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Derivatives
 12 Months Ended
Dec. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
8. Derivatives
Accounting for Derivatives
See Note 1 for a description of the Company’s accounting policies for derivatives and Note 9 for information about the fair value hierarchy for derivatives.
Derivatives are financial instruments with values derived from interest rates, foreign currency exchange rates, credit spreads and/or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter (“OTC”) market. Certain of the Company’s OTC derivatives are cleared and settled through central clearing counterparties (“OTC-cleared”), while others are bilateral contracts between two counterparties (“OTC-bilateral”). The types of derivatives the Company uses include swaps, forwards, futures and option contracts. To a lesser extent, the Company uses credit default swaps to synthetically replicate investment risks and returns which are not readily available in the cash markets.
Interest Rate Derivatives
The Company uses a variety of interest rate derivatives to reduce its exposure to changes in interest rates, including interest rate swaps, caps, floors, swaptions, futures and forwards.
Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). In an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional amount. The Company utilizes interest rate swaps in fair value, cash flow and nonqualifying hedging relationships.
Interest rate total return swaps are swaps whereby the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of an asset or a market index and the London Interbank Offered Rate (“LIBOR”), calculated by reference to an agreed notional amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by the counterparty at each due date. Interest rate total return swaps are used by the Company to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). The Company utilizes interest rate total return swaps in nonqualifying hedging relationships.
The Company purchases interest rate caps and floors primarily to protect its floating rate liabilities against rises in interest rates above a specified level, and against interest rate exposure arising from mismatches between assets and liabilities, as well as to protect its minimum rate guarantee liabilities against declines in interest rates below a specified level, respectively. In certain instances, the Company locks in the economic impact of existing purchased caps and floors by entering into offsetting written caps and floors. The Company utilizes interest rate caps and floors in nonqualifying hedging relationships.
In exchange-traded interest rate (Treasury and swap) futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of interest rate securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded interest rate (Treasury and swap) futures are used primarily to hedge mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets, to hedge against changes in value of securities the Company owns or anticipates acquiring, to hedge against changes in interest rates on anticipated liability issuances by replicating Treasury or swap curve performance, and to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. The Company utilizes exchange-traded interest rate futures in nonqualifying hedging relationships.
Swaptions are used by the Company to hedge interest rate risk associated with the Company’s long-term liabilities and invested assets. A swaption is an option to enter into a swap with a forward starting effective date. In certain instances, the Company locks in the economic impact of existing purchased swaptions by entering into offsetting written swaptions. The Company pays a premium for purchased swaptions and receives a premium for written swaptions. The Company utilizes swaptions in nonqualifying hedging relationships. Swaptions are included in interest rate options.
Foreign Currency Exchange Rate Derivatives
The Company uses foreign currency swaps to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. In a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a fixed exchange rate, generally set at inception, calculated by reference to an agreed upon notional amount. The notional amount of each currency is exchanged at the inception and termination of the currency swap by each party. The Company utilizes foreign currency swaps in cash flow and nonqualifying hedging relationships.
To a lesser extent, the Company uses foreign currency forwards in nonqualifying hedging relationships.
Credit Derivatives
The Company enters into purchased credit default swaps to hedge against credit-related changes in the value of its investments. In a credit default swap transaction, the Company agrees with another party to pay, at specified intervals, a premium to hedge 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 delivery of par quantities of the referenced investment equal to the specified swap notional amount in exchange for the payment of cash amounts by the counterparty equal to the par value of the investment surrendered. Credit events vary by type of issuer but typically include bankruptcy, failure to pay debt obligations, repudiation, moratorium, involuntary restructuring or governmental intervention. In each case, payout on a credit default swap is triggered only after the Credit Derivatives Determinations Committee of the International Swaps and Derivatives Association, Inc. (“ISDA”) deems that a credit event has occurred. The Company utilizes credit default swaps in nonqualifying hedging relationships.
The Company enters into written credit default swaps to create synthetic credit investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and one or more cash instruments, such as U.S. government and agency securities or other fixed maturity securities. These credit default swaps are not designated as hedging instruments.
Equity Derivatives
The Company uses a variety of equity derivatives to reduce its exposure to equity market risk, including equity index options, equity variance swaps, exchange-traded equity futures and equity total return swaps.
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. To hedge against adverse changes in equity indices, the Company enters into contracts to sell the equity index within a limited time at a contracted price. The contracts will be net settled in cash based on differentials in the indices at the time of exercise and the strike price. Certain of these contracts may also contain settlement provisions linked to interest rates. In certain instances, the Company may enter into a combination of transactions to hedge adverse changes in equity indices within a pre-determined range through the purchase and sale of options. The Company utilizes equity index options in nonqualifying hedging relationships.
Equity variance swaps are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. In an equity variance swap, the Company agrees with another party to exchange amounts in the future, based on changes in equity volatility over a defined period. The Company utilizes equity variance swaps in nonqualifying hedging relationships.
In exchange-traded equity futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of equity securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded equity futures are used primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. The Company utilizes exchange-traded equity futures in nonqualifying hedging relationships.
In an equity total return swap, the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of an asset or a market index and the LIBOR, calculated by reference to an agreed notional amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract based on the terms of the swap. The Company uses equity total return swaps to hedge its equity market guarantees in certain of its insurance products. Equity total return swaps can be used as hedges or to create synthetic investments. The Company utilizes equity total return swaps in nonqualifying hedging relationships.
Primary Risks Managed by Derivatives
The following table presents the primary underlying risk exposure, gross notional amount, and estimated fair value of the Company’s derivatives, excluding embedded derivatives, held at:
 
