Derivative Financial Instruments

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company primarily enters into the following types of derivatives:

Interest rate swaps: 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/or liabilities. Interest rate swaps are also used to hedge the interest rate risk associated with the value of assets it owns or in an anticipation of acquiring them. Using interest rate swaps, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest payments, calculated by reference to an agreed upon notional principal amount. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made to/from the counterparty at each due date. The Company utilizes these contracts in qualifying hedging relationships as well as non-qualifying hedging relationships.

Foreign exchange swaps: The Company uses foreign exchange or currency swaps to reduce the risk of change in the value, yield or cash flows associated with certain foreign denominated invested assets. Foreign exchange swaps represent contracts that require the exchange of foreign currency cash flows against U.S. dollar cash flows at regular periods, typically quarterly or semi-annually. The Company utilizes these contracts in qualifying hedging relationships as well as non-qualifying hedging relationships.

Futures: The Company uses interest rate futures contracts to hedge its exposure to market risks due to changes in interest rates. The Company enters into exchange traded futures with regulated futures commissions that are members of the exchange. The Company also posts initial and variation margins, with the exchange, on a daily basis. The Company utilizes exchange-traded futures in non-qualifying hedging relationships. The Company may also use futures contracts as a hedge against an increase in certain equity indices.

Embedded derivatives: The Company also invests in certain fixed maturity instruments and has issued certain products that contain embedded derivatives for which market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short-term or long-term), exchange rates, prepayment rates, equity rates, or

credit ratings/spreads. In addition, the Company has entered into coinsurance with funds withheld arrangements, which contain embedded derivatives.

The notional amounts and fair values of derivatives were as follows as of the dates indicated:


	March 31, 2023						December 31, 2022
	Notional Amount		Asset Fair Value		Liability Fair Value		Notional Amount		Asset Fair Value		Liability Fair Value
Derivatives: Qualifying for hedge accounting(1)
Cash flow hedges:
Interest rate contracts	$	18	$	—	$	—	$	18	$	—	$	—
Foreign exchange contracts	620		48		2		596		58		2
Derivatives: Non-qualifying for hedge accounting(1)
Interest rate contracts	11,139		220		314		12,470		262		327
Foreign exchange contracts	56		2		—		45		2		—

Credit contracts	141		—		3		141		—		2
Embedded derivatives and Managed custody guarantees:
Within fixed maturity investments(2)	N/A		2		—		N/A		2		—


Managed custody guarantees(3)	N/A		—		3		N/A		—		6
Total			$	272	$	322			$	324	$	337

(1) Open derivative contracts are reported as Derivatives assets or liabilities on the Condensed Consolidated Balance Sheets at fair value.

(2) Included in Fixed maturities, available-for-sale, at fair value on the Condensed Consolidated Balance Sheets.

(3) Included in Contract owner account balances on the Condensed Consolidated Balance Sheets.

N/A - Not Applicable

Based on the notional amounts, a substantial portion of the Company’s derivative positions was not designated or did not qualify for hedge accounting as part of a hedging relationship as of March 31, 2023 and December 31, 2022. The Company utilizes derivative contracts mainly to hedge exposure to variability in cash flows, interest rate risk, credit risk, foreign exchange risk and equity market risk. The majority of derivatives used by the Company are designated as product hedges, which hedge the exposure arising from insurance liabilities or guarantees embedded in the contracts the Company offers through various product lines. These derivatives do not qualify for hedge accounting as they do not meet the criteria of being "highly effective" as outlined in ASC Topic 815, but do provide an economic hedge, which is in line with the Company’s risk management objectives. The Company also uses derivatives contracts to hedge its exposure to various risks associated with the investment portfolio. The Company does not seek hedge accounting treatment for certain of these derivatives as they generally do not qualify for hedge accounting due to the criteria required under the portfolio hedging rules outlined in ASC Topic 815. The Company also uses credit default swaps coupled with other investments in order to produce the investment characteristics of otherwise permissible investments that do not qualify as effective accounting hedges under ASC Topic 815.

