Derivatives

12 Months Ended

Dec. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

7. Derivatives

Accounting for Derivatives

See Note 1 for a description of the Company’s accounting policies for derivatives and Note 8 for information about the fair value hierarchy for derivatives.

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 uses interest rate swaps to manage the collective interest rate risks primarily in variable annuity products and ULSG. Interest rate swaps are used in non-qualifying 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 non-qualifying hedging relationships.

Interest rate swaptions: The Company uses interest rate swaptions to manage the collective interest rate risks primarily in variable annuity products and ULSG. Interest rate swaptions are used in non-qualifying hedging relationships. Interest rate swaptions are included in interest rate options.

Interest rate forwards: The Company uses interest rate forwards to manage the collective interest rate risks primarily in variable annuity products and ULSG. Interest rate forwards are used in cash flow and non-qualifying 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 non-qualifying 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 non-qualifying 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 non-qualifying hedging relationships.

Credit default swaptions: The Company uses credit default swaptions to synthetically create investments that are either more expensive to acquire or otherwise unavailable in the cash markets. Swaptions are used to create callable bonds from replication synthetic asset transaction (“RSAT”) positions. This enhances the income of the RSAT program through earned premiums while not changing the credit profile of the RSATs. Credit default swaptions are used in non-qualifying hedging relationships.

Equity Market Derivatives

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 and certain invested assets against adverse changes in equity markets. Certain of these contracts may also contain settlement provisions linked to interest rates (“hybrid options”). Equity index options are used in non-qualifying 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 in equity markets. Additionally, the Company uses equity total return swaps to hedge index-linked annuity products against adverse changes in equity markets. Equity total return swaps are used in non-qualifying 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 non-qualifying hedging relationships.

Primary Risks Managed by Derivatives

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

		December 31,
		2021						2020
		Gross Notional Amount		Estimated Fair Value				Gross Notional Amount		Estimated Fair Value
	Primary Underlying Risk Exposure			Assets		Liabilities				Assets		Liabilities
		(In millions)
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate forwards	Interest rate	$	180	$	30	$	—	$	290	$	66	$	—
Foreign currency swaps	Foreign currency exchange rate	3,237		220		22		2,750		122		112
Total qualifying hedges		3,417		250		22		3,040		188		112
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate swaps	Interest rate	2,595		325		17		2,295		463		—
Interest rate caps	Interest rate	5,100		29		4		2,350		2		—
Interest rate options	Interest rate	8,050		83		—		25,980		712		122
Interest rate forwards	Interest rate	9,808		627		109		8,086		851		78
Foreign currency swaps	Foreign currency exchange rate	956		94		21		989		85		32
Foreign currency forwards	Foreign currency exchange rate	288		—		4		201		—		—
Credit default swaps — purchased	Credit	—		—		—		18		—		—
Credit default swaps — written	Credit	1,724		39		1		1,755		41		—
Credit default swaptions	Credit	150		—		—		100		—		—
Equity index options	Equity market	24,692		1,155		877		30,976		1,071		838
Equity variance swaps	Equity market	281		9		1		1,098		13		20
Equity total return swaps	Equity market	32,719		493		588		15,056		143		822
Hybrid options	Equity market	900		8		—		600		—		—
Total non-designated or non-qualifying derivatives		87,263		2,862		1,622		89,504		3,381		1,912
Embedded derivatives:
Ceded guaranteed minimum income benefits	Other	N/A		186		—		N/A		283		—
Direct index-linked annuities	Other	N/A		—		6,211		N/A		—		3,855
Direct guaranteed minimum benefits	Other	N/A		—		1,725		N/A		—		2,751
Assumed guaranteed minimum benefits	Other	N/A		—		427		N/A		—		596
Assumed index-linked annuities	Other	N/A		—		437		N/A		—		382
Total embedded derivatives		N/A		186		8,800		N/A		283		7,584
Total		$	90,680	$	3,298	$	10,444	$	92,544	$	3,852	$	9,608

