reducing any exposure to market-related earnings volatility.

Derivatives used for General Account Investment Portfolio

The Company maintains a strategy in its General Account investment portfolio to replicate the credit exposure of fixed maturity securities otherwise permissible for investment under its investment guidelines through the sale of credit default swaps (“CDSs”). Under the terms of these swaps, the Company receives quarterly fixed premiums that, together with any initial amount paid or received at trade inception, replicate the credit spread otherwise currently obtainable by purchasing the referenced entity’s bonds of similar maturity. These credit derivatives generally have remaining terms of five years or less and are recorded at fair value with changes in fair value, including the yield component that emerges from initial amounts paid or received, reported in Net investment income (loss).

The Company manages its credit exposure taking into consideration both cash and derivatives based positions and selects the reference entities in its replicated credit exposures in a manner consistent with its selection of fixed maturities. In addition, the Company generally transacts the sale of CDSs in single name reference entities of investment grade credit quality and with counterparties subject to collateral posting requirements. If there is an event of default by the reference entity or other such credit event as defined under the terms of the swap contract, the Company is obligated to perform under the credit derivative and, at the counterparty’s option, either pay the referenced amount of the contract less an auction-determined recovery amount or pay the referenced amount of the contract and receive in return the defaulted or similar security of the reference entity for recovery by sale at the contract settlement auction.

To date, there have been no events of default or circumstances indicative of a deterioration in the credit quality of the named referenced entities to require or suggest that the Company will have to perform under these CDSs. The maximum potential amount of future payments the Company could be required to make under these credit derivatives is limited to the par value of the referenced securities which is the U.S. dollar or euro-equivalent of the derivative’s notional amount. The Standard North American CDS Contract (“SNAC”) or Standard European Corporate Contract (“STEC”) under which the Company executes these CDS sales transactions does not contain recourse provisions for recovery of amounts paid under the credit derivative.

The Company purchased 30-year TIPS and other sovereign bonds, both inflation linked and non-inflation linked, as General Account investments and enters into asset or cross-currency basis swaps, to result in payment of the given bond’s coupons and principal at maturity in the bond’s specified currency to the swap counterparty in return for fixed dollar amounts. These swaps, when considered in combination with the bonds, together result in a net position that is intended to replicate a dollar-denominated fixed-coupon cash bond with a yield higher than a term-equivalent U.S. Treasury bond.

In 2016, the Company implemented a program to mitigate its duration gap using total return swaps for which the reference U.S. Treasury securities are sold to the swap counterparty under arrangements economically similar to repurchase agreements. As these transactions result in a transfer of control of the U.S. Treasury securities to the swap counterparty, the Company derecognizes these securities with consequent gain or loss from the sale. Under this program, the Company derecognized $3,905 million of U.S. Treasury securities for which the Company received proceeds of $3,905 million at inception of the total return swap contract. Under the terms of these swaps, the Company retains ongoing exposure to the total returns of the underlying U.S. Treasury securities in exchange for a financing cost. At March 31, 2019, the aggregate fair value of U.S. Treasury securities derecognized under this program was $3,788 million. Reported in Other invested assets in the Company’s balance sheet at March 31, 2019 is $87 million, representing the fair value of the total return swap contracts.

The tables below present quantitative disclosures about the Company’s derivative instruments, including those embedded in other contracts required to be accounted for as derivative instruments.

Derivative Instruments by Category



	At March 31, 2019						Gains (Losses) Reported in Net Income (Loss) Three Months Ended March 31, 2019
			Fair Value
	Notional Amount		Asset Derivatives		Liability Derivatives
	(in millions)
Freestanding Derivatives (1) (2):
Equity contracts:
Futures	$	6,544	$	—	$	—	$	(738	)
Swaps	8,065		6		371		(973		)
Options	37,417		3,474		1,310		1,101
Interest rate contracts:
Swaps	28,153		910		209		648
Futures	16,385		—		—		55
Credit contracts:
Credit default swaps	1,242		22		—		10
Other freestanding contracts:
Foreign currency contracts	1,796		24		1		10
Margin	—		16		—		—
Collateral	—		9		2,556		—

Embedded Derivatives (2):
GMIB reinsurance contracts	—		2,009		—		27
GMxB derivative features liability (3)	—		—		5,944		(409		)
SCS, SIO, MSO and IUL indexed features (4)	—		—		1,992		(1,286		)
Total	$	99,602	$	6,470	$	12,383	$	(1,555	)

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(1)	Reported in Other invested assets in the consolidated balance sheets.


