Derivatives and Hedging Activities

Derivative instruments enable the Company to manage its exposure to various market risks. The value of such instruments is derived from an underlying variable or multiple variables, including equity, foreign exchange and interest rate indices or prices. The Company primarily enters into derivative agreements for risk management purposes related to the Company’s products and operations.

The Company’s freestanding derivative instruments are all subject to master netting arrangements. The Company’s policy on the recognition of derivatives on the Consolidated Balance Sheets is to not offset fair value amounts recognized for derivatives and collateral arrangements executed with the same counterparty under the same master netting arrangement. See Note 11 for additional information regarding the estimated fair value of the Company’s freestanding derivatives after considering the effect of master netting arrangements and collateral.

The Company uses derivatives as economic hedges and accounting hedges. The following table presents the notional value and gross fair value of derivative instruments, including embedded derivatives:



	September 30, 2016						December 31, 2015
	Notional		Gross Fair Value				Notional		Gross Fair Value
	Notional		Assets⁽¹⁾		Liabilities⁽²⁾⁽³⁾		Notional		Assets⁽¹⁾		Liabilities⁽²⁾⁽³⁾
	(in millions)
Derivatives designated as hedging instruments
Interest rate contracts	$	675	$	54	$	—	$	675	$	58	$	—
Foreign exchange contracts	256		3		—		—		—		—
Total qualifying hedges	931		57		—		675		58		—

Derivatives not designated as hedging instruments
Interest rate contracts	75,028		3,593		1,663		63,798		1,882		969
Equity contracts	60,729		1,452		1,876		70,238		1,587		1,993
Credit contracts	1,073		1		—		600		2		—
Foreign exchange contracts	4,849		72		35		4,408		56		18
Other contracts	2,055		3		104		3,760		2		96
Total non-designated hedges	143,734		5,121		3,678		142,804		3,529		3,076

Embedded derivatives
GMWB and GMAB ⁽⁴⁾	N/A		—		1,756		N/A		—		851
IUL	N/A		—		438		N/A		—		364
EIA	N/A		—		5		N/A		—		5
SMC	N/A		—		8		N/A		—		4
Total embedded derivatives	N/A		—		2,207		N/A		—		1,224
Total derivatives	$	144,665	$	5,178	$	5,885	$	143,479	$	3,587	$	4,300

N/A Not applicable.

⁽¹⁾The fair value of freestanding derivative assets is included in Other assets on the Consolidated Balance Sheets.

⁽²⁾The fair value of freestanding derivative liabilities is included in Other liabilities on the Consolidated Balance Sheets. The fair value of GMWB and GMAB, IUL, and EIA embedded derivatives is included in Policyholder account balances, future policy benefits and claims on the Consolidated Balance Sheets. The fair value of the SMC embedded derivative liability is included in Customer deposits on the Consolidated Balance Sheets.

⁽³⁾The fair value of the Company’s derivative liabilities after considering the effects of master netting arrangements, cash collateral held by the same counterparty and the fair value of net embedded derivatives was $2.4 billion and $1.6 billion at September 30, 2016 and December 31, 2015, respectively. See Note 11 for additional information related to master netting arrangements and cash collateral. See Note 3 for information about derivatives held by consolidated VIEs.

⁽⁴⁾The fair value of the GMWB and GMAB embedded derivatives at September 30, 2016 included $1.8 billion of individual contracts in a liability position and $73 million of individual contracts in an asset position. The fair value of the GMWB and GMAB embedded derivatives at December 31, 2015 included $994 million of individual contracts in a liability position and $143 million of individual contracts in an asset position.

See Note 10 for additional information regarding the Company’s fair value measurement of derivative instruments.

At September 30, 2016 and December 31, 2015, investment securities with a fair value of $940 million and $323 million, respectively, were received as collateral to meet contractual obligations under derivative contracts, of which $670 million and $193 million, respectively, may be sold, pledged or rehypothecated by the Company. At September 30, 2016 and December 31, 2015, the Company had sold, pledged or rehypothecated $19 million and nil, respectively, of these securities. In addition, at September 30, 2016 and December 31, 2015, non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Consolidated Balance Sheets.

