(5) Derivative Instruments

Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges” in the following disclosures. For derivatives that meet the accounting requirements to be designated as hedges, the following disclosures for these derivatives are denoted as “derivatives designated as hedges,” which include both cash flow and fair value hedges.

The following table sets forth our positions in derivative instruments as of December 31:


	Derivative assets					Derivative liabilities
	Balance sheet classification	Fair value				Balance sheet classification	Fair value
(Amounts in millions)	Balance sheet classification	2015		2014		Balance sheet classification	2015		2014
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps	Other invested assets	$	629	$	639	Other liabilities	$	37	$	27
Inflation indexed swaps	Other invested assets		—		—	Other liabilities		33		42
Foreign currency swaps	Other invested assets		8		6	Other liabilities		—		—

Total cash flow hedges			637		645			70		69

Total derivatives designated as hedges			637		645			70		69

Derivatives not designated as hedges
Interest rate swaps	Other invested assets		425		452	Other liabilities		183		177
Interest rate swaps related to securitization entities ⁽¹⁾	Restricted other invested assets		—		—	Other liabilities		30		26
Credit default swaps	Other invested assets		1		4	Other liabilities		—		—
Credit default swaps related to securitization entities ⁽¹⁾	Restricted other invested assets		—		—	Other liabilities		14		17
Foreign currency swaps	Other invested assets		—		—	Other liabilities		27		7
Equity index options	Other invested assets		30		17	Other liabilities		—		—
Financial futures	Other invested assets		—		—	Other liabilities		—		—
Equity return swaps	Other invested assets		2		—	Other liabilities		1		1
Other foreign currency contracts	Other invested assets		17		14	Other liabilities		34		13
GMWB embedded derivatives	Reinsurance recoverable ⁽²⁾		17		13	Policyholder account balances ⁽³⁾		352		291
Fixed index annuity embedded derivatives	Other assets		—		—	Policyholder account balances ⁽⁴⁾		342		276
Indexed universal life embedded derivatives	Reinsurance recoverable		—		—	Policyholder account balances ⁽⁵⁾		10		7

Total derivatives not designated as hedges			492		500			993		815

Total derivatives		$	1,129	$	1,145		$	1,063	$	884

⁽¹⁾	See note 17 for additional information related to consolidated securitization entities.

⁽²⁾	Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

⁽³⁾	Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

⁽⁴⁾	Represents the embedded derivatives associated with our fixed index annuity liabilities.

⁽⁵⁾	Represents the embedded derivatives associated with our indexed universal life liabilities.

The fair value of derivative positions presented above was not offset by the respective collateral amounts received or provided under these agreements.

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB, fixed index annuity embedded derivatives and indexed universal life embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:


(Notional in millions)	Measurement	December 31, 2014		Additions		Maturities/ terminations			December 31, 2015
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps	Notional	$	11,961	$	—	$	(747	)	$	11,214
Inflation indexed swaps	Notional		571		13		(13	)		571
Foreign currency swaps	Notional		35		—		—			35

Total cash flow hedges			12,567		13		(760	)		11,820

Total derivatives designated as hedges			12,567		13		(760	)		11,820

Derivatives not designated as hedges
Interest rate swaps	Notional		5,074		2,100		(2,242	)		4,932
Interest rate swaps related to securitization entities ⁽¹⁾	Notional		77		—		(10	)		67
Credit default swaps	Notional		394		—		(250	)		144
Credit default swaps related to securitization entities ⁽¹⁾	Notional		312		—		—			312
Equity index options	Notional		994		1,455		(1,369	)		1,080
Financial futures	Notional		1,331		5,700		(5,700	)		1,331
Equity return swaps	Notional		108		386		(360	)		134
Foreign currency swaps	Notional		104		58		—			162
Forward bond purchase commitments	Notional		—		1,140		(1,140	)		—
Other foreign currency contracts	Notional		425		2,516		(1,285	)		1,656

Total derivatives not designated as hedges			8,819		13,355		(12,356	)		9,818

Total derivatives		$	21,386	$	13,368	$	(13,116	)	$	21,638

⁽¹⁾	See note 17 for additional information related to consolidated securitization entities.


