DERIVATIVES

12 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES

DERIVATIVES

The Company uses derivatives as part of its overall asset/liability risk management primarily to reduce exposures to equity market and interest rate risks. Derivative hedging strategies are designed to reduce these risks from an economic perspective and are all executed within the framework of a “Derivative Use Plan” approved by applicable states’ insurance law. The Company does not designate any derivatives as hedge accounting. Operation of these hedging programs is based on models involving numerous estimates and assumptions, including, among others, mortality, lapse, surrender and withdrawal rates, election rates, fund performance, market volatility and interest rates. A wide range of derivative contracts can be used in these hedging programs, including exchange traded equity and interest rate futures contracts as well as equity options. The derivative contracts are collectively managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in capital markets.

Derivatives Utilized to Hedge Exposure to Variable Annuities with Guarantee Features

The Company has issued and continues to offer variable annuity products with GMxB features which are accounted for as market risk benefits. The risk associated with the GMDB feature is that under-performance of the financial markets could result in GMDB benefits, in the event of death, being higher than what accumulated policyholders’ account balances would support. The risk associated with the GMIB feature is that under-performance of the financial markets could result in the present value of GMIB, in the event of annuitization, being higher than what accumulated policyholders’ account balances would support, taking into account the relationship between current annuity purchase rates and the GMIB guaranteed annuity purchase rates. The risk associated with products that have a GMxB feature and are accounted for as market risk benefits is that under-performance of the financial markets could result in the GMxB features benefits being higher than what accumulated policyholders’ account balances would support.

For GMxB features, the Company retains certain risks including basis, credit spread and some volatility risk and risk associated with actual experience versus expected actuarial assumptions for mortality, lapse and surrender, withdrawal and policyholder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMxB features that result from financial markets movements.

Derivatives Utilized to Hedge Crediting Rate Exposure on SCS, MSO and IUL Products/Investment Options

The Company hedges crediting rates in the SCS, MSO in the variable life insurance products and IUL insurance products. These products permit the contract owner to participate in the performance of an index, ETF or commodity price movement up to a cap for a set period of time. They also contain a protection feature, in which the Company will absorb, up to a certain percentage, the loss of value in an index, ETF or commodity price, which varies by product segment.

In order to support the returns associated with these features, the Company enters into derivative contracts whose payouts, in combination with fixed income investments, emulate those of the index, ETF or commodity price, subject to caps and buffers, thereby substantially reducing any exposure to market-related earnings volatility.

The tables below present quantitative disclosures about the Company’s derivative instruments, including those embedded in other contracts required to be accounted for as derivative instruments:

The following table presents the gross notional amount and estimated fair value of the Company’s derivatives:

Derivative Instruments by Category

	December 31, 2022						December 31, 2021
			Fair Value						Fair Value
	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
	(in millions)
Derivatives: (1)
Equity contracts:
Futures	$	394	$	—	$	—	$	295	$	—	$	—
Options	209		34		16		59		8		5
Interest rate contracts:
Futures	282		—		—		120		—		—
Other contracts:
Margin	—		29		—		—		18		—
Collateral	—		—		3		—		—		3
Total:	885		63		19		474		26		8
Embedded derivatives:
MSO, SCS and IUL indexed features (2)	—		—		87		—		—		132
Total embedded derivatives	—		—		87		—		—		132
Total derivative instruments	$	885	$	63	$	106	$	474	$	26	$	140

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(1)Reported in other invested assets in the balance sheets.

(2)Reported in policyholders’ account balances in the balance sheets.

The following table presents the effects of derivative instruments on the statements of income and comprehensive income (loss).

	Year Ended December 31, 2022		Year Ended December 31, 2021		Year Ended December 31, 2020
	Net Derivatives Gain(Losses)		Net Derivatives Gain(Losses)		Net Derivatives Gain(Losses)
	(in millions)
Derivatives:
Equity contracts:
Futures	$	(84)	$	68	$	25
Options	(3)		3		3
Interest rate contracts:
Futures	(43)		1		—
Total:	(130)		72		28
MSO, SCS and IUL indexed features (2)	99		(73)		(44)
Total Embedded Derivatives	99		(73)		(44)
Total Derivatives instruments (1)	$	(31)	$	(1)	$	(16)

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(1)Reported in net derivative gains (losses) in the statements of income (loss).

