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Derivative Instruments
 3 Months Ended
Mar. 31, 2020
Derivative Instruments
(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 some 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 cash flow hedges.
The following table sets forth our positions in derivative instruments as of the dates indicated:
 
Derivative assets
 
Derivative liabilities
 
  
Balance
 
sheet
classification
 
Fair value
   
Balance
 
sheet
classification
 
Fair value
 
(Amounts in millions)
March 31,
2020
 
 
  
December 31,
2019
 
March 31,
2020
 
 
  
December 31,
2019
 
Derivatives designated as
 
hedges
  
 
 
 
  
 
 
  
 
 
 
  
 
 
Cash flow hedges:
  
   
     
   
   
     
 
Interest rate swaps
  
Other invested assets
  $
1,002
    $
197
    
Other liabilities
   $
—  
    $
10
  
Foreign currency swaps
  
Other invested assets
   
21
      
4
    
Other liabilities
    
—  
     
—  
  
                                         
Total cash flow
 
hedges
  
   
1,023
      
201
    
   
—  
     
10
  
                                         
Total derivatives
designated
 
as hedges
  
   
1,023
      
201
    
   
—  
     
10
  
                                         
Derivatives not designated as
 
hedges
  
 
 
 
  
 
 
  
 
 
 
  
 
 
Equity index options
  
Other invested assets
   
62
      
81
    
Other liabilities
    
—  
     
—  
  
Financial futures
  
Other invested assets
   
—  
     
—  
    
Other liabilities
    
—  
     
—  
  
Other foreign currency
contracts
  
Other invested assets
   
16
      
8
    
Other liabilities
    
14
      
1
  
GMWB embeddedderivatives
  
Reinsurance
recoverable
(1)
    
47
      
20
    
Policyholder
account balances
 
(2)
    
691
      
323
  
Fixed index annuity embedded
 
derivatives
  
Other assets
    
—  
     
—  
    
Policyholder
account balances 
(3)
    
413
      
452
  
Indexed universal lifeembedded
 
derivatives
  
Reinsurance
recoverable
    
—  
     
—  
    
Policyholder
account balances 
(4)
    
21
      
19
  
                                         
Total derivatives not
designated as
 
hedges
  
   
125
      
109
    
   
1,139
      
795
  
                                         
Total derivatives
  
  $
     1,148
    $
     310
    
  $
     1,139
    $
     805
  
                                         
 
(1)
Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities.
(2)
Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
(3)
Represents the embedded derivatives associated with our fixed index annuity liabilities.
(4)
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 embedded derivatives, 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,
2019
 
  
Additions
 
  
Maturities/
terminations
 
  
March 31,
2020
 
Derivatives designated as hedges
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Cash flow hedges:
   
     
     
     
     
 
Interest rate swaps
   
Notional
    $
8,968
     $
1,158
     $
(1,102
 )   $
9,024
  
Foreign currency swaps
   
Notional
     
110
      
—
      
—
      
110
  
                                         
Total cash flow hedges
   
     
9,078
      
1,158
      
(1,102
 )    
9,134
  
                                         
Total derivatives designated as hedges
   
     
9,078
      
1,158
      
(1,102
 )    
9,134
  
                                         
Derivatives not designated as hedges
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Interest rate swaps
   
Notional
     
4,674
      
—
      
—
      
4,674
  
Equity index options
   
Notional
     
2,451
      
509
      
(531
 )    
2,429
  
Financial futures
   
Notional
     
1,182
      
1,651
      
(1,266
 )    
1,567
  
Other foreign currency contracts
   
Notional
     
628
      
1,819
      
(1,308
 )    
1,139
  
                                         
Total derivatives not designated as hedges
   
     
8,935
      
3,979
      
(3,105
 )    
9,809
  
                                         
Total derivatives
   
    $
18,013
     $
5,137
     $
(4,207
 )   $
18,943
  
                                         
                               
(Number of policies)
 
Measurement
 
  
December 31,
2019
 
  
Additions
 
  
Maturities/
terminations
 
  
March 31,
2020
 
Derivatives not designated as hedges
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
GMWB embedded derivatives
   
Policies
     
25,623
      
—
      
(561
 )    
25,062
  
Fixed index annuity embedded derivatives
   
Policies
     
15,441
      
—
      
(317
 )    
15,124
  
Indexed universal life embedded derivatives
   
Policies
     
884
      
—
      
(18
 )    
866
  
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; and (v) 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 three months ended March 31, 2020:
(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)
 
  
Classification of gain
(loss) recognized in
net income (loss)
 
Interest rate swaps hedging assets
  $
1,041
     $
43
      
Net investment income
    $
—
      
Net investment gains (losses)
 
Interest rate swaps hedging assets
   
—  
      
4
      
Net investment gains (losses)
     
—
      
Net investment gains (losses)
 
Interest rate swaps hedging liabilities
   
(63
 )    
—  
      
Interest expense
     
—
      
Net investment gains (losses)
 
Foreign currency swaps
   
17
      
—  
      
Net investment income
     
—
      
Net investment gains (losses)
 
                                         
Total
  $
995
     $
47
      
    $
—
      
 
                                         
