XML 28 R17.htm IDEA: XBRL DOCUMENT v3.20.2
Derivative Instruments
 6 Months Ended
Jun. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments Derivative Instruments
Accounting for Derivative Instruments and Hedging Activities
See Note 2 – “Significant Accounting Policies and Pronouncements” of the Company’s 2019 Annual Report for a detailed discussion of the accounting treatment for derivative instruments, including embedded derivatives. See Note 6 – “Fair Value of Assets and Liabilities” for additional disclosures related to the fair value hierarchy for derivative instruments, including embedded derivatives.
Types of Derivatives Used by the Company
Commonly used derivative instruments include, but are not necessarily limited to: credit default swaps, financial futures, equity options, foreign currency swaps, foreign currency forwards, interest rate swaps, synthetic guaranteed investment contracts (“GICs”), consumer price index (“CPI”) swaps, longevity swaps, mortality swaps and embedded derivatives.
For detailed information on these derivative instruments and the related strategies, see Note 5 – “Derivative Instruments” of the Company’s 2019 Annual Report.
Summary of Derivative Positions
Derivatives, except for embedded derivatives and longevity and mortality swaps, are carried on the Company’s condensed consolidated balance sheets in other invested assets or other liabilities, at fair value. Longevity and mortality swaps, which have been discontinued or matured in 2019 are included on the condensed consolidated balance sheets in other assets or other liabilities, at fair value. Embedded derivative assets and liabilities on modco or funds withheld arrangements are included on the condensed consolidated balance sheets with the host contract in funds withheld at interest, at fair value. Embedded derivative liabilities on indexed annuity and variable annuity products are included on the condensed consolidated balance sheets with the host contract in interest-sensitive contract liabilities, at fair value. The following table presents the notional amounts and gross fair value of derivative instruments prior to taking into account the netting effects of master netting agreements as of June 30, 2020 and December 31, 2019 (dollars in millions):
 
 
 
 
June 30, 2020
 
December 31, 2019
 
 
Primary Underlying Risk
 
Notional
 
Carrying Value/Fair Value
 
Notional
 
Carrying Value/Fair Value
 
 
 
Amount
 
Assets
 
Liabilities
 
Amount
 
Assets
 
Liabilities
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest rate
 
$
1,086

 
$
105

 
$
3

 
$
909

 
$
70

 
$
3

Financial futures
 
Equity
 
342

 
—

 
—

 
307

 
—

 
—

Foreign currency swaps
 
Foreign currency
 
150

 
—

 
21

 
150

 
—

 
9

Foreign currency forwards
 
Foreign currency
 
252

 
1

 
—

 
175

 
1

 
—

CPI swaps
 
CPI
 
569

 
9

 
52

 
441

 
—

 
28

Credit default swaps
 
Credit
 
1,327

 
3

 
1

 
1,306

 
5

 
—

Equity options
 
Equity
 
366

 
38

 
—

 
364

 
15

 
—

Synthetic GICs
 
Interest rate
 
14,888

 
—

 
—

 
13,823

 
—

 
—

Embedded derivatives in:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Modco or funds withheld arrangements
 
 
 
—

 
—

 
108

 
—

 
121

 
—

Indexed annuity products
 
 
 
—

 
—

 
746

 
—

 
—

 
767

Variable annuity products
 
 
 
—

 
—

 
184

 
—

 
—

 
163

Total non-hedging derivatives
 
 
 
18,980

 
156

 
1,115

 
17,475

 
212

 
970

Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Foreign currency/Interest rate
 
489

 
1

 
41

 
535

 
1

 
29

Foreign currency swaps
 
Foreign currency
 
302

 
23

 
10

 
342

 
17

 
2

Foreign currency forwards
 
Foreign currency
 
1,092

 
68

 
—

 
1,094

 
28

 
2

Total hedging derivatives
 
 
 
1,883

 
92

 
51

 
1,971

 
46

 
33

Total derivatives
 
 
 