Equity-Based and Treasury Futures Contracts Margin

All outstanding equity-based futures contracts as of December 31, 2022 and 2021 are exchange-traded and net settled daily in cash. As of December 31, 2022 and 2021, respectively, the Company had open exchange-traded futures positions on: (i) the S&P 500, Nasdaq, Russell 2000 and Emerging Market indices, having initial margin requirements of $22 million and $14 million and (ii) the 2-year, 5-year and 10-year U.S. Treasury Notes on U.S. Treasury bonds and ultra-long bonds, having initial margin requirements of $10 million and $3 million.

Collateral Arrangements

The Company generally has executed a CSA under the ISDA Master Agreement it maintains with each of its OTC derivative counterparties that requires both posting and accepting collateral either in the form of cash or high-quality securities, such as U.S. Treasury securities, U.S. government and government agency securities and investment grade corporate bonds. The Company nets the fair value of all derivative financial instruments with counterparties for which an ISDA Master Agreement and related CSA have been executed. As of December 31, 2022 and 2021, respectively, the Company held $3 million and $3 million in cash and securities collateral delivered by trade counterparties, representing the fair value of the related derivative agreements. The unrestricted cash collateral is reported in other invested assets. The Company posted collateral of $0 million and $0 million as of December 31, 2022 and 2021, respectively, in the normal operation of its collateral arrangements. The Company is exposed to losses in the event of non-performance by counterparties to financial derivative transactions with a positive fair value. The Company manages credit risk by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreements, as applicable; (ii) trading through central clearing and OTC parties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single party credit exposures which are subject to periodic management review.

Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a liability position. In addition, certain of the Company’s derivative agreements contain credit-risk related contingent features; if the credit rating of one of the parties to the derivative agreement is to fall below a certain level, the party with positive fair value could request termination at the then fair value or demand immediate full collateralization from the party whose credit rating fell and is in a net liability position.

As of December 31, 2022, there were no net liability derivative positions with counterparties with credit risk-related contingent features whose credit rating has fallen. All derivatives have been appropriately collateralized by the Company or the counterparty in accordance with the terms of the derivative agreements.

The following tables present information about the Company’s offsetting of financial assets and liabilities and derivative instruments as of December 31, 2022 and 2021:

Offsetting of Financial Assets and Liabilities and Derivative Instruments

As of December 31, 2022

	Gross Amount Recognized		Gross Amount Offset in the Balance Sheets		Net Amount Presented in the Balance Sheets		Gross Amount not Offset in the Balance Sheets (1)		Net Amount
	(in millions)
Assets:
Derivative assets	$	63	$	18	$	45	$	—	$	45
Other financial assets	2		—		2		—		2
Other invested assets	$	65	$	18	$	47	$	—	$	47
Liabilities:
Derivative liabilities	$	19	$	18	$	1	$	—	$	1
Other financial liabilities	72		—		72		—		72
Other liabilities	$	91	$	18	$	73	$	—	$	73

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(1)Financial instruments sent (held).

As of December 31, 2021

	Gross Amount Recognized		Gross Amount Offset in the Balance Sheets		Net Amount Presented in the Balance Sheets		Gross Amount not Offset in the Balance Sheets (1)		Net Amount
	(in millions)
Assets:
Derivative assets	$	26	$	8	$	18	$	—	$	18
Other financial assets	1		—		1		—		1
Other invested assets	$	27	$	8	$	19	$	—	$	19
Liabilities:
Derivative liabilities	$	8	$	8	$	—	$	—	$	—
Other financial liabilities	42		—		42		—		42
Other liabilities	$	50	$	8	$	42	$	—	$	42

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(1)Financial instruments sent (held).