Primary Underlying Risk Exposure
 
December 31,
 
 
2017
 
2016
 
 
 
 
Estimated Fair Value
 
 
 
Estimated Fair Value
 
 
Gross
Notional
Amount
 
Assets
 
Liabilities
 
Gross
Notional
Amount
 
Assets
 
Liabilities
 
 
 
(In millions)
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Interest rate
 
$
175

 
$
44

 
$
—

 
$
310

 
$
41

 
$
—

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Interest rate
 
27

 
5

 
—

 
45

 
7

 
—

Foreign currency swaps
Foreign currency exchange rate
 
1,762

 
86

 
75

 
1,420

 
186

 
10

Subtotal
 
1,789

 
91

 
75

 
1,465

 
193

 
10

Total qualifying hedges
 
1,964

 
135

 
75

 
1,775

 
234

 
10

Derivatives Not Designated or Not Qualifying as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Interest rate
 
20,213

 
922

 
774

 
28,175

 
1,928

 
1,688

Interest rate floors
Interest rate
 
—

 
—

 
—

 
2,100

 
5

 
2

Interest rate caps
Interest rate
 
2,671

 
7

 
—

 
12,042

 
25

 
—

Interest rate futures
Interest rate
 
282

 
1

 
—

 
1,288

 
9

 
—

Interest rate options
Interest rate
 
24,600

 
133

 
63

 
15,520

 
136

 
—

Interest rate total return swaps
Interest rate
 
—

 
—

 
—

 
3,876

 
—

 
611

Foreign currency swaps
Foreign currency exchange rate
 
1,103

 
69

 
41

 
1,250

 
153

 
4

Foreign currency forwards
Foreign currency exchange rate
 
130

 
—

 
2

 
158

 
9

 
—

Credit default swaps — purchased
Credit
 
65

 
—

 
1

 
34

 
—

 
—

Credit default swaps — written
Credit
 
1,878

 
40

 
—

 
1,891

 
28

 
—

Equity futures
Equity market
 
2,713

 
15

 
—

 
8,037

 
38

 
—

Equity index options
Equity market
 
47,066

 
794

 
1,664

 
37,501

 
897

 
934

Equity variance swaps
Equity market
 
8,998

 
128

 
430

 
14,894

 
140

 
517

Equity total return swaps
Equity market
 
1,767

 
—

 
79

 
2,855

 
1

 
117

Total non-designated or nonqualifying derivatives
 
111,486

 
2,109

 
3,054

 
129,621

 
3,369

 
3,873

Total
 
$
113,450

 
$
2,244

 
$
3,129

 
$
131,396

 
$
3,603

 
$
3,883


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 December 31, 2017 and 2016. The Company’s use of derivatives includes (i) derivatives that serve as macro hedges of the Company’s exposure to various risks and that generally do not qualify for hedge accounting due to the criteria required under the portfolio hedging rules; (ii) derivatives that economically hedge insurance liabilities that contain mortality or morbidity risk and that generally do not qualify for hedge accounting because the lack of these risks in the derivatives cannot support an expectation of a highly effective hedging relationship; (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. For these nonqualified derivatives, changes in market factors can lead to the recognition of fair value changes on the statement of operations without an offsetting gain or loss recognized in earnings for the item being hedged.
The following table presents earned income on derivatives:
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(In millions)
Qualifying hedges:
 