Derivatives Not Designated as Hedges

The following tables present a summary of the impact of derivatives not designated as hedging instruments on the Consolidated Statements of Operations:



	Net Investment Income		Banking and Deposit Interest Expense			Distribution Expenses		Interest Credited to Fixed Accounts			Benefits, Claims, Losses and Settlement Expenses			General and Administrative Expense
	(in millions)
Three Months Ended September 30, 2016
Interest rate contracts	$	6	$	—		$	—	$	—		$	(13	)	$	—
Equity contracts	2		2			11		12			(357		)	2
Credit contracts	—		—			—		—			(3		)	—
Foreign exchange contracts	2		—			—		—			(12		)	3
Other contracts	—		—			—		—			(28		)	—
GMWB and GMAB embedded derivatives	—		—			—		—			209			—
IUL embedded derivatives	—		—			—		(5		)	—			—
SMC embedded derivatives	—		(1		)	—		—			—			—
Total gain (loss)	$	10	$	1		$	11	$	7		$	(204	)	$	5



Nine Months Ended September 30, 2016
Interest rate contracts	$	(54	)	$	—		$	—	$	—	$	1,191		$	—
Equity contracts	2			1			13		10		(518		)	3
Credit contracts	—			—			—		—		(34		)	—
Foreign exchange contracts	—			—			2		—		(66		)	15
Other contracts	—			—			—		—		(36		)	—
GMWB and GMAB embedded derivatives	—			—			—		—		(905		)	—
IUL embedded derivatives	—			—			—		12		—			—
SMC embedded derivatives	—			(1		)	—		—		—			—
Total gain (loss)	$	(52	)	$	—		$	15	$	22	$	(368	)	$	18



	Net Investment Income			Banking and Deposit Interest Expense			Distribution Expenses			Interest Credited to Fixed Accounts			Benefits, Claims, Losses and Settlement Expenses			General and Administrative Expense
	(in millions)
Three Months Ended September 30, 2015
Interest rate contracts	$	(31	)	$	—		$	—		$	—		$	536		$	—
Equity contracts	—			(3		)	(15		)	(16		)	328			(4		)
Credit contracts	—			—			—			—			(10		)	—
Foreign exchange contracts	—			—			—			—			6			(1		)
Other contracts	—			—			—			—			3			—
GMWB and GMAB embedded derivatives	—			—			—			—			(872		)	—
IUL embedded derivatives	—			—			—			6			—			—
EIA embedded derivatives	—			—			—			1			—			—
SMC embedded derivatives	—			2			—			—			—			—
Total loss	$	(31	)	$	(1	)	$	(15	)	$	(9	)	$	(9	)	$	(5	)



Nine Months Ended September 30, 2015
Interest rate contracts	$	(32	)	$	—		$	—		$	—		$	360		$	—
Equity contracts	(2		)	(2		)	(9		)	(17		)	69			(3		)
Credit contracts	—			—			—			—			(5		)	—
Foreign exchange contracts	—			—			(2		)	—			(2		)	(1		)
Other contracts	—			—			—			—			(4		)	—
GMWB and GMAB embedded derivatives	—			—			—			—			(628		)	—
IUL embedded derivatives	—			—			—			1			—			—
EIA embedded derivatives	—			—			—			1			—			—
SMC embedded derivatives	—			2			—			—			—			—
Total loss	$	(34	)	$	—		$	(11	)	$	(15	)	$	(210	)	$	(4	)

The Company holds derivative instruments that either do not qualify or are not designated for hedge accounting treatment. These derivative instruments are used as economic hedges of equity, interest rate, credit and foreign currency exchange rate risk related to various products and transactions of the Company.

Certain annuity contracts contain GMWB or GMAB provisions, which guarantee the right to make limited partial withdrawals each contract year regardless of the volatility inherent in the underlying investments or guarantee a minimum accumulation value of consideration received at the beginning of the contract period, after a specified holding period, respectively. The GMAB and non-life contingent GMWB provisions are considered embedded derivatives, which are bifurcated from their host contracts for valuation purposes and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. The Company economically hedges the exposure related to GMAB and non-life contingent GMWB provisions primarily using futures, options, interest rate swaptions, interest rate swaps, total return swaps and variance swaps.

The deferred premium associated with certain of the above options is paid or received semi-annually over the life of the option contract or at maturity. The following is a summary of the payments the Company is scheduled to make and receive for these options:



	Premiums Payable		Premiums Receivable
	(in millions)
2016⁽¹⁾	$	92	$	31
2017	277		77
2018	233		132
2019	280		132
2020	198		59
2021 - 2027	831		206
Total	$	1,911	$	637

⁽¹⁾2016 amounts represent the amounts payable and receivable for the period from October 1, 2016 to December 31, 2016.

Actual timing and payment amounts may differ due to future contract settlements, modifications or exercises of options prior to the full premium being paid or received.

The Company has a macro hedge program to provide protection against the statutory tail scenario risk arising from variable annuity reserves on its statutory surplus and to cover some of the residual risks not covered by other hedging activities. As a means of economically hedging these risks, the Company uses a combination of futures, options, interest rate swaptions and/or swaps. Certain of the macro hedge derivatives used contain settlement provisions linked to both equity returns and interest rates; the remaining are interest rate contracts or equity contracts. The Company’s macro hedge derivatives are included in Other contracts in the tables above.