$
20,863

 
$
248

 
$
1,166

 
$
19,446

 
$
258

 
$
1,003


Fair Value Hedges
The Company designates and reports certain foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated assets as fair value hedges when they meet the requirements of the general accounting principles for Derivatives and Hedging. The gain or loss on the hedged item attributable to a change in foreign currency and the offsetting gain or loss on the related foreign currency swaps as of June 30, 2020 and 2019 were (dollars in millions):
Type of Fair Value Hedge
 
Hedged Item
 
Gains (Losses) Recognized for Derivatives
 
Gains (Losses) Recognized for Hedged Items
 
 
 
 
Investment Related Gains (Losses)
For the three months ended June 30, 2020:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
15

 
$
(13
)
For the three months ended June 30, 2019:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
(4
)
 
$
1

For the six months ended June 30, 2020:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
(8
)
 
$
2

For the six months ended June 30, 2019:
 
 
 
 
Foreign currency swaps
 
Foreign-denominated fixed maturity securities
 
$
(4
)
 
$
—


Cash Flow Hedges
Certain derivative instruments are designated as cash flow hedges when they meet the requirements of the general accounting principles for Derivatives and Hedging. The Company designates and accounts for the following as cash flow hedges: (i) certain interest rate swaps, in which the cash flows of assets and liabilities are variable based on a benchmark rate; and (ii) certain interest rate swaps, in which the cash flows of assets are denominated in different currencies, commonly referred to as cross-currency swaps.
The following tables present the components of AOCI, before income tax, and the condensed consolidated income statement classification where the gain or loss is recognized related to cash flow hedges for the three and six months ended June 30, 2020 and 2019 (dollars in millions):
 
 
Three months ended June 30,
 
 
2020
 
2019
Balance, beginning of period
 
$
(87
)
 
$
(2
)
Gains (losses) deferred in other comprehensive income (loss)
 
12

 
(13
)
Amounts reclassified to investment income
 
—

 
—

Amounts reclassified to interest expense
 
1

 
—

Balance, end of period
 
$
(74
)
 
$
(15
)
 
 
 
 
 
 
 
Six months ended June 30,
 
 
2020
 
2019
Balance, beginning of period
 
$
(26
)
 
$
9

Gains (losses) deferred in other comprehensive income (loss)
 
(49
)
 
(23
)
Amounts reclassified to investment income
 
—

 
—

Amounts reclassified to interest expense
 
1

 
(1
)
Balance, end of period
 
$
(74
)
 
$
(15
)

As of June 30, 2020, an immaterial amount and approximately $(6) million of before-tax deferred net gains (losses) on derivative instruments recorded in AOCI are expected to be reclassified to investment income and interest expense, respectively, during the next twelve months.
The following table presents the effect of derivatives in cash flow hedging relationships on the condensed consolidated statements of income and the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2020 and 2019 (dollars in millions):
Derivative Type
 
Gain (Loss) Deferred in AOCI
 
Gain (Loss) Reclassified into Income from AOCI
 
 
 
 
Investment Income
 
Interest Expense
For the three months ended June 30, 2020:
 
 
 
 
 
 
Interest rate
 
$
(1
)
 
$
—

 
$
(1
)
Currency/Interest rate
 
13

 
—

 
—

Total
 
$
12

 
$
—

 
$
(1
)
For the three months ended June 30, 2019:
 
 
 
 
 
 
Interest rate
 
$
(10
)
 
$
—

 
$
—

Currency/Interest rate
 
(3
)
 
—

 
—

Total
 
$
(13
)
 
$
—

 
$
—

 
 
 
 
 
 
 
For the six months ended June 30, 2020:
 
 
 
 
 
 
Interest rate
 
$
(36
)
 
$
—

 
$
(1
)
Currency/Interest rate
 
(13
)
 
—

 
—

Total
 
$
(49
)
 
$
—

 
$
(1
)
For the six months ended June 30, 2019:
 
 
 
 
 
 
Interest rate
 
$
(22
)
 
$
—

 
$
1

Currency/Interest rate
 
(1
)
 
—

 
—

Total
 
$
(23
)
 