 
 
 
 
Net investment income
$
21

 
$
19

 
$
11

Interest credited to policyholder account balances
—

 
—

 
(2
)
Nonqualifying hedges:
 
 
 
 
 
Net derivative gains (losses)
314

 
460

 
361

Policyholder benefits and claims
8

 
16

 
14

Total
$
343

 
$
495

 
$
384

The following tables present the amount and location of gains (losses) recognized for derivatives and gains (losses) pertaining to hedged items presented in net derivative gains (losses):
 
Year Ended December 31, 2017
 
Net
Derivative
Gains
(Losses)
Recognized for
Derivatives (1)
 
Net
Derivatives
Gains (Losses)
Recognized for
Hedged Items (2)
 
Net
Investment
Income
(3)
 
Policyholder
Benefits and
Claims (4)
 
Amount of Gains (Losses) deferred in AOCI
 
(In millions)
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Fair value hedges (5):
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$
2

 
$
(2
)
 
$
—

 
$
—

 
$
—

Total fair value hedges
2

 
(2
)
 
—

 
—

 
—

Cash flow hedges (5):
 
 
 
 
 
 
 
 
 
Interest rate derivatives
—

 
—

 
6

 
—

 
1

Foreign currency exchange rate derivatives
8

 
(9
)
 
—

 
—

 
(153
)
Total cash flow hedges
8

 
(9
)
 
6

 
—

 
(152
)
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Interest rate derivatives
(325
)
 
—

 
—

 
8

 
—

Foreign currency exchange rate derivatives
(98
)
 
(32
)
 
—

 
—

 
—

Credit derivatives
21

 
—

 
—

 
—

 
—

Equity derivatives
(2,584
)
 
—

 
(1
)
 
(341
)
 
—

Embedded derivatives
1,237

 
—

 
—

 
(16
)
 
—

Total non-qualifying hedges
(1,749
)
 
(32
)
 
(1
)
 
(349
)
 
—

Total
$
(1,739
)
 
$
(43
)
 
$
5

 
$
(349
)
 
$
(152
)
 
Year Ended December 31, 2016
 
Net
Derivative
Gains
(Losses)
Recognized for
Derivatives (1)
 
Net
Derivatives
Gains (Losses)
Recognized for
Hedged Items (2)
 
Net
Investment
Income
(3)
 
Policyholder
Benefits and
Claims (4)
 
Amount of Gains (Losses) deferred in AOCI
 
(In millions)
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Fair value hedges (5):
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$
1

 
$
(1
)
 
$
—

 
$
—

 
$
—

Total fair value hedges
1

 
(1
)
 
—

 
—

 
—

Cash flow hedges (5):
 
 
 
 
 
 
 
 
 
Interest rate derivatives
35

 
—

 
5

 
—

 
28

Foreign currency exchange rate derivatives
3

 
(2
)
 
—

 
—

 
42

Total cash flow hedges
38

 
(2
)
 
5

 
—

 
70

Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Interest rate derivatives
(2,873
)
 
—

 
—

 
(4
)
 
—

Foreign currency exchange rate derivatives
76

 
(14
)
 
—

 
—

 
—

Credit derivatives
10

 
—

 
—

 
—

 
—

Equity derivatives
(1,724
)
 
—

 
(6
)
 
(320
)
 
—

Embedded derivatives
(1,741
)
 
—

 
—

 
(4
)
 
—

Total non-qualifying hedges
(6,252
)
 
(14
)
 
(6
)
 
(328
)
 
—

Total
$
(6,213
)
 
$
(17
)
 
$
(1
)
 
$
(328
)
 
$
70


 
Year Ended December 31, 2015
 
Net
Derivative
Gains
(Losses)
Recognized for
Derivatives (1)
 