(Number of policies)	Measurement		December 31, 2014		Additions		Maturities/ terminations			December 31, 2015
Derivatives not designated as hedges
GMWB embedded derivatives		Policies		39,015		—		(2,869	)		36,146
Fixed index annuity embedded derivatives		Policies		13,901		3,939		(358	)		17,482
Indexed universal life embedded derivatives		Policies		421		595		(34	)		982

Cash Flow Hedges

Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; (v) forward bond purchase commitments to hedge against the variability in the anticipated cash flows required to purchase future fixed rate bonds; and (vi) other instruments to hedge the cash flows of various forecasted transactions.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the year ended December 31, 2015:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income (loss) from OCI		Classification of gain (loss) reclassified into net income (loss)	Gain (loss) recognized in net income (loss)⁽¹⁾		Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	78		$	85	Net investment income	$	—	Net investment gains (losses)
Interest rate swaps hedging liabilities		(10	)		—	Interest expense		—	Net investment gains (losses)
Inflation indexed swaps		9			—	Net investment income		—	Net investment gains (losses)
Foreign currency swaps		2			—	Net investment income		—	Net investment gains (losses)
Forward bond purchase commitments		—			1	Net investment income		—	Net investment gains (losses)
Forward bond purchase commitments		—			32	Net investment gains (losses)		—	Net investment gains (losses)

Total	$	79		$	118		$	—

⁽¹⁾	Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the year ended December 31, 2014:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income (loss) from OCI			Classification of gain (loss) reclassified into net income (loss)	Gain (loss) recognized in net income (loss)⁽¹⁾		Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	1,229		$	63		Net investment income	$	15	Net investment gains (losses)
Interest rate swaps hedging assets		—			2		Net investment gains (losses)		—	Net investment gains (losses)
Interest rate swaps hedging liabilities		(69	)		1		Interest expense		—	Net investment gains (losses)
Inflation indexed swaps		17			(9	)	Net investment income		—	Net investment gains (losses)
Foreign currency swaps		4			—		Interest expense		—	Net investment gains (losses)
Forward bond purchase commitments		34			—		Net investment income		—	Net investment gains (losses)

Total	$	1,215		$	57			$	15

⁽¹⁾	Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the year ended December 31, 2013:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income (loss) from OCI			Classification of gain (loss) reclassified into net income (loss)	Gain (loss) recognized in net income (loss) ⁽¹⁾			Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	(892	)	$	47		Net investment income	$	(14	)	Net investment gains (losses)
Interest rate swaps hedging assets		—			1		Net investment gains (losses)		—		Net investment gains (losses)
Interest rate swaps hedging liabilities		42			2		Interest expense		—		Net investment gains (losses)
Inflation indexed swaps		45			(5	)	Net investment income		—		Net investment gains (losses)
Foreign currency swaps		(1	)		—		Interest expense		—		Net investment gains (losses)
Forward bond purchase commitments		(60	)		—		Net investment income		—		Net investment gains (losses)

Total	$	(866	)	$	45			$	(14	)

⁽¹⁾	Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness.

The following table provides a reconciliation of current period changes, net of applicable income taxes, for these designated derivatives presented in the separate component of stockholders’ equity labeled “derivatives qualifying as hedges,” for the years ended December 31:


(Amounts in millions)	2015			2014			2013
Derivatives qualifying as effective accounting hedges as of January 1	$	2,070		$	1,319		$	1,909
Current period increases (decreases) in fair value, net of deferred taxes of $(29), $(427) and $305		50			788			(561	)
Reclassification to net (income) loss, net of deferred taxes of $43, $20 and $16		(75	)		(37	)		(29	)

Derivatives qualifying as effective accounting hedges as of December 31	$	2,045		$	2,070		$	1,319

The total of derivatives designated as cash flow hedges of $2,045 million, net of taxes, recorded in stockholders’ equity as of December 31, 2015 is expected to be reclassified to net income (loss) in the future, concurrently with and primarily offsetting changes in interest expense and interest income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $70 million, net of taxes, is expected to be reclassified to net income (loss) in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2047. There were immaterial amounts reclassified to net income (loss) during the years ended December 31, 2015, 2014 and 2013 in connection with forecasted transactions that were no longer considered probable of occurring.

Fair Value Hedges

Certain derivative instruments are designated as fair value hedges. The changes in fair value of these instruments are recorded in net income (loss). In addition, changes in the fair value attributable to the hedged portion of the underlying instrument are reported in net income (loss). We designate and account for the following as fair value hedges when they have met the effectiveness requirements: (i) interest rate swaps to convert fixed rate liabilities into floating rate liabilities; (ii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iii) other instruments to hedge various fair value exposures of investments.