EIA, IUL and stock market certificate products have returns tied to the performance of equity markets. As a result of fluctuations in equity markets, the obligation incurred by the Company related to EIA, IUL and stock market certificate products will positively or negatively impact earnings over the life of these products. The equity component of the EIA, IUL and stock market certificate product obligations are considered embedded derivatives, which are bifurcated from their host contracts for valuation purposes and reported on the Consolidated Balance Sheets at fair value with changes in fair value reported in earnings. As a means of economically hedging its obligations under the provisions of these products, the Company enters into index options and futures contracts.

The Company enters into futures and commodity swaps to manage its exposure to price risk arising from seed money investments in proprietary investment products. The Company enters into foreign currency forward contracts to economically hedge its exposure to certain foreign transactions. The Company enters into futures contracts to economically hedge its exposure related to compensation plans.

Cash Flow Hedges

The Company has designated and accounts for the following as cash flow hedges: (i) interest rate swaps to hedge interest rate exposure on debt, (ii) interest rate lock agreements to hedge interest rate exposure on debt issuances and (iii) swaptions used to hedge the risk of increasing interest rates on forecasted fixed premium product sales.

For the three months and nine months ended September 30, 2016 and 2015, amounts recognized in earnings related to cash flow hedges due to ineffectiveness were not material. The estimated net amount of existing pretax losses as of September 30, 2016 that the Company expects to reclassify to earnings within the next twelve months is $4 million, which consists of $1 million of pretax gains to be recorded as a reduction to interest and debt expense and $5 million of pretax losses to be recorded in net investment income. Currently, the longest period of time over which the Company is hedging exposure to the variability in future cash flows is 20 years and relates to forecasted debt interest payments. See Note 13 for a rollforward of net unrealized derivative gains (losses) included in AOCI related to cash flow hedges.

Fair Value Hedges

In 2010, the Company entered into and designated as fair value hedges three interest rate swaps to convert senior notes due 2015, 2019 and 2020 from fixed rate debt to floating rate debt. The interest rate swaps related to the senior notes due 2015 expired in the fourth quarter of 2015, consistent with the maturity of the debt. The swaps have identical terms as the underlying debt being hedged so no ineffectiveness is expected to be realized. The Company recognizes gains and losses on the derivatives and the related hedged items within interest and debt expense. The following table presents the amounts recognized in income related to fair value hedges:



Derivatives designated as hedging instruments	Location of Gain Recorded into Income	Amount of Gain Recognized in Income on Derivatives
		Three Months Ended September 30,				Nine Months Ended September 30,
		2016		2015		2016		2015
		(in millions)
Interest rate contracts	Interest and debt expense	$	5	$	8	$	15	$	24

Net Investment Hedges

During the second quarter of 2016, the Company entered into, and designated as net investment hedges in foreign operations, two forward contracts to hedge a portion of the Company’s foreign currency exchange rate risk associated with its investment in Threadneedle. As the Company determined that the forward contracts are effective, the change in fair value of the derivatives is recognized in AOCI as part of the foreign currency translation adjustment. For the three months and nine months ended September 30, 2016, the Company recognized a gain of $6 million and $25 million, respectively, in OCI.

Credit Risk

Credit risk associated with the Company’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. To mitigate such risk, the Company has established guidelines and oversight of credit risk through a comprehensive enterprise risk management program that includes members of senior management. Key components of this program are to require preapproval of counterparties and the use of master netting arrangements and collateral arrangements whenever practical. See Note 11 for additional information on the Company’s credit exposure related to derivative assets.

Certain of the Company’s derivative contracts contain provisions that adjust the level of collateral the Company is required to post based on the Company’s debt rating (or based on the financial strength of the Company’s life insurance subsidiaries for contracts in which those subsidiaries are the counterparty). Additionally, certain of the Company’s derivative contracts contain provisions that allow the counterparty to terminate the contract if the Company’s debt does not maintain a specific credit rating (generally an investment grade rating) or the Company’s life insurance subsidiary does not maintain a specific financial strength rating. If these termination provisions were to be triggered, the Company’s counterparty could require immediate settlement of any net liability position. At September 30, 2016 and December 31, 2015, the aggregate fair value of derivative contracts in a net liability position containing such credit contingent provisions was $185 million and $284 million, respectively. The aggregate fair value of assets posted as collateral for such instruments as of September 30, 2016 and December 31, 2015 was $170 million and $283 million, respectively. If the credit contingent provisions of derivative contracts in a net liability position at September 30, 2016 and December 31, 2015 were triggered, the aggregate fair value of additional assets that would be required to be posted as collateral or needed to settle the instruments immediately would have been $15 million and $1 million, respectively.