Derivatives

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

5. Derivatives

Accounting for Derivatives

Freestanding Derivatives

Freestanding derivatives are carried on the Company’s balance sheet either as assets within other invested assets or as liabilities within other liabilities at estimated fair value. The Company does not offset the estimated fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement.

If a derivative is not designated or did not qualify as an accounting hedge, changes in the estimated fair value of the derivative are reported in net derivative gains (losses) except for economic hedges of limited partnerships and LLCs which are presented in net investment income.

The Company generally reports cash received or paid for a derivative in the investing activity section of the statement of cash flows except for cash flows of certain derivative options with deferred premiums, which are reported in the financing activity section of the statement of cash flows.

Hedge Accounting

The Company primarily designates derivatives as a hedge of a forecasted transaction or a variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in fair value are recorded in OCI and subsequently reclassified into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.

To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge. In its hedge documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and at least quarterly throughout the life of the designated hedging relationship.

The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item; (ii) the derivative or hedged item expires, is sold, terminated, or exercised; (iii) it is no longer probable that the hedged forecasted transaction will occur; or (iv) the derivative is de-designated as a hedging instrument.

When hedge accounting is discontinued the derivative is carried at its estimated fair value on the balance sheet, with changes in its estimated fair value recognized in the current period as net derivative gains (losses). The changes in estimated fair value of derivatives previously recorded in OCI related to discontinued cash flow hedges are released into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item. When the hedged item matures or is sold, or the forecasted transaction is not probable of occurring, the Company immediately reclassifies any remaining balances in OCI to net derivative gains (losses).

Embedded Derivatives

The Company has certain insurance and reinsurance contracts that contain embedded derivatives which are required to be separated from their host contracts and reported as derivatives. These host contracts include: variable annuities with guaranteed minimum benefits, including GMWBs, GMABs and certain GMIBs; index-linked annuities that are directly written or assumed through reinsurance; and ceded reinsurance of variable annuity GMIBs. Embedded derivatives within asset host contracts are presented within premiums, reinsurance and other receivables on the consolidated balance sheets. Embedded derivatives within liability host contracts are presented within policyholder account balances on the consolidated balance sheets. Changes in the estimated fair value of the embedded derivative are reported in net derivative gains (losses).

Derivative Strategies

The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to minimize its exposure to various market risks, including interest rate, foreign currency exchange rate, credit and equity market.

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”).

Interest Rate Derivatives

Interest rate swaps: The Company primarily uses interest rate swaps to hedge interest rate exposure in variable annuity products and minimum guarantees embedded in universal life products. Interest rate swaps are used in nonqualifying hedging relationships.

Interest rate caps: The Company uses interest rate caps 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. Interest rate caps are used in nonqualifying hedging relationships.

Interest rate futures: The Company uses exchange-traded interest rate futures contracts to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. Exchange-traded interest rate futures are used in nonqualifying hedging relationships.

Swaptions: The Company uses swaptions to hedge interest rate risk associated with the Company’s variable annuity and universal life products. Swaptions are used in nonqualifying hedging relationships. Swaptions are included in interest rate options.

Interest rate forwards: The Company uses interest rate forwards to hedge minimum guarantees embedded in universal life products. Interest rate forwards are used in cash flow and nonqualifying hedging relationships.

Foreign Currency Exchange Rate Derivatives

Foreign currency swaps: The Company uses foreign currency swaps to convert foreign currency denominated cash flows to U.S. dollars to reduce cash flow fluctuations due to changes in currency exchange rates. Foreign currency swaps are used in cash flow and nonqualifying hedging relationships.

Foreign currency forwards: The Company uses foreign currency forwards to hedge currency exposure on its invested assets. Foreign currency forwards are used in nonqualifying hedging relationships.

Credit Derivatives

Credit default swaps: The Company uses credit default swaps to create synthetic credit investments to replicate credit exposure that is more economically attractive than what is available in the market or otherwise unavailable (written credit protection), or to reduce credit loss exposure on certain assets that the Company owns (purchased credit protection). Credit default swaps are used in nonqualifying hedging relationships.

Equity Derivatives

Equity futures: The Company uses exchange-traded equity futures to hedge minimum guarantees embedded in certain variable annuity products against adverse changes in equity markets. Exchange-traded equity futures are used in nonqualifying hedging relationships.

Equity index options: The Company uses equity index options primarily to hedge minimum guarantees embedded in certain variable annuity products against adverse changes in equity markets. Additionally, the Company uses equity index options to hedge index-linked annuity products against adverse changes in equity markets. Equity index options are used in nonqualifying hedging relationships.

Equity total return swaps: The Company uses equity total return swaps to hedge minimum guarantees embedded in certain variable annuity products against adverse changes equity markets. Equity total return swaps are used in nonqualifying hedging relationships.