Net
Derivatives
Gains (Losses)
Recognized for
Hedged Items (2)
 
Net
Investment
Income
(3)
 
Policyholder
Benefits and
Claims (4)
 
Amount of Gains (Losses) deferred in AOCI
 
(In millions)
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Fair value hedges (5):
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$
3

 
$
(1
)
 
$
—

 
$
—

 
$
—

Total fair value hedges
3

 
(1
)
 
—

 
—

 
—

Cash flow hedges (5):
 
 
 
 
 
 
 
 
 
Interest rate derivatives
3

 
—

 
3

 
—

 
16

Foreign currency exchange rate derivatives
—

 
1

 
—

 
—

 
79

Total cash flow hedges
3

 
1

 
3

 
—

 
95

Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Interest rate derivatives
(67
)
 
—

 
—

 
5

 
—

Foreign currency exchange rate derivatives
44

 
(7
)
 
—

 
—

 
—

Credit derivatives
(14
)
 
—

 
—

 
—

 
—

Equity derivatives
(476
)
 
—

 
(4
)
 
(25
)
 
—

Embedded derivatives
(344
)
 
—

 
—

 
21

 
—

Total non-qualifying hedges
(857
)
 
(7
)
 
(4
)
 
1

 
—

Total
$
(851
)
 
$
(7
)
 
$
(1
)
 
$
1

 
$
95

______________
(1)
Includes gains (losses) reclassified from AOCI for cash flow hedges. Ineffective portion of the gains (losses) recognized in income is not significant.
(2)
Includes foreign currency transaction gains (losses) on hedged items in cash flow and nonqualifying hedging relationships. Hedged items in fair value hedging relationship includes fixed rate liabilities reported in policyholder account balances or future policy benefits and fixed maturity securities.
(3)
Includes changes in estimated fair value related to economic hedges of equity method investments in joint ventures and gains (losses) reclassified from AOCI for cash flow hedges.
(4)
Changes in estimated fair value related to economic hedges of variable annuity guarantees included in future policy benefits.
(5)
All components of each derivative's gain or loss were included in the assessment of hedge effectiveness.
In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions were no longer probable of occurring. Because certain of the forecasted transactions also were not probable of occurring within two months of the anticipated date, the Company reclassified amounts from AOCI into net derivative gains (losses). These amounts were $9 million, $1 million and $3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
At December 31, 2017 and 2016, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions did not exceed two years and three years, respectively.
At December 31, 2017 and 2016, the balance in AOCI associated with cash flow hedges was $231 million and $397 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. Such credit derivatives are included within the nonqualifying derivatives and derivatives for purposes other than hedging table. 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 Company can terminate these contracts at any time through cash settlement with the counterparty at an amount equal to the then current estimated fair value of the credit default swaps.
The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps at:
 
 
December 31,
 
 
2017
 
2016
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
 
$
12

 
$
558

 
2.8
 
$
9

 
478

 
3.6
Baa
 
28

 
1,295

 
4.7
 
19

 
1,393

 
4.4
Ba
 
—

 
25

 
4.5
 
—

 
20

 
2.7
Total
 
$
40

 
$
1,878

 
4.1
 
$
28

 
$
1,891

 
4.2
______________
(1)
Includes both single name credit default swaps that may be referenced to the credit of corporations, foreign governments, or state and political subdivisions and credit default swap referencing indices. The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s Investors Service (“Moody’s”), S&P and Fitch Ratings. 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.
Credit Risk
The Company may be exposed to credit-related losses in the event of nonperformance by its counterparties to derivatives. Generally, the current credit exposure of the Company’s derivatives is limited to the net positive estimated fair value of derivatives at the reporting date after taking into consideration the existence of master netting or similar agreements and any collateral received pursuant to such agreements.
The Company manages its credit risk related to derivatives by entering into transactions with creditworthy counterparties and establishing and monitoring exposure limits. The Company’s OTC-bilateral derivative transactions are generally governed by ISDA Master Agreements which provide for legally enforceable set-off and close-out netting of exposures to specific counterparties in the event of early termination of a transaction, which includes, but is not limited to, events of default and bankruptcy. In the event of an early termination, the Company is permitted to set off receivables from the counterparty against payables to the same counterparty arising out of all included transactions. Substantially all of the Company’s ISDA Master Agreements also include Credit Support Annex provisions which require both the pledging and accepting of collateral in connection with its OTC-bilateral derivatives.
The Company’s OTC-cleared derivatives are effected through central clearing counterparties and its exchange-traded derivatives are effected through regulated exchanges. Such positions are marked to market and margined on a daily basis (both initial margin and variation margin), and the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivatives.
See Note 9 for a description of the impact of credit risk on the valuation of derivatives.
The estimated fair values of the Company’s net derivative assets and net derivative liabilities after the application of master netting agreements and collateral were as follows at:
 