The following table provides information about the
pre-tax
income (loss) effects of cash flow hedges for the three months ended March 31, 2019:
(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)
 
  
Classification of gain
(loss) recognized in
net income (loss)
 
Interest rate swaps hedging assets
  $
137
     $
38
      
Net investment income
    $
—
      
Net investment gains (losses)
 
Interest rate swaps hedging assets
   
—  
      
6
      
Net investment gains (losses)
     
—
      
Net investment gains (losses)
 
Interest rate swaps hedging liabilities
   
(12
 )    
—  
      
Interest expense
     
—
      
Net investment gains (losses)
 
Foreign currency swaps
   
(3
 )    
—  
      
Net investment income
     
—
      
Net investment gains (losses)
 
Forward currency swaps
   
—
      
—
      
Net investment gains (losses)
     
2
      
Net investment gains (losses)
 
                                         
Total
  $
     122
     $
     44
      
    $
2
      
 
                                         
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 periods indicated:
                 
 
Three months ended
March 31,
 
(Amounts in millions)
 
2020
 
  
2019
 
Derivatives qualifying as effective accounting hedges as of January 1
  $
     2,002
     $
     1,781
  
Current period increases (decreases) in fair value, net of deferred taxes of $(212) and $(25)
   
783
      
97
  
Reclassification to net (income) loss, net of deferred taxes of $17 and $16
   
(30
 )    
(28
 )
                 
Derivatives qualifying as effective accounting hedges as of March 31
  $
2,755
     $
1,850
  
                 
 
 
 
The total of derivatives designated as cash flow hedges of $2,755 million, net of taxes, recorded in stockholders’ equity as of March 31, 2020 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, $120 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 2057. During the three months ended March 31, 2020 and 2019, we reclassified $2 million and $4 million, respectively, to net income (loss) in connection with forecasted transactions that were no longer considered probable of occurring.
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) 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; (iii) interest rate caps where the hedging relationship does not qualify for hedge accounting; (iv) foreign currency forward contracts to mitigate currency risk associated with
non-functional
currency investments held by certain foreign subsidiaries; and (v) foreign currency options and forward contracts to mitigate currency risk associated with future dividends or other cash flows from certain foreign subsidiaries to our holding company. 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 insurance products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.
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 periods indicated:
                         
 
  
Three months ended March 31,
    
Classification of gain (loss) recognized 
in net income (loss)
  
(Amounts in millions)
 
2020
 
  
2019
 
Interest rate swaps
  $
(10
 )   $
(1
 )    
Net investment gains (losses)
 
Equity index options
   
(13
 )    
17
      
Net investment gains (losses)
 
Financial futures
   
261
      
(44
 )    
Net investment gains (losses)
 
Other foreign currency contracts
   
(47
 )    
—
      
Net investment gains (losses)
 
GMWB embedded derivatives
   
(336
 )    
45
      
Net investment gains (losses)
 
Fixed index annuity embedded derivatives
   
32
      
(38
 )    
Net investment gains (losses)
 
Indexed universal life embedded derivatives
   
4
      
1
      
Net investment gains (losses)
 
                         
Total derivatives not designated as hedges
  $
 
 
(109
 )   $
 
 
(20
 )    
 
                         
 
 
 
Derivative Counterparty Credit Risk
Most of our derivative arrangements with counterparties require the posting of collateral upon meeting certain net exposure thresholds. The following table presents additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of the dates indicated:
                                                 
 
March 31, 2020
   
December 31, 2019
 
(Amounts in millions)
  
Derivative
assets
(1)
 
  
Derivative
liabilities 
(2)
 
  
Net
derivatives
 
  
Derivative
assets
(1)
 
  
Derivative
liabilities 
(2)
 
  
Net
derivatives
 
Amounts presented in the balance sheet:
    
     
     
     
     
     
 
Gross amounts recognized
   $
1,102
     $
14
     $
1,088
     $
291
     $
11
     $
280
  
Gross amounts offset in the balance sheet
    
—
      
—
      
—
      
—
      
—
      
—
  
                                                 
Net amounts presented in the balance sheet
    
1,102
      
14
      
1,088
      
291
      
11
      
280
  
Gross amounts not offset in the balance sheet:
    
     
     
     
     
     
 
Financial instruments
(3)
    
—
      
—
      
—
      
(7
 )
    
(7
 )
    
—
  
Collateral received
    
(1,016
 )
    
—
      
(1,016
 )    
(179
 )
    
—
      
(179
 )
Collateral pledged
    
—
      
(451
 )
    
451
      
—
      
(405
 )
    
405
  
Over collateralization
    
42
      
437
      
(395
 )    
18
      
401
      
(383
 )
                                                 
Net amount
   $
128
     $
—
     $
128
     $
123
     $
—
     $
123
  
                                                 
 
 
 
 
(1)
Included $1 million of accruals on derivatives classified as other assets as of March 31, 2020 and December 31, 2019 and does not include amounts related to embedded derivatives as of March 31, 2020 and December 31, 2019.
 
 
 
(2)
Does not include amounts related to embedded derivatives as of March 31, 2020 and December 31, 2019.
 
 
 
(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.