Derivatives

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

5. Derivatives

Accounting for Derivatives

See Note 1 of the Notes to the Consolidated Financial Statements included in the 2019 Annual Report for a description of the Company’s accounting policies for derivatives and Note 9 for information about the fair value hierarchy for derivatives.

Types of Derivative Instruments and 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. Commonly used derivative instruments include, but are not necessarily limited to:


•	Interest rate derivatives: swaps, caps, swaptions and forwards;


•	Foreign currency exchange rate derivatives: forwards and swaps;


•	Equity derivatives: options, total return swaps and variance swaps; and


•	Credit derivatives: single and index reference credit default swaps.

For detailed information on these contracts and the related strategies, see Note 8 of the Notes to the Consolidated Financial Statements included in the 2019 Annual Report.

Primary Risks Managed by Derivatives

The primary underlying risk exposure, gross notional amount and estimated fair value of derivatives held were as follows at:



		March 31, 2020							December 31, 2019
	Primary Underlying Risk Exposure	Gross Notional Amount		Estimated Fair Value					Gross Notional Amount		Estimated Fair Value
	Primary Underlying Risk Exposure	Gross Notional Amount		Assets		Liabilities			Gross Notional Amount		Assets		Liabilities
		(In millions)
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate forwards	Interest rate	$	390	$	114	$	—		$	420	$	22	$	—
Foreign currency swaps	Foreign currency exchange rate	2,761		611		2			2,701		176		27
Total qualifying hedges		3,151		725		2			3,121		198		27
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate swaps	Interest rate	3,060		739		7			7,559		878		29
Interest rate caps	Interest rate	3,350		1		—			3,350		2		—
Interest rate options	Interest rate	27,650		3,657		833			29,750		782		187
Interest rate forwards	Interest rate	6,656		1,439		—			5,418		94		114
Foreign currency swaps	Foreign currency exchange rate	1,027		215		13			1,040		94		15
Foreign currency forwards	Foreign currency exchange rate	142		—		1			138		—		1
Credit default swaps — purchased	Credit	18		—		—			18		—		—
Credit default swaps — written	Credit	1,876		7		13			1,613		36		—
Equity index options	Equity market	51,247		1,243		1,655			51,509		850		1,728
Equity variance swaps	Equity market	1,098		11		30			2,136		69		69
Equity total return swaps	Equity market	8,516		1,423		89			7,723		2		367
Total non-designated or non-qualifying derivatives		104,640		8,735		2,641			110,254		2,807		2,510
Embedded derivatives:
Ceded guaranteed minimum income benefits	Other	N/A		316		—			N/A		217		—
Direct index-linked annuities	Other	N/A		—		(116		)	N/A		—		2,253
Direct guaranteed minimum benefits	Other	N/A		—		4,190			N/A		—		1,548
Assumed guaranteed minimum benefits	Other	N/A		—		709			N/A		—		442
Assumed index-linked annuities	Other	N/A		—		280			N/A		—		339
Total embedded derivatives		N/A		316		5,063			N/A		217		4,582
Total		$	107,791	$	9,776	$	7,706		$	113,375	$	3,222	$	7,119

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 March 31, 2020 and December 31, 2019. 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 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) were as follows:



	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 March 31, 2020
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives	$	1		$	—		$	1	$	—	$	97
Foreign currency exchange rate derivatives	—			—			11		—		456
Total cash flow hedges	1			—			12		—		553
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives	4,921			—			—		—		—
Foreign currency exchange rate derivatives	132			(7		)	—		—		—
Credit derivatives	(31		)	—			—		—		—
Equity derivatives	1,964			—			—		—		—
Embedded derivatives	(233		)	—			—		—		—
Total non-qualifying hedges	6,753			(7		)	—		—		—
Total	$	6,754		$	(7	)	$	12	$	—	$	553
Three Months Ended March 31, 2019
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives	$	22		$	—		$	1	$	—	$	—
Foreign currency exchange rate derivatives	3			—			8		—		(34		)
Total cash flow hedges	25			—			9		—		(34		)
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives	332			—			—		—		—
Foreign currency exchange rate derivatives	(8		)	—			—		—		—
Credit derivatives	18			—			—		—		—
Equity derivatives	(1,446		)	—			—		—		—
Embedded derivatives	(231		)	—			—		—		—
Total non-qualifying hedges	(1,335		)	—			—		—		—
Total	$	(1,310	)	$	—		$	9	$	—	$	(34	)

At March 31, 2020 and December 31, 2019, the balance in AOCI associated with cash flow hedges was $783 million and $232 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 estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps were as follows at:



	March 31, 2020						December 31, 2019
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	$	3		$	680	2.5	$	11	$	615	2.5
Baa	(9		)	1,196		5.4	25		998		5.1
Total	$	(6	)	$	1,876	4.4	$	36	$	1,613	4.1

_______________


(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, S&P and Fitch. 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 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		Securities Collateral Received/Pledged (3)			Net Amount After Securities Collateral
	(In millions)
March 31, 2020
Derivative assets	$	9,508	$	(2,101	)	$	(6,854	)	$	553	$	(541	)	$	12
Derivative liabilities	$	2,639	$	(2,101	)	$	(5	)	$	533	$	(531	)	$	2
December 31, 2019
Derivative assets	$	3,046	$	(1,458	)	$	(1,100	)	$	488	$	(487	)	$	1
Derivative liabilities	$	2,522	$	(1,458	)	$	—		$	1,064	$	(1,061	)	$	3

_______________


(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 aggregate estimated fair values 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 were as follows at:



	March 31, 2020		December 31, 2019
	(In millions)
Estimated fair value of derivatives in a net liability position (1)	$	538	$	1,064
Estimated Fair Value of Collateral Provided (2):
Fixed maturity securities	$	1,078	$	1,473

_______________


(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.