$
—

 
$
1


Hedges of Net Investments in Foreign Operations
The Company uses foreign currency swaps and foreign currency forwards to hedge a portion of its net investment in certain foreign operations against adverse movements in exchange rates. The following table illustrates the Company’s net investments in foreign operations (“NIFO”) hedges for the three and six months ended June 30, 2020 and 2019 (dollars in millions):
 
 
 
Derivative Gains (Losses) Deferred in AOCI     
 
 
For the three months ended June 30,
 
For the six months ended June 30,
Type of NIFO Hedge
 
2020
 
2019
 
2020
 
2019
Foreign currency swaps
 
$
(6
)
 
$
(2
)
 
$
9

 
$
(10
)
Foreign currency forwards
 
(34
)
 
(6
)
 
46

 
(24
)
Total
 
$
(40
)
 
$
(8
)
 
$
55

 
$
(34
)


The cumulative foreign currency translation gain recorded in AOCI related to these hedges was $223 million and $168 million at June 30, 2020 and December 31, 2019, respectively. If a hedged foreign operation was sold or substantially liquidated, the amounts in AOCI would be reclassified to the condensed consolidated statements of income. A pro rata portion would be reclassified upon partial sale of a hedged foreign operation. There were no sales or substantial liquidations of net investments in foreign operations that would have required the reclassification of gains or losses from accumulated other comprehensive income (loss) into investment income during the periods presented.
Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging
The Company uses various other derivative instruments for risk management purposes that either do not qualify or have not been qualified for hedge accounting treatment. The gain or loss related to the change in fair value for these derivative instruments is recognized in investment related gains (losses), net in the condensed consolidated statements of income, except where otherwise noted.
A summary of the effect of non-hedging derivatives, including embedded derivatives, on the Company’s condensed consolidated statements of income for the three and six months ended June 30, 2020 and 2019 is as follows (dollars in millions):
 
 
 
 
Gain (Loss) for the three months ended June 30,
Type of Non-hedging Derivative
 
Income Statement Location of Gain (Loss)
 
2020
 
2019
Interest rate swaps
 
Investment related gains (losses), net
 
$
3

 
$
34

Financial futures
 
Investment related gains (losses), net
 
(48
)
 
(8
)
Foreign currency swaps
 
Investment related gains (losses), net
 
3

 
(6
)
Foreign currency forwards
 
Investment related gains (losses), net
 
1

 
—

CPI swaps
 
Investment related gains (losses), net
 
26

 
(7
)
Credit default swaps
 
Investment related gains (losses), net
 
17

 
5

Equity options
 
Investment related gains (losses), net
 
(25
)
 
(5
)
Longevity swaps
 
Other revenues
 
—

 
2

Mortality swaps
 
Other revenues
 
—

 
(1
)
Subtotal
 
 
 
(23
)
 
14

Embedded derivatives in:
 
 
 
 
 
 
Modco or funds withheld arrangements
 
Investment related gains (losses), net
 
1

 
5

Indexed annuity products
 
Interest credited
 
(7
)
 
(8
)
Variable annuity products
 
Investment related gains (losses), net
 
107

 
(18
)
Total non-hedging derivatives
 
 
 
$
78

 
$
(7
)
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss) for the six months ended June 30,
Type of Non-hedging Derivative
 
Income Statement Location of Gain (Loss)
 
2020
 
2019
Interest rate swaps
 
Investment related gains (losses), net
 
$
109

 
$
58

Financial futures
 
Investment related gains (losses), net
 
(4
)
 
(30
)
Foreign currency swaps
 
Investment related gains (losses), net
 
(10
)
 
(5
)
Foreign currency forwards
 
Investment related gains (losses), net
 
(2
)
 
—

CPI swaps
 
Investment related gains (losses), net
 
(14
)
 
(16
)
Credit default swaps
 
Investment related gains (losses), net
 
(7
)
 
20

Equity options
 
Investment related gains (losses), net
 
28

 
(28
)
Longevity swaps
 
Other revenues
 
—

 
4

Mortality swaps
 
Other revenues
 
—

 
—

Subtotal
 
 
 
100

 
3

Embedded derivatives in:
 
 
 
 
 
 
Modco or funds withheld arrangements
 
Investment related gains (losses), net
 
(229
)
 