(2)	Reported in Net derivative gains (losses) in the consolidated statements of income (loss).


(3)	Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.


(4)	SCS, SIO, MSO and IUL indexed features are reported in Policyholders’ account balances in the consolidated balance sheets.



	At December 31, 2018						Gains (Losses) Reported in Net Income (Loss) Three Months Ended March 31, 2018
			Fair Value
	Notional Amount		Asset Derivatives		Liability Derivatives
	(in millions)
Freestanding Derivatives (1) (2):
Equity contracts:
Futures	$	10,411	$	—	$	—	$	(29	)
Swaps	7,697		140		168		64
Options	21,698		2,119		1,163		(15		)
Interest rate contracts:
Swaps	27,003		632		194		(490		)
Futures	11,448		—		—		40
Credit contracts:
Credit default swaps	1,282		17		—		—
Other freestanding contracts:
Foreign currency contracts	2,097		27		14		(51		)
Margin	—		7		5		—
Collateral	—		3		1,564		—

Embedded Derivatives (2):
GMIB reinsurance contracts	—		1,991		—		(842		)
GMxB derivative features liability (3)	—		—		5,431		485
SCS, SIO, MSO and IUL indexed features (4)	—		—		687		21
Total	$	81,636	$	4,936	$	9,226	$	(817	)

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(1)	Reported in Other invested assets in the consolidated balance sheets.


(2)	Reported in Net derivative gains (losses) in the consolidated statements of income (loss).


(3)	Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.


(4)	SCS, SIO, MSO and IUL indexed features are reported in Policyholders’ account balances in the consolidated balance sheets.

Equity-Based and Treasury Futures Contracts Margin

All outstanding equity-based and treasury futures contracts at March 31, 2019 are exchange-traded and net settled daily in cash. At March 31, 2019, the Company had open exchange-traded futures positions on: (i) the S&P 500, Russell 2000, and Emerging Market indices, having initial margin requirements of $256 million, (ii) the 2-year, 5-year and 10-year U.S. Treasury Notes on U.S. Treasury bonds and ultra-long bonds, having initial margin requirements of $34 million and (iii) the Euro Stoxx, FTSE 100, Topix, ASX 200, and European, Australasia, and Far East (“EAFE”) indices as well as corresponding currency futures on the Euro/U.S. dollar, Pound/U.S. dollar, Australian dollar/U.S. dollar, and Yen/U.S. dollar, having initial margin requirements of $25 million.

Collateral Arrangements

The Company generally has executed a Credit Support Annex (“CSA”) under the International Swaps and Derivatives Association Master Agreement (“ISDA Master Agreement”) it maintains with each of its over-the-counter (“OTC”) derivative counterparties that requires both posting and accepting collateral either in the form of cash or high-quality securities, such as U.S. Treasury securities, U.S. government and government agency securities and investment grade corporate bonds. The Company nets the fair value of all derivative financial instruments with counterparties for which an ISDA Master Agreement and related CSA have been executed. At March 31, 2019 and December 31, 2018, respectively, the Company held $2,556 million and $1,564 million in cash and securities collateral delivered by trade counterparties, representing the fair value of the related derivative agreements. The unrestricted cash collateral is reported in Other invested assets. The Company posted collateral of $9 million and $3 million at March 31, 2019 and December 31, 2018, respectively, in the normal operation of its collateral arrangements.

Securities Repurchase and Reverse Repurchase Transactions

Securities repurchase and reverse repurchase transactions are conducted by the Company under a standardized securities industry master agreement, amended to suit the requirements of each respective counterparty. The Company’s securities repurchase and reverse repurchase agreements are accounted for as secured borrowing or lending arrangements, respectively and are reported in the consolidated balance sheets on a gross basis. At March 31, 2019 and December 31, 2018, the balance outstanding under securities repurchase transactions was $0 and $573 million, respectively. The Company utilized these repurchase and reverse repurchase agreements for asset liability and cash management purposes. For other instruments used for asset and liability management purposes, see Note 12.

