Derivative Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 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:


	September 30, 2020					December 31, 2019
	Notional Amount	Fair Value				Notional Amount	Fair Value
(In millions)		Assets		Liabilities			Assets		Liabilities
Derivatives designated as hedges
Foreign currency swaps	3,268	$	243	$	45	3,158	$	113	$	56
Foreign currency forwards	1,736	15		1		717	1		9
Foreign currency forwards on net investments	136	—		1		139	—		2
Total derivatives designated as hedges		258		47			114		67
Derivatives not designated as hedges
Equity options	53,997	2,401		26		49,549	2,746		5
Futures	16	48		4		8	10		1
Total return swaps	72	1		—		106	6		—
Foreign currency swaps	1,510	25		8		35	2		1
Interest rate swaps	911	11		41		776	3		4
Credit default swaps	10	—		5		10	—		3
Foreign currency forwards	2,963	27		16		1,924	7		16
Embedded derivatives
Funds withheld including related party		1,980		50			1,395		31
Interest sensitive contract liabilities		—		11,741			—		10,942
Total derivatives not designated as hedges		4,493		11,891			4,169		11,003
Total derivatives		$	4,751	$	11,938		$	4,283	$	11,070

Derivatives Designated as Hedges

Foreign currency swaps – We use foreign currency swaps to convert foreign currency denominated cash flows of an investment to US 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 three months ended September 30, 2020 and 2019, we had foreign currency swap losses of $178 million and gains of $124 million, respectively, recorded in AOCI. During the nine months ended September 30, 2020 and 2019, we had foreign currency swap gains of $140 million and $171 million, respectively, recorded in AOCI. There were no amounts reclassified to income and no amounts deemed ineffective during the nine months ended September 30, 2020 and 2019. As of September 30, 2020, 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 September 30, 2020 and December 31, 2019, the carrying amount of the hedged AFS securities was $1,739 million and $456 million, respectively, and the cumulative amount of fair value hedging adjustments included in the hedged AFS securities included gains of $60 million and $1 million, respectively.

The following is a summary of the gains (losses) related to the derivatives and related hedged items in fair value hedge relationships, which are included in investment related gains (losses) on the condensed consolidated statements of income:


	Three months ended September 30,				Nine months ended September 30,
(In millions)	2020		2019		2020		2019
Derivatives	$	(52)	$	13	$	(60)	$	13
Related AFS securities	50		(11)		59		(12)
Total gains (losses) on derivatives and related hedged items	$	(2)	$	2	$	(1)	$	1

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 US dollar. We assess hedge effectiveness based on the changes in forward rates. During the three months and nine months ended September 30, 2020, these derivatives had gains of $3 million and $5 million, respectively, which are included in foreign currency translation and other adjustments on the condensed consolidated statements of comprehensive income. As of September 30, 2020 and December 31, 2019, the cumulative foreign currency translation recorded in AOCI related to these net investment hedges were gains of $3 million and losses of $2 million, respectively. During the three and nine months ended September 30, 2020, there were no amounts deemed ineffective.

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 a modified coinsurance (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:


	Three months ended September 30,				Nine months ended September 30,
(In millions)	2020		2019		2020		2019
Equity options	$	606	$	77	$	(303)	$	1,365
Futures	50		(3)		63		(17)
Swaps	29		8		9		37
Foreign currency forwards	(114)		42		(70)		47
Embedded derivatives on funds withheld	1,077		496		1,260		2,061
Amounts recognized in investment related gains (losses)	1,648		620		959		3,493
Embedded derivatives in indexed annuity products1	(553)		(265)		(910)		(1,920)
Total gains (losses) on derivatives not designated as hedges	$	1,095	$	355	$	49	$	1,573

1 Included in interest sensitive contract benefits on the condensed 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 condensed 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
September 30, 2020
Derivative assets		$	2,771	$	(61)	$	(2,564)	$	146	$	(41)	$	105
Derivative liabilities		(147)		61		77		(9)		—		(9)

December 31, 2019
Derivative assets		$	2,888	$	(67)	$	(2,743)	$	78	$	(145)	$	(67)
Derivative liabilities		(97)		67		31		1		—		1

1	The gross amounts of recognized derivative assets and derivative liabilities are reported on the condensed consolidated balance sheets. As of September 30, 2020 and December 31, 2019, 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 condensed 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.