Derivative Investments

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Investments

DERIVATIVE INVESTMENTS

Fixed-index products provide traditional fixed annuities and universal life contracts with the option to have credited interest rates linked in part to an underlying equity index or a combination of equity indices. The equity return component of such policy contracts is identified separately and accounted for in future policy benefits as embedded derivatives on the Consolidated Balance Sheets. The remaining portions of these policy contracts are considered the host contracts and are recorded separately as fixed annuity or universal life contracts. The host contracts are accounted for under debt instrument type accounting in which future policy benefits are recorded as discounted debt instruments that are accreted, using the effective yield method, to their minimum account values at their projected maturities or termination dates.

The Company purchases over-the-counter index options, which are derivative financial instruments, to hedge the equity return component of its fixed-index annuity and life products. The index options act as hedges to match closely the returns on the underlying index or indices. The amounts which may be credited to policyholders are linked, in part, to the returns of the underlying index or indices. As a result, changes to policyholders' liabilities are substantially offset by changes in the value of the options. Cash is exchanged upon purchase of the index options and no principal or interest payments are made by either party during the option periods. Upon maturity or expiration of the options, cash may be paid to the Company depending on the performance of the underlying index or indices and terms of the contract.

The Company does not elect hedge accounting relative to these derivative instruments. The index options are reported at fair value in the accompanying Consolidated Financial Statements. The changes in the values of the index options and the changes in the policyholder liabilities are both reflected in the Consolidated Statements of Earnings. Any changes relative to the embedded derivatives associated with policy contracts are reflected in contract interest in the Consolidated Statements of Earnings. Any gains or losses from the sale or expiration of the options, as well as period-to-period changes in values, are reflected as net investment income in the Consolidated Statements of Earnings.

Although there is credit risk in the event of nonperformance by counterparties to the index options, the Company does not expect any of its counterparties to fail to meet their obligations, given their high credit ratings. In addition, credit support agreements are in place with all counterparties for option holdings in excess of specific limits, which may further reduce the Company's credit exposure.

The tables below present the fair value of derivative instruments.

	December 31, 2020
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
		(In thousands)			(In thousands)
Derivatives not designated as hedging instruments:
Equity index options	Derivatives, Index Options	$	132,821
Fixed-index products				Universal Life and Annuity Contracts	$	161,351
Total		$	132,821		$	161,351

	December 31, 2019
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
		(In thousands)			(In thousands)
Derivatives not designated as hedging instruments:
Equity index options	Derivatives, Index Options	$	157,588
Fixed-index products				Universal Life and Annuity Contracts	$	155,902
Total		$	157,588		$	155,902

The table below presents the effect of derivative instruments in the Consolidated Statements of Earnings for the years ended December 31, 2020, 2019 and 2018.

		Amount of Gain or (Loss) Recognized In Income on Derivatives
Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized In Income on Derivatives	2020		2019	2018
		(In thousands)
Equity index options	Net investment income (loss)	$	14,754	123,207	(80,004)
Fixed-index products	Universal life and annuity contract interest	(44,970)		(91,424)	66,335
		$	(30,216)	31,783	(13,669)

The embedded derivative liability, the change of which is recorded in universal life and annuity contract interest in the Consolidated Statements of Earnings, includes projected interest credits that are offset by the expected collectability by the Company of asset management fees on fixed-index products. The anticipated asset management fees assumed to be collected increases or decreases based upon the most recent performance of index options and adds to or reduces the offset applied to the embedded derivative liability (increasing or decreasing contract interest expense). In the years ended December 31, 2020, 2019, and 2018, the change in the embedded derivative liability due to the expected collectability of asset management fees increased/(decreased) contract interest expense by $34.6 million, $(33.6) million, and $17.6 million, respectively. During 2020, the Company changed its budget for purchasing options to match the collection of asset management fees with the payoff from out of the money options, thereby removing the option premium currently being paid for the probability or expectation of collecting asset management fees ("out of the money" hedging). As the current one year options outstanding at December 31, 2020 expire and are replaced by out of the money hedges, the embedded derivative liability component due to the projected collectability of asset management fees will be eliminated.