3

Indexed annuity products
 
Interest credited
 
(1
)
 
(5
)
Variable annuity products
 
Investment related gains (losses), net
 
(21
)
 
—

Total non-hedging derivatives
 
 
 
$
(151
)
 
$
1



Credit Derivatives
The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of credit default swaps sold by the Company at June 30, 2020 and December 31, 2019 (dollars in millions):
 
 
June 30, 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(2)
 
Weighted
Average
Years to
Maturity(3)
 
Estimated Fair
Value of Credit  
Default Swaps
 
Maximum
Amount of Future
Payments under
Credit Default
Swaps(2)
 
Weighted
Average
Years to
Maturity(3)  
AAA/AA+/AA/AA-/A+/A/A-
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps
 
$
1

 
$
87

 
1.7
 
$
2

 
$
142

 
1.7
Subtotal
 
1

 
87

 
1.7
 
2

 
142

 
1.7
BBB+/BBB/BBB-
 
 
 
 
 
 
 
 
 
 
 
 
Single name credit default swaps
 
—

 
252

 
1.8
 
3

 
291

 
1.9
Credit default swaps referencing indices
 
1

 
988

 
4.4
 
—

 
873

 
4.7
Subtotal
 
1

 
1,240

 
3.9
 
3

 
1,164

 
4.0
Total
 
$
2

 
$
1,327

 
3.7
 
$
5

 
$
1,306

 
3.7
(1)
The rating agency designations are based on ratings from Standard and Poor’s (“S&P”).
(2)
Assumes the value of the referenced credit obligations is zero.
(3)
The weighted average years to maturity of the credit default swaps is calculated based on weighted average notional amounts.
Netting Arrangements
Certain of the Company’s derivatives are subject to enforceable master netting arrangements and reported as a net asset or liability in the condensed consolidated balance sheets. The Company nets all derivatives that are subject to such arrangements.
The Company has elected to include all derivatives, except embedded derivatives, in the table below, irrespective of whether they are subject to an enforceable master netting arrangement or a similar agreement. See Note 4 – “Investments” for information regarding the Company’s securities borrowing, lending, and repurchase/reverse repurchase programs.
The following table provides information relating to the Company’s derivative instruments as of June 30, 2020 and December 31, 2019 (dollars in millions):
 
 
 
 
 
 
 
 
Gross Amounts Not
Offset in the Balance Sheet
 
 
 
 
Gross Amounts   
Recognized
 
Gross Amounts
Offset in the
Balance Sheet   
 
Net Amounts
Presented in the
Balance Sheet   
 
Financial Instruments (1)    
 
Cash Collateral   
Pledged/
Received
 
Net Amount   
June 30, 2020:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
248

 
$
(43
)
 
$
205

 
$
—

 
$
(205
)
 
$
—

Derivative liabilities
 
128

 
(43
)
 
85

 
(128
)
 
(89
)
 
(132
)
December 31, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
137

 
$
(20
)
 
$
117

 
$
—

 
$
(119
)
 
$
(2
)
Derivative liabilities
 
73

 
(20
)
 
53

 
(92
)
 
(52
)
 
(91
)
(1)
Includes initial margin posted to a central clearing partner.
Credit Risk
The Company had $4 million and no credit exposure related to its derivative contracts, as of June 30, 2020 and December 31, 2019, respectively. The Company may be exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments with a positive fair value. Generally, the credit exposure of the Company’s derivative contracts is limited to the fair value at the reporting date plus or minus any collateral posted or held by the Company.
Derivatives may be exchange-traded or they may be privately negotiated contracts, which are referred to as over-the-counter (“OTC”) derivatives. Certain of the Company’s OTC derivatives are cleared and settled through central clearing counterparties (“OTC cleared”) and others are bilateral contracts between two counterparties. The Company manages its credit risk related to OTC derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master netting agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. The Company is only exposed to the default of the central clearing counterparties for OTC cleared derivatives, and these transactions require initial and daily variation margin collateral postings. Exchange-traded derivatives are settled on a daily basis, thereby reducing the credit risk exposure in the event of non-performance by counterparties to such financial instruments.