 
December 31,
 
 
2017
 
2016
Derivatives Subject to a Master Netting Arrangement or a Similar Arrangement
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
(In millions)
Gross estimated fair value of derivatives:
 
 
 
 
 
 
 
 
OTC-bilateral (1)
 
$
2,222

 
$
3,080

 
$
3,394

 
$
2,929

OTC-cleared and Exchange-traded (1) (6)
 
69

 
40

 
313

 
905

Total gross estimated fair value of derivatives (1)
 
2,291

 
3,120

 
3,707

 
3,834

Amounts offset on the consolidated balance sheets
 
—

 
—

 
—

 
—

Estimated fair value of derivatives presented on the consolidated balance sheets (1) (6)
 
2,291

 
3,120

 
3,707

 
3,834

Gross amounts not offset on the consolidated balance sheets:
 
 
 
 
 
 
 
 
Gross estimated fair value of derivatives: (2)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(1,942
)
 
(1,942
)
 
(2,231
)
 
(2,231
)
OTC-cleared and Exchange-traded
 
(1
)
 
(1
)
 
(165
)
 
(165
)
Cash collateral: (3), (4)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(247
)
 
—

 
(634
)
 
—

OTC-cleared and Exchange-traded
 
(27
)
 
(39
)
 
(91
)
 
(740
)
Securities collateral: (5)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(31
)
 
(1,138
)
 
(429
)
 
(698
)
OTC-cleared and Exchange-traded
 
—

 
—

 
—

 
—

Net amount after application of master netting agreements and collateral
 
$
43

 
$
—

 
$
157

 
$
—

______________
(1)
At December 31, 2017 and 2016, derivative assets included income or (expense) accruals reported in accrued investment income or in other liabilities of $47 million and $104 million, respectively, and derivative liabilities included (income) or expense accruals reported in accrued investment income or in other liabilities of ($9) million and ($49) million, respectively.
(2)
Estimated fair value of derivatives is limited to the amount that is subject to set-off and includes income or expense accruals.
(3)
Cash collateral received by the Company for OTC-bilateral and OTC-cleared derivatives is included in cash and cash equivalents, short-term investments or in fixed maturity securities, and the obligation to return it is included in payables for collateral under securities loaned and other transactions on the balance sheet.
(4)
The receivable for the return of cash collateral provided by the Company is inclusive of initial margin on exchange-traded and OTC-cleared derivatives and is included in premiums, reinsurance and other receivables on the balance sheet. The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements. At December 31, 2017 and 2016, the Company received excess cash collateral of $93 million and $3 million, respectively, and provided excess cash collateral of $5 million and $25 million, respectively, which is not included in the table above due to the foregoing limitation.
(5)
Securities collateral received by the Company is held in separate custodial accounts and is not recorded on the balance sheet. Subject to certain constraints, the Company is permitted by contract to sell or re-pledge this collateral, but at December 31, 2017 none of the collateral had been sold or re-pledged. Securities collateral pledged by the Company is reported in fixed maturity securities on the balance sheet. Subject to certain constraints, the counterparties are permitted by contract to sell or re-pledge this collateral. The amount of securities collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements and cash collateral. At December 31, 2017 and 2016, the Company received excess securities collateral with an estimated fair value of $337 million and $135 million, respectively, for its OTC-bilateral derivatives, which are not included in the table above due to the foregoing limitation. At December 31, 2017 and 2016, the Company provided excess securities collateral with an estimated fair value of $471 million and $108 million, respectively, for its OTC-bilateral derivatives, $426 million and $630 million, respectively, for its OTC-cleared derivatives, and $118 million and $453 million, respectively, for its exchange-traded derivatives, which are not included in the table above due to the foregoing limitation.
(6)
Effective January 3, 2017, the CME amended its rulebook, resulting in the characterization of variation margin transfers as settlement payments, as opposed to adjustments to collateral. See Note 1 for further information on the CME amendments.
The Company’s collateral arrangements for its OTC-bilateral derivatives generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the collateral amount owed by that counterparty reaches a minimum transfer amount. A small number of these arrangements also include credit-contingent provisions that include a threshold above which collateral must be posted. Such agreements provide for a reduction of these thresholds (on a sliding scale that converges toward zero) in the event of downgrades in the credit ratings of Brighthouse Life Insurance Company, and/or the counterparty. In addition, substantially all of the Company’s netting agreements for derivatives contain provisions that require both the Company and the counterparty to maintain a specific investment grade credit rating from each of Moody’s and S&P. If a party’s financial strength or credit ratings, as applicable, were to fall below that specific investment grade credit rating, that party would be in violation of these provisions, and the other party to the derivatives could terminate the transactions and demand immediate settlement and payment based on such party’s reasonable valuation of the derivatives.
The following table presents the estimated fair value of the Company’s OTC-bilateral derivatives that are in a net liability position after considering the effect of netting agreements, together with the estimated fair value and balance sheet location of the collateral pledged. The Company’s collateral agreements require both parties to be fully collateralized, as such, Brighthouse Life Insurance Company would not be required to post additional collateral as a result of a downgrade in financial strength rating. OTC-bilateral derivatives that are not subject to collateral agreements are excluded from this table.
 
