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Derivative Instruments
12 Months Ended
Dec. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
3. Derivative Instruments

We use a variety of derivative instruments to manage risks, primarily equity, interest rate, credit, foreign currency and market volatility. See Note 1 – Business, Basis of Presentation and Significant Accounting Policies for a description of our accounting policies for derivatives and Note 5 – Fair Value for information about the fair value hierarchy for derivatives.

The following table presents the notional amount and fair value of derivative instruments:
 
December 31,
 
2019
 
2018
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
(In millions)
 
Assets
 
Liabilities
 
 
Assets
 
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency swaps
3,158

 
$
113

 
$
56

 
2,041

 
$
83

 
$
55

Foreign currency forwards
717

 
1

 
9

 
85

 

 
1

Foreign currency forwards on net investments
139

 

 
2

 

 

 

Total derivatives designated as hedges
 
 
114

 
67

 
 
 
83

 
56

Derivatives not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
Equity options
49,549

 
2,746

 
5

 
49,821

 
942

 
11

Futures
8

 
10

 
1

 
4

 
9

 
3

Total return swaps
106

 
6

 

 
62

 

 
3

Foreign currency swaps
35

 
2

 
1

 
38

 
3

 
2

Interest rate swaps
776

 
3

 
4

 
326

 

 
1

Credit default swaps
10

 

 
3

 
10

 

 
4

Foreign currency forwards
1,924

 
7

 
16

 
646

 
6

 
5

Embedded derivatives
 
 
 
 
 
 
 
 
 
 
 
Funds withheld including related party
 
 
1,395

 
31

 
 
 
(53
)
 
(1
)
Interest sensitive contract liabilities
 
 

 
10,942

 
 
 

 
7,969

Total derivatives not designated as hedges
 
 
4,169

 
11,003

 
 
 
907

 
7,997

Total derivatives
 
 
$
4,283

 
$
11,070

 
 
 
$
990

 
$
8,053



Derivatives Designated as Hedges

Foreign currency swaps We use foreign currency swaps to convert foreign currency denominated cash flows of an investment to U.S. dollars to reduce cash flow fluctuations due to changes in currency exchange rates. Certain of these swaps are designated and accounted for as cash flow hedges, which will expire by December 2050. During the years ended December 31, 2019, 2018 and 2017, we had foreign currency swap gains of $29 million and $146 million and losses of $105 million, respectively, recorded in AOCI. There were no amounts reclassified to income and no amounts deemed ineffective for the years ended December 31, 2019, 2018 or 2017. As of December 31, 2019, no amounts are expected to be reclassified to income within the next 12 months.

Foreign currency forwards – We use foreign currency forward contracts to hedge certain exposures to foreign currency risk. The price is agreed upon at the time of the contract and payment is made at a specified future date. Certain of these forwards are designated and accounted for as fair value hedges. As of December 31, 2019 and 2018, the carrying amount of the hedged AFS securities was $456 million and $88 million, respectively, and the cumulative amount of fair value hedging adjustments included in the hedged AFS securities included gains of $1 million and $1 million, respectively. The gains and losses on derivatives and the related hedged items in fair value hedge relationships are recorded in investment related gains (losses) on the consolidated statements of income. During the years ended December 31, 2019 and 2018, the derivatives had gains of $2 million and losses of $1 million, respectively, and the related hedged items had gains of $0 million and $1 million, respectively.

Foreign currency forwards on net investments – We have foreign currency forwards designated as net investment hedges. These forwards hedge the foreign currency exchange rate risk of our investments in subsidiaries that have a reporting currency other than the U.S. dollar. We assess hedge effectiveness based on the changes in forward rates. During the year ended December 31, 2019, these derivatives had losses of $2 million, which are included in foreign currency translation and other adjustments on the consolidated statements of comprehensive income. As of December 31, 2019, the cumulative foreign currency translation loss recorded in AOCI related to these net investment hedges was $2 million. There were no amounts deemed ineffective for the year ended December 31, 2019.

Derivatives Not Designated as Hedges

Equity options – We use equity indexed options to economically hedge fixed indexed annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index, primarily the S&P 500. To hedge against adverse changes in equity indices, we enter into contracts to buy equity indexed options. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.

Futures – Futures contracts are purchased to hedge the growth in interest credited to the customer as a direct result of increases in the related indices. We enter into exchange-traded futures with regulated futures commission clearing brokers who are members of a trading exchange. Under exchange-traded futures contracts, we agree to purchase a specified number of contracts with other parties and to post variation margin on a daily basis in an amount equal to the difference in the daily fair values of those contracts.

Total return swaps – We purchase total rate of return swaps to gain exposure and benefit from a reference asset or index without ownership. Total rate of return swaps are contracts in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of the underlying asset or index, which includes both the income it generates and any capital gains.