Equity variance swaps: The Company uses equity variance swaps to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. Equity variance swaps are used 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, held at:

		September 30, 2019						December 31, 2018
	Primary Underlying Risk Exposure	Gross Notional Amount		Estimated Fair Value				Gross Notional Amount		Estimated Fair Value
				Assets		Liabilities				Assets		Liabilities
		(In millions)
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate forwards	Interest rate	$	460	$	51	$	—	$	—	$	—	$	—
Foreign currency swaps	Foreign currency exchange rate	2,674		304		16		2,461		200		30
Total qualifying hedges		3,134		355		16		2,461		200		30
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate swaps	Interest rate	8,730		1,049		32		10,747		528		558
Interest rate caps	Interest rate	3,350		2		—		3,350		21		—
Interest rate futures	Interest rate	—		—		—		53		—		—
Interest rate options	Interest rate	27,250		1,771		375		17,168		168		61
Interest rate forwards	Interest rate	4,143		241		15		—		—		—
Foreign currency swaps	Foreign currency exchange rate	1,066		143		13		1,398		99		18
Foreign currency forwards	Foreign currency exchange rate	118		2		—		125		—		—
Credit default swaps — purchased	Credit	12		—		—		98		3		—
Credit default swaps — written	Credit	1,712		30		—		1,798		14		3
Equity futures	Equity market	—		—		—		169		—		—
Equity index options	Equity market	46,098		766		1,503		45,815		1,372		1,207
Equity variance swaps	Equity market	5,574		95		249		5,574		80		232
Equity total return swaps	Equity market	5,037		41		33		3,920		280		3
Total non-designated or nonqualifying derivatives		103,090		4,140		2,220		90,215		2,565		2,082
Embedded derivatives:
Ceded guaranteed minimum income benefits	Other	N/A		303		—		N/A		228		—
Direct guaranteed minimum benefits	Other	N/A		—		2,250		N/A		—		1,546
Direct index-linked annuities	Other	N/A		—		1,566		N/A		—		488
Assumed guaranteed minimum benefits	Other	N/A		—		541		N/A		—		386
Assumed index-linked annuities	Other	N/A		—		316		N/A		—		96
Total embedded derivatives		N/A		303		4,673		N/A		228		2,516
Total		$	106,224	$	4,798	$	6,909	$	92,676	$	2,993	$	4,628

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 September 30, 2019 and December 31, 2018. The Company’s use of derivatives includes (i) derivatives that serve as macro hedges of the Company’s exposure to various risks and generally do not qualify for hedge accounting because they do not meet the criteria required under portfolio hedging rules; (ii) derivatives that economically hedge insurance liabilities and generally do not qualify for hedge accounting because they do not meet the criteria of being “highly effective” as outlined in ASC 815; (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.

The following tables present the amount and location of gains (losses), including earned income, recognized for derivatives and gains (losses) pertaining to hedged items presented in net derivative gains (losses):

	Net Derivative Gains (Losses) Recognized for Derivatives			Net Derivative Gains (Losses) Recognized for Hedged Items			Net Investment Income		Policyholder Benefits and Claims			Amount of Gains (Losses) deferred in AOCI
	(In millions)
Three Months Ended September 30, 2019
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives	$	—		$	—		$	1	$	—		$	51
Foreign currency exchange rate derivatives	—			—			9		—			106
Total cash flow hedges	—			—			10		—			157
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives	1,656			—			—		—			—
Foreign currency exchange rate derivatives	49			(2		)	—		—			—
Credit derivatives	2			—			—		—			—
Equity derivatives	(18		)	—			—		—			—
Embedded derivatives	(703		)	—			—		—			—
Total non-qualifying hedges	986			(2		)	—		—			—
Total	$	986		$	(2	)	$	10	$	—		$	157
Three Months Ended September 30, 2018
Derivatives Designated as Hedging Instruments:
Fair value hedges:
Interest rate derivatives	$	(2	)	$	2		$	—	$	—		$	—
Total fair value hedges	(2		)	2			—		—			—
Cash flow hedges:
Interest rate derivatives	45			—			1		—			(3		)
Foreign currency exchange rate derivatives				—			6		—			(4		)
Total cash flow hedges	45			—			7		—			(7		)
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives	(266		)	—			—		—			—
Foreign currency exchange rate derivatives	6			(2		)	—		—			—
Credit derivatives	11			—			—		—			—
Equity derivatives	(446		)	—			—		—			—
Embedded derivatives	(13		)	—			—		(2		)	—
Total non-qualifying hedges	(708		)	(2		)	—		(2		)	—
Total	$	(665	)	$	—		$	7	$	(2	)	$	(7	)