Although the Company has not elected to net its derivative exposures, the notional amounts and fair values of Over-The-Counter ("OTC") and cleared derivatives excluding exchange traded contracts are presented in the tables below as of the dates

indicated:


	March 31, 2023
	Notional Amount		Asset Fair Value		Liability Fair Value
Credit contracts	$	141	$	—	$	3

Foreign exchange contracts	676		50		2
Interest rate contracts	8,831		220		313
			270		318

Counterparty netting(1)			(219)		(219)
Cash collateral netting(1)			(44)		(94)
Securities collateral netting(1)			(6)		(2)
Net receivables/payables			$	1	$	3

(1) Represents the netting of receivable balances with payable balances, net of collateral, for the same counterparty under eligible netting agreements.


	December 31, 2022
	Notional Amount		Asset Fair Value		Liability Fair Value
Credit contracts	$	141	$	—	$	2

Foreign exchange contracts	641		60		2
Interest rate contracts	8,736		261		327
			321		331

Counterparty netting(1)			(263)		(263)
Cash collateral netting(1)			(51)		(64)
Securities collateral netting(1)			(6)		(1)
Net receivables/payables			$	1	$	3

(1) Represents the netting of receivable balances with payable balances, net of collateral, for the same counterparty under eligible netting agreements.

Collateral

Under the terms of the OTC Derivative International Swaps and Derivatives Association, Inc. ("ISDA") agreements, the Company may receive from, or deliver to, counterparties, collateral to assure that terms of the ISDA agreements will be met with regard to the Credit Support Annex ("CSA"). The terms of the CSA call for the Company to pay interest on any cash received equal to the Federal Funds rate. To the extent cash collateral is received and delivered, it is included in Payables under securities loan agreements, including collateral held and Short-term investments under securities loan agreements, including collateral delivered, respectively, on the Condensed Consolidated Balance Sheets and is reinvested in short-term investments. Collateral held is used in accordance with the CSA to satisfy any obligations. Investment grade bonds owned by the Company are the source of noncash collateral posted, which is reported in Securities pledged on the Condensed Consolidated Balance Sheets.

As of March 31, 2023, the Company held $45 and pledged $94 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. As of December 31, 2022, the Company held $50 and delivered $62 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. In addition, as of March 31, 2023, the Company delivered $122 of securities and held $6 of securities as collateral. As of December 31, 2022, the Company delivered $102 of securities and held $7 securities as collateral.

The location and effect of derivatives qualifying for hedge accounting on the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income are as follows for the periods indicated:


	Three Months Ended March 31,
	2023				2022
	Interest Rate Contracts		Foreign Exchange Contracts		Interest Rate Contracts		Foreign Exchange Contracts
Derivatives: Qualifying for hedge accounting
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income	Net investment income/(loss)		Net investment income and Net gains/(losses)		Net investment income/(loss)		Net investment income and Net gains/(losses)
Amount of Gain or (Loss) Recognized in Other Comprehensive Income	$	—	$	(10)	$	(1)	$	6
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income	—		2		—		2

The location and amount of gain (loss) recognized in the Condensed Consolidated Statements of Operations for derivatives qualifying for hedge accounting are as follows for the periods indicated:



	Three Months Ended March 31,
	2023				2022
	Net investment income/(loss)		Net gains/(losses)		Net investment income/(loss)		Net gains/(losses)
Total amounts of line items presented in the statement of operations in which the effects of cash flow hedges are recorded	$	384	$	(25)	$	449	$	(182)
Derivatives: Qualifying for hedge accounting
Cash flow hedges:


Foreign exchange contracts:
Gain (loss) reclassified from accumulated other comprehensive income into income	2		—		2		—

The location and effect of derivatives not designated as hedging instruments on the Condensed Consolidated Statements of Operations are as follows for the periods indicated:



	Location of Gain or (Loss) on Derivative	Three Months Ended March 31,
		2023		2022
Derivatives: Non-qualifying for hedge accounting
Interest rate contracts	Net gains (losses)	$	(27)	$	51
Foreign exchange contracts	Net gains (losses)	—		1

Credit contracts	Net gains (losses)	(1)		—
Embedded derivatives and Managed custody guarantees:
Within fixed maturity investments	Net gains (losses)	1		(2)


Managed custody guarantees	Net gains (losses)	3		(3)
Total		$	(24)	$	47