There were no pre-tax income (loss) effects of fair value hedges and related hedged items for the years ended December 31, 2015 and 2014.

The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the year ended December 31, 2013:


	Derivative instrument							Hedged item
(Amounts in millions)	Gain (loss) recognized in net income (loss)			Classification of gain (losses) recognized in net income (loss)	Other impacts to net income (loss)		Classification of other impacts to net income (loss)	Gain (loss) recognized in net income (loss)		Classification of gain (losses) recognized in net income (loss)
Interest rate swaps hedging liabilities	$	(11	)	Net investment gains (losses)	$	13	Interest credited	$	11	Net investment gains (losses)
Foreign currency swaps		(31	)	Net investment gains (losses)		—	Interest credited		31	Net investment gains (losses)

Total	$	(42	)		$	13		$	42

The difference between the gain (loss) recognized for the derivative instrument and the hedged item presented above represents the net ineffectiveness of the fair value hedging relationships. The other impacts presented above represent the net income (loss) effects of the derivative instruments that are presented in the same location as the income (loss) activity from the hedged item. There were no amounts excluded from the measurement of effectiveness.

Derivatives Not Designated As Hedges

We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits, fixed index annuities and indexed universal life; (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; (vi) foreign currency swaps, options and forward contracts to mitigate currency risk associated with non-functional currency investments held by certain foreign subsidiaries and future dividends or other cash flows from certain foreign subsidiaries to our holding company; and (vii) equity index options to mitigate certain macroeconomic risks associated with certain foreign subsidiaries. Additionally, we provide GMWBs on certain variable annuities that are required to be bifurcated as embedded derivatives. We also offer fixed index annuity and indexed universal life products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.

We also have derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only have recourse to the securitization entity. The interest rate swaps used for these entities are typically used to effectively convert the interest payments on the assets of the securitization entity to the same basis as the interest rate on the borrowings issued by the securitization entity. Credit default swaps are utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also include a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap.

The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the years ended December 31:


(Amounts in millions)	2015			2014			2013			Classification of gain (loss) recognized in net income (loss)
Interest rate swaps	$	(11	)	$	1		$	(7	)	Net investment gains (losses)
Interest rate swaps related to securitization entities ⁽¹⁾		(4	)		(9	)		9		Net investment gains (losses)
Credit default swaps		1			1			14		Net investment gains (losses)
Credit default swaps related to securitization entities ⁽¹⁾		7			19			77		Net investment gains (losses)
Equity index options		(25	)		(31	)		(43	)	Net investment gains (losses)
Financial futures		(34	)		90			(232	)	Net investment gains (losses)
Equity return swaps		(3	)		5			(33	)	Net investment gains (losses)
Other foreign currency contracts		10			(4	)		6		Net investment gains (losses)
Foreign currency swaps		(22	)		(7	)		—		Net investment gains (losses)
Forward bond purchase commitments		2			—			—		Net investment gains (losses)
GMWB embedded derivatives		(25	)		(147	)		277		Net investment gains (losses)
Fixed index annuity embedded derivatives		(7	)		(27	)		(18	)	Net investment gains (losses)
Indexed universal life embedded derivatives		6			(1	)		—		Net investment gains (losses)

Total derivatives not designated as hedges	$	(105	)	$	(110	)	$	50

⁽¹⁾	See note 17 for additional information related to consolidated securitization entities.

Derivative Counterparty Credit Risk

Most of our derivative arrangements with counterparties require the posting of collateral upon meeting certain net exposure thresholds. For derivatives related to securitization entities, there are no arrangements that require either party to provide collateral and the recourse of the derivative counterparty is typically limited to the assets held by the securitization entity and there is no recourse to any entity other than the securitization entity.