	Net Derivative Gains (Losses) Recognized for Derivatives			Net Derivative Gains (Losses) Recognized for Hedged Items			Net Investment Income		Policyholder Benefits and Claims			Amount of Gains (Losses) deferred in AOCI
	(In millions)
Nine Months Ended September 30, 2019
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives	$	28		$	—		$	2	$	—		$	51
Foreign currency exchange rate derivatives	20			(23		)	25		—			145
Total cash flow hedges	48			(23		)	27		—			196
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives	2,905			—			—		—			—
Foreign currency exchange rate derivatives	71			(6		)	—		—			—
Credit derivatives	31			—			—		—			—
Equity derivatives	(1,808		)	—			—		—			—
Embedded derivatives	(1,436		)	—			—		—			—
Total non-qualifying hedges	(237		)	(6		)	—		—			—
Total	$	(189	)	$	(29	)	$	27	$	—		$	196
Nine Months Ended September 30, 2018
Derivatives Designated as Hedging Instruments:
Fair value hedges:
Interest rate derivatives	$	(12	)	$	12		$	1	$	—		$	—
Total fair value hedges	(12		)	12			1		—			—
Cash flow hedges:
Interest rate derivatives	62			—			4		—			(5		)
Foreign currency exchange rate derivatives	(1		)	—			17		—			33
Total cash flow hedges	61			—			21		—			28
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives	(1,190		)	—			—		—			—
Foreign currency exchange rate derivatives	29			(4		)	—		—			—
Credit derivatives	7			—			—		—			—
Equity derivatives	(904		)	—			—		—			—
Embedded derivatives	771			—			—		(4		)	—
Total non-qualifying hedges	(1,287		)	(4		)	—		(4		)	—
Total	$	(1,238	)	$	8		$	22	$	(4	)	$	28

At September 30, 2019 and December 31, 2018, the balance in AOCI associated with cash flow hedges was $399 million and $253 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. 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 following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps at: 

	September 30, 2019					December 31, 2018
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	$	9	$	615	2.4	$	8	$	689	2.0
Baa	21		1,097		5.3	3		1,109		5.0
Total	$	30	$	1,712	4.3	$	11	$	1,798	3.9

__________________

(1) The Company has written credit protection on both single name and index references. The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s Investors Service, Standard & Poor’s Global Ratings 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.

Counterparty Credit Risk

The Company may be exposed to credit-related losses in the event of counterparty nonperformance on derivative instruments. Generally, the credit exposure is the fair value at the reporting date less any collateral received from the counterparty.

The Company manages its credit risk by: (i) entering into derivative transactions with creditworthy counterparties governed by master netting agreements; (ii) trading through regulated exchanges and central clearing counterparties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single party credit exposures which are subject to periodic management review.

See Note 6 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:

			Gross Amounts Not Offset on the Consolidated Balance Sheets
	Gross Amount Recognized		Financial Instruments (1)			Collateral Received/Pledged (2)			Net Amount		Off-balance Sheet Securities Collateral (3)			Net Amount After Securities Collateral
	(In millions)
September 30, 2019
Derivative assets	$	4,555	$	(1,599	)	$	(1,831	)	$	1,125	$	(1,088	)	$	37
Derivative liabilities	$	2,232	$	(1,599	)	$	—		$	633	$	(633	)	$	—
December 31, 2018
Derivative assets	$	2,820	$	(1,671	)	$	(1,053	)	$	96	$	(83	)	$	13
Derivative liabilities	$	2,104	$	(1,671	)	$	—		$	433	$	(433	)	$	—

__________________

(1) Represents amounts subject to an enforceable master netting agreement or similar agreement.

(2) The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreement.

(3) Securities collateral received by the Company is not recorded on the balance sheet. Amounts do not include excess of collateral pledged or received.

The Company’s collateral arrangements generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the amount owed by that counterparty reaches a minimum transfer amount. Certain of these arrangements also include credit contingent provisions which permit the party with positive fair value to terminate the derivative at the current fair value or demand immediate full collateralization from the party in a net liability position, in the event that the financial strength or credit rating of the party in a net liability position falls below a certain level.

The following table presents the aggregate estimated fair value of derivatives in a net liability position containing such credit contingent provisions and the aggregate estimated fair value of assets posted as collateral for such instruments.

	September 30, 2019		December 31, 2018
	(In millions)
Estimated fair value of derivatives in a net liability position (1)	$	633	$	433
Estimated Fair Value of Collateral Provided (2):
Fixed maturity securities	$	1,250	$	797

__________________

(1) After taking into consideration the existence of netting agreements.

(2)

Substantially all of the Company’s collateral arrangements provide for daily posting of collateral for the full value of the derivative contract. As a result, if the credit contingent provisions of derivative contracts in a net liability position were triggered, minimal additional assets would be required to be posted as collateral or needed to settle the instruments immediately.