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, 2021 and 2020. 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 Accounting Standards Codification 815 — Derivatives and Hedging; (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:

	Year Ended December 31, 2021
	Net Derivative Gains (Losses) Recognized for Derivatives		Net Derivative Gains (Losses) Recognized for Hedged Items		Net Investment Income		Amount of Gains (Losses) Deferred in AOCI
	(In millions)
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives	$	2	$	—	$	3	$	(20)
Foreign currency exchange rate derivatives	7		(3)		34		190
Total cash flow hedges	9		(3)		37		170
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives	(717)		—		—		—
Foreign currency exchange rate derivatives	48		2		—		—
Credit derivatives	17		—		—		—
Equity market derivatives	(486)		—		—		—
Embedded derivatives	(1,229)		—		—		—
Total non-qualifying hedges	(2,367)		2		—		—
Total	$	(2,358)	$	(1)	$	37	$	170

	Year Ended December 31, 2020
	Net Derivative Gains (Losses) Recognized for Derivatives		Net Derivative Gains (Losses) Recognized for Hedged Items		Net Investment Income		Amount of Gains (Losses) Deferred in AOCI
	(In millions)
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives	$	2	$	—	$	3	$	77
Foreign currency exchange rate derivatives	13		(6)		36		(129)
Total cash flow hedges	15		(6)		39		(52)
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives	3,557		—		—		—
Foreign currency exchange rate derivatives	(17)		(7)		—		—
Credit derivatives	18		—		—		—
Equity market derivatives	(1,367)		—		—		—
Embedded derivatives	(2,325)		—		—		—
Total non-qualifying hedges	(134)		(7)		—		—
Total	$	(119)	$	(13)	$	39	$	(52)

	Year Ended December 31, 2019
	Net Derivative Gains (Losses) Recognized for Derivatives		Net Derivative Gains (Losses) Recognized for Hedged Items		Net Investment Income		Amount of Gains (Losses) Deferred in AOCI
	(In millions)
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives	$	31	$	—	$	2	$	25
Foreign currency exchange rate derivatives	25		(29)		32		12
Total cash flow hedges	56		(29)		34		37
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives	1,589		—		—		—
Foreign currency exchange rate derivatives	22		(3)		—		—
Credit derivatives	44		—		—		—
Equity market derivatives	(2,476)		—		—		—
Embedded derivatives	(1,249)		—		—		—
Total non-qualifying hedges	(2,070)		(3)		—		—
Total	$	(2,014)	$	(32)	$	34	$	37

At December 31, 2021 and 2020, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions was two years and three years, respectively.

At December 31, 2021 and 2020, the balance in AOCI associated with cash flow hedges was $320 million and $162 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:

	December 31,
	2021					2020
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	$	589	2.4	$	15	$	683	2.9
Baa	27		1,131		5.0	26		1,072		5.2
Caa and Lower	(1)		4		4.0	—		—		0.0
Total	$	38	$	1,724	4.1	$	41	$	1,755	4.3

_______________

(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 8 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)
December 31, 2021
Derivative assets	$	3,113	$	(1,155)	$	(1,480)	$	478	$	(413)	$	65
Derivative liabilities	$	1,632	$	(1,155)	$	—	$	477	$	(477)	$	—
December 31, 2020
Derivative assets	$	3,574	$	(1,342)	$	(1,327)	$	905	$	(840)	$	65
Derivative liabilities	$	2,010	$	(1,342)	$	—	$	668	$	(630)	$	38

_______________

(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 from counterparties is not reported on the consolidated balance sheets and may not be sold or re-pledged unless the counterparty is in default. 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:

	December 31,
	2021		2020
	(In millions)
Estimated fair value of derivatives in a net liability position (1)	$	477	$	668
Estimated Fair Value of Collateral Provided (2):
Fixed maturity securities	$	839	$	1,205

_______________

(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.