 
December 31,
 
 
2017
 
2016
 
 
(In millions)
Estimated fair value of derivatives in a net liability position (1)
 
$
1,138

 
$
698

Estimated Fair Value of Collateral Provided:
 
 
 
 
Fixed maturity securities
 
$
1,414

 
$
777

______________
(1)
After taking into consideration the existence of netting agreements.
Embedded Derivatives
The Company issues certain products or purchases certain investments that contain embedded derivatives that are required to be separated from their host contracts and accounted for as freestanding derivatives. These host contracts principally include: variable annuities with guaranteed minimum benefits, including GMWBs, GMABs and certain GMIBs; related party ceded reinsurance of guaranteed minimum benefits related to GMWBs, GMABs and certain GMIBs; related party assumed reinsurance of guaranteed minimum benefits related to GMWBs and certain GMIBs; funds withheld on assumed and ceded reinsurance; assumed reinsurance on fixed deferred annuities; fixed annuities with equity indexed returns; and certain debt and equity securities.
The following table presents the estimated fair value and balance sheet location of the Company’s embedded derivatives that have been separated from their host contracts at:
 
 
 
December 31,
 
Balance Sheet Location
 
2017
 
2016
 
 
 
(In millions)
Embedded derivatives within asset host contracts:
 
 
 
 
 
Ceded guaranteed minimum benefits
Premiums, reinsurance and other receivables
 
$
227

 
$
409

Options embedded in debt or equity securities
Investments
 
(52
)
 
(49
)
Embedded derivatives within asset host contracts
 
$
175

 
$
360

Embedded derivatives within liability host contracts:
 
 
 
 
Direct guaranteed minimum benefits
Policyholder account balances
 
$
1,122

 
$
2,237

Assumed reinsurance on fixed deferred annuities
Policyholder account balances
 
1

 
—

Assumed guaranteed minimum benefits
Policyholder account balances
 
437

 
741

Fixed annuities with equity indexed returns
Policyholder account balances
 
674

 
192

Embedded derivatives within liability host contracts
 
$
2,234

 
$
3,170


The following table presents changes in estimated fair value related to embedded derivatives:
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(In millions)
Net derivative gains (losses) (1), (2)
$
1,237

 
$
(1,741
)
 
$
(344
)
Policyholder benefits and claims
$
(16
)
 
$
(4
)
 
$
21

______________
(1)
The valuation of direct and assumed guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses) in connection with this adjustment were $337 million, $244 million and $26 million for the years ended December 31, 2017, 2016 and 2015, respectively.
(2)
See Note 6 for discussion of related party net derivative gains (losses).