Interest rate swaps – We use interest rate swaps to reduce market risks from interest rate changes and to alter interest rate exposure arising from duration mismatches between assets and liabilities. With an interest rate swap, we agree with another party to exchange the difference between fixed-rate and floating-rate interest amounts tied to an agreed-upon notional principal amount at specified intervals.

Credit default swaps – Credit default swaps provide a measure of protection against the default of an issuer or allow us to gain credit exposure to an issuer or traded index. We use credit default swaps coupled with a bond to synthetically create the characteristics of a reference bond. These transactions have a lower cost and are generally more liquid relative to the cash market. We receive a periodic premium for these transactions as compensation for accepting credit risk.

Hedging credit risk involves buying protection for existing credit risk. The exposure resulting from the agreements, which is usually the notional amount, is equal to the maximum proceeds that must be paid by a counterparty for a defaulted security. If a credit event occurs on a reference entity, then a counterparty who sold protection is required to pay the buyer the trade notional amount less any recovery value of the security.

Embedded derivatives – We have embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance agreements structured on modco or funds withheld basis and indexed annuity products.

The following is a summary of the gains (losses) related to derivatives not designated as hedges:
 
Years ended December 31,
(In millions)
2019
 
2018
 
2017
Equity options
$
2,169

 
$
(877
)
 
$
1,939

Futures
(13
)
 
2

 
(24
)
Swaps
43

 
(8
)
 
27

Foreign currency forwards
(2
)
 
16

 
28

Embedded derivatives on funds withheld
2,246

 
(232
)
 
407

Amounts recognized in investment related gains (losses)
4,443

 
(1,099
)
 
2,377

Embedded derivatives in indexed annuity products1
(2,526
)
 
923

 
(1,744
)
Total gains (losses) on derivatives not designated as hedges
$
1,917

 
$
(176
)
 
$
633

 
 
 
 
 
 
1 Included in interest sensitive contract benefits on the consolidated statements of income.


Credit Risk—We may be exposed to credit-related losses in the event of counterparty nonperformance on derivative financial instruments. Generally, the current credit exposure of our derivative contracts is the fair value at the reporting date less any collateral received from the counterparty.

We manage credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties. Where possible, we maintain collateral arrangements and use master netting agreements that provide for a single net payment from one counterparty to another at each due date and upon termination. We have also established counterparty exposure limits, where possible, in order to evaluate if there is sufficient collateral to support the net exposure.

Collateral arrangements typically require the posting of collateral in connection with its derivative instruments. Collateral agreements often contain posting thresholds, some of which may vary depending on the posting party’s financial strength ratings. Additionally, a decrease in our financial strength rating to a specified level can result in settlement of the derivative position.

The estimated fair value of our net derivative and other financial assets and liabilities after the application of master netting agreements and collateral were as follows:
 
 
 
Gross amounts not offset on the consolidated balance sheets
 
 
 
 
 
 
(In millions)
Gross amount recognized1
 
Financial instruments2
 
Collateral received/pledged
 
Net amount
 
Off-balance sheet securities collateral3
 
Net amount after securities collateral
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
2,888

 
$
(67
)
 
$
(2,743
)
 
$
78

 
$
(145
)
 
$
(67
)
Derivative liabilities
(97
)
 
67

 
31

 
1

 

 
1

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
1,043

 
$
(52
)
 
$
(969
)
 
$
22

 
$
(4
)
 
$
18

Derivative liabilities
(85
)
 
52

 
24

 
(9
)
 

 
(9
)
 
 
 
 
 
 
 
 
 
 
 
 
1 The gross amounts of recognized derivative assets and derivative liabilities are reported on the consolidated balance sheets. As of December 31, 2019 and 2018, amounts not subject to master netting or similar agreements were immaterial.
2 Represents amounts offsetting derivative assets and derivative liabilities that are subject to an enforceable master netting agreement or similar agreement that are not netted against the gross derivative assets or gross derivative liabilities for presentation on the consolidated balance sheets.
3 For non-cash collateral received, we do not recognize the collateral on our balance sheet unless the obligor (transferor) has defaulted under the terms of the secured contract and is no longer entitled to redeem the pledged asset. Amounts do not include any excess of collateral pledged or received.


Certain derivative instruments contain provisions for credit-related events, such as downgrades in our credit ratings or for a negative credit event of a credit default swap’s reference entity. If a credit event were to occur, we may be required to settle an outstanding liability. The following is a summary of our exposure to credit-related events:
 
December 31,
(In millions)
2019
 
2018
Fair value of derivative liabilities with credit related provisions
$
3

 
$
4

Maximum exposure for credit default swaps
10

 
10


As of December 31, 2019 and 2018, no additional collateral would be required if a default or termination event were to occur.