The following table presents additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of December 31:


	2015									2014
(Amounts in millions)	Derivatives assets⁽¹⁾			Derivatives liabilities⁽²⁾			Net derivatives			Derivatives assets⁽¹⁾			Derivatives liabilities⁽²⁾			Net derivatives
Amounts presented in the balance sheet:
Gross amounts recognized	$	1,135		$	320		$	815		$	1,157		$	273		$	884
Gross amounts offset in the balance sheet		—			—			—			—			—			—

Net amounts presented in the balance sheet		1,135			320			815			1,157			273			884
Gross amounts not offset in the balance sheet:
Financial instruments ⁽³⁾		(231	)		(231	)		—			(227	)		(227	)		—
Collateral received		(642	)		—			(642	)		(884	)		—			(884	)
Collateral pledged		—			(263	)		263			—			(49	)		49
Over collateralization		3			174			(171	)		1			5			(4	)

Net amount	$	265		$	—		$	265		$	47		$	2		$	45

⁽¹⁾	Included $24 million and $25 million of accruals on derivatives classified as other assets and does not include amounts related to embedded derivatives as of December 31, 2015 and 2014, respectively.

⁽²⁾	Included $6 million of accruals on derivatives classified as other liabilities and does not include amounts related to embedded derivatives and derivatives related to securitization entities as of December 31, 2015 and 2014.

⁽³⁾	Amounts represent derivative assets and/or liabilities that are presented gross within the balance sheet but are held with the same counterparty where we have a master netting arrangement. This adjustment results in presenting the net asset and net liability position for each counterparty.

Except for derivatives related to securitization entities, almost all of our master swap agreements contain credit downgrade provisions that allow either party to assign or terminate derivative transactions if the other party’s long-term unsecured debt rating or financial strength rating is below the limit defined in the applicable agreement. If the downgrade provisions had been triggered as of December 31, 2015 and 2014, we could have been allowed to claim $265 million and $47 million, respectively, or required to disburse up to $2 million as of December 31, 2014. The chart above excludes embedded derivatives and derivatives related to securitization entities as those derivatives are not subject to master netting arrangements.

Credit Derivatives

We sell protection under single name credit default swaps and credit default swap index tranches in combination with purchasing securities to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for both indexed reference entities and single name reference entities follow the Credit Derivatives Physical Settlement Matrix published by the International Swaps and Derivatives Association. Under these terms, credit default triggers are defined as bankruptcy, failure to pay or restructuring, if applicable. Our maximum exposure to credit loss equals the notional value for credit default swaps. In the event of default for credit default swaps, we are typically required to pay the protection holder the full notional value less a recovery rate determined at auction.

In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we consolidate. These derivatives represent a customized index of reference entities with specified attachment points for certain derivatives. The credit default triggers are similar to those described above. In the event of default, the securitization entity will provide the counterparty with the par value of assets held in the securitization entity for the amount of incurred loss on the credit default swap. The maximum exposure to loss for the securitization entity is the notional value of the derivatives. Certain losses on these credit default swaps would be absorbed by the third-party noteholders of the securitization entity and the remaining losses on the credit default swaps would be absorbed by our portion of the notes issued by the securitization entity.

The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of December 31:


	2015						2014
(Amounts in millions)	Notional value		Assets		Liabilities		Notional value		Assets		Liabilities
Investment grade
Matures in less than one year	$	—	$	—	$	—	$	—	$	—	$	—
Matures after one year through five years		39		—		—		39		1		—

Total credit default swaps on single name reference entities	$	39	$	—	$	—	$	39	$	1	$	—

The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of December 31:


	2015						2014
(Amounts in millions)	Notional value		Assets		Liabilities		Notional value		Assets		Liabilities
Original index tranche attachment/detachment point and maturity:
7% - 15% matures in less than one year ⁽¹⁾	$	100	$	1	$	—	$	—	$	—	$	—
7% - 15% matures after one year through five years ⁽¹⁾		—		—		—		100		1		—
9% - 12% matures in less than one year ⁽²⁾		—		—		—		250		2		—

Total credit default swap index tranches		100		1		—		350		3		—

Customized credit default swap index tranches related to securitization entities:
Portion backing third-party borrowings maturing 2017 ⁽³⁾		12		—		2		12		—		—
Portion backing our interest maturing 2017 ⁽⁴⁾		300		—		12		300		—		17

Total customized credit default swap index tranches related to securitization entities		312		—		14		312		—		17

Total credit default swaps on index tranches	$	412	$	1	$	14	$	662	$	3	$	17

⁽¹⁾	The current attachment/detachment as of December 31, 2015 and 2014 was 7% – 15%.

⁽²⁾	The current attachment/detachment as of December 31, 2015 and 2014 was 9% – 12%.

⁽³⁾	Original notional value was $39 million.

⁽⁴⁾	Original notional value was $300 million.