The following table presents information about the Company’s offsetting of financial assets and liabilities and derivative instruments at March 31, 2019.

Offsetting of Financial Assets and Liabilities and Derivative Instruments

At March 31, 2019



	Gross Amount Recognized		Gross Amount Offset in the Balance Sheets		Net Amount Presented in the Balance Sheets
	(in millions)
Assets
Total derivatives	$	4,460	$	4,399	$	61
Other financial instruments	1,688		—		1,688
Other invested assets	$	6,148	$	4,399	$	1,749

Liabilities
Total derivatives	$	4,399	$	4,352	$	47
Other financial liabilities	1,553		—		1,553
Other liabilities	$	5,952	$	4,352	$	1,600

The following table presents information about the Company’s gross collateral amounts that are not offset in the consolidated balance sheets at March 31, 2019.

Collateral Amounts Not Offset in the Consolidated Balance Sheets

At March 31, 2019



	Net Amount Presented in the Balance Sheets		Collateral (Received)/Held
	Net Amount Presented in the Balance Sheets		Financial Instruments		Cash		Net Amount
	(in millions)
Assets
Total derivatives	$	2,546	$	367	$	2,118	$	61
Other financial instruments	1,688		—		—		1,688
Other invested assets	$	4,234	$	367	$	2,118	$	1,749

Liabilities
Total derivatives	$	47	$	—	$	—	$	47
Other financial liabilities	1,553		—		—		1,553
Other liabilities	$	1,600	$	—	$	—	$	1,600

The Company had no securities sold under agreements to repurchase at March 31, 2019.

The following table presents information about the Company’s offsetting financial assets and liabilities and derivative instruments at December 31, 2018.

Offsetting of Financial Assets and Liabilities and Derivative Instruments

At December 31, 2018



	Gross Amount Recognized		Gross Amount Offset in the Balance Sheets		Net Amount Presented in the Balance Sheets
	(in millions)
Assets
Total derivatives	$	2,946	$	2,912	$	34
Other financial instruments	1,520		—		1,520
Other invested assets	$	4,466	$	2,912	$	1,554

Liabilities
Total derivatives	$	3,109	$	2,912	$	197
Other financial liabilities	1,263		—		1,263
Other liabilities	$	4,372	$	2,912	$	1,460

Securities sold under agreement to repurchase (1)	$	571	$	—	$	571

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(1)	Excludes expense of $2 million in Securities sold under agreement to repurchase.

The following table presents information about the Company’s gross collateral amounts that are not offset in the consolidated balance sheets at December 31, 2018.

Collateral Amounts Not Offset in the Consolidated Balance Sheets

At December 31, 2018



	Net Amount Presented in the Balance Sheets		Collateral (Received)/Held
	Net Amount Presented in the Balance Sheets		Financial Instruments			Cash			Net Amount
	(in millions)
Assets
Total derivatives	$	1,397	$	—		$	(1,363	)	$	34
Other financial instruments	1,520		—			—			1,520
Other invested assets	$	2,917	$	—		$	(1,363	)	$	1,554

Liabilities
Total derivatives	$	197	$	—		$	—		$	197
Other financial liabilities	1,263		—			—			1,263
Other liabilities	$	1,460	$	—		$	—		$	1,460

Securities sold under agreement to repurchase (1) (2) (3)	$	571	$	(588	)	$	—		$	(17	)

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(1)	Excludes expense of $2 million in Securities sold under agreement to repurchase.


(2)	U.S. Treasury and agency securities are in Fixed maturities available-for-sale on the consolidated balance sheets.


(3)	Cash is included in Cash and cash equivalents on consolidated balance sheets.

The following table presents information about repurchase agreements accounted for as secured borrowings in the consolidated balance sheets at December 31, 2018.

Repurchase Agreement Accounted for as Secured Borrowings

At December 31, 2018



	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Up to 30 days		30–90 days		Greater Than 90 days		Total
	(in millions)
Securities sold under agreement to repurchase: (1)
U.S. Treasury and agency securities	$	—	$	571	$	—	$	—	$	571
Total	$	—	$	571	$	—	$	—	$	571

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(1)	Excludes expense of $2 million in Securities sold under agreement to repurchase on the consolidated balance sheets.