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DERIVATIVE INSTRUMENTS | 6 Months Ended
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Jun. 30, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE INSTRUMENTS | DERIVATIVE INSTRUMENTS The Company manages risks associated with certain assets and liabilities by using derivative financial instruments. Derivative financial instruments are financial contracts whose value is derived from underlying interest rates, exchange rates or other financial instruments. The Company does not invest in derivatives for speculative purposes. Foreign exchange forwards, options, cross currency swaps, interest rate swaps and interest rate options are over-the-counter contractual agreements negotiated between counterparties. The Company purchases equity-indexed options as economic hedges against fluctuations in the equity markets to which equity-indexed products are exposed. Equity-indexed contracts include a fixed host universal-life insurance or annuity contract and an equity-indexed embedded derivative. Futures contracts are traded in an organized market and are contractual obligations to buy or sell a financial instrument at a predetermined future time at a given price. The notional principal represents the amount to which a rate or price is applied to determine the cash flows to be exchanged periodically and does not represent credit exposure. Maximum credit risk is the estimated cost of replacing derivative financial instruments which have a positive value, should the counterparty default. Derivatives, except for embedded derivatives, are included in “Other invested assets” or “Other liabilities”, at fair value in the statements of financial position. Embedded derivatives on Modco arrangements, embedded derivatives on indexed annuity and variable annuity products and embedded derivatives on funds withheld arrangements are included in the statements of financial position within the “Reinsurance funds withheld”, “Policyholders’ account balances” and “Funds withheld for reinsurance liabilities” lines respectively, at fair value. The notional and fair values of freestanding derivative instruments, presented in the statements of financial position, are shown below:
AS OF US$ MILLIONS |  | Primary underlying risk |  | Location in the statements of financial position |  | June 30, 2024 |  | December 31, 2023
|  |  | Notional Amount |  | Carrying Amount / Fair Value |  | Notional Amount |  | Carrying Amount / Fair Value
|  |  |  | Assets |  | Liabilities |  |  | Assets |  | Liabilities
Derivatives designated as hedging instruments:
Foreign exchange forwards |  | Foreign currency |  | Other invested assets, Other liabilities |  | $ | 1,472 |  |  | $ | — |  |  | $ | (10) |  |  | $ | 1,532 |  |  | $ | 11 |  |  | $ | — |
Derivatives not designated as hedging instruments:
Equity-indexed options |  | Equity |  | Other invested assets |  | $ | 45,871 |  |  | $ | 1,611 |  |  | $ | — |  |  | $ | 8,795 |  |  | $ | 322 |  |  | $ | — |
Foreign exchange forwards |  | Foreign currency |  | Other invested assets, Other liabilities |  | 983 |  |  | 4 |  |  | (1) |  |  | 1,362 |  |  | 1 |  |  | (4) |
Bond futures |  | Interest rate |  | Other liabilities |  | 1,507 |  |  | — |  |  | (3) |  |  | 1,652 |  |  | — |  |  | (8) |
Cross currency swaps |  | Foreign currency |  | Other invested assets, Other liabilities |  | — |  |  | — |  |  | — |  |  | 8 |  |  | — |  |  | — |
Interest rate swaps |  | Interest rate |  | Other invested assets |  | 84 |  |  | 5 |  |  | — |  |  | 87 |  |  | 8 |  |  | — |
|  |  |  |  |  | $ | 49,917 |  |  | $ | 1,620 |  |  | $ | (14) |  |  | $ | 13,436 |  |  | $ | 342 |  |  | $ | (12) |
Derivatives Designated as Hedging Instruments Starting in the third quarter of 2023, the Company has designated and accounted for certain foreign exchange forwards as fair value hedges to protect a portion of the available-for-sale fixed maturity securities against changes in fair value due to changes in exchange rates. For derivative financial instruments that were designated and qualified as fair value hedges, the gain or loss on the portion of the derivative instrument included in the assessment of hedge effectiveness and the offsetting gain or loss on the hedged item attributable to the hedged risk were recognized in the same line item in the statements of operations. The unrealized gain or loss attributable to changes in exchange rates on the available-for-sale fixed maturity securities that were designated as part of the hedge were reclassified out of OCI into “Investment related gains (losses)” in the statements of operations. The remaining change in unrealized gain or loss on the hedged item not associated with the risk being hedged remained as a component of OCI. The following represents the financial statement location and amount of gains (losses) related to the derivatives and hedged items that qualify for fair value hedge accounting:
|  | Three Months Ended |  | Six Months Ended
FOR THE PERIODS ENDED JUN. 30 US$ MILLIONS |  | 2024 |  | 2023 |  | 2024 |  | 2023
Hedged items |  | $ | 15 |  |  | $ | — |  |  | $ | 56 |  |  | $ | — |
Derivatives designated as hedging instruments |  | (14) |  |  | — |  |  | (55) |  |  | — |
Investment related gains (losses) |  | $ | 1 |  |  | $ | — |  |  | $ | 1 |  |  | $ | — |
Derivatives Not Designated as Hedging Instruments The following represents the amount of gains (losses) related to the derivatives not designated as hedging instruments, recognized in “Investment related gains (losses)” on the statements of operations, except for equity-indexed options which are recognized in “Change in fair value of insurance-related derivatives and embedded derivatives”:
FOR THE PERIODS ENDED JUN. 30 US$ MILLIONS |  | Three Months Ended |  | Six Months Ended
| 2024 |  | 2023 |  | 2024 |  | 2023
Equity-indexed options |  | $ | 285 |  |  | $ | 68 |  |  | $ | 385 |  |  | $ | 93 |
Foreign exchange forwards |  | (6) |  |  | 41 |  |  | (2) |  |  | 37 |
Bond futures |  | 9 |  |  | (24) |  |  | 5 |  |  | (9) |
Interest rate swaps |  | — |  |  | — |  |  | (3) |  |  | — |
Interest rate options |  | 1 |  |  | — |  |  | 1 |  |  | — |
|  | $ | 289 |  |  | $ | 85 |  |  | $ | 386 |  |  | $ | 121 |
Derivative Exposure The Company’s use of derivative instruments exposes it to credit risk in the event of non-performance by counterparties. The Company has a policy of only dealing with counterparties it believes are creditworthy and obtaining sufficient collateral where appropriate, as a means to mitigating the financial loss from defaults. The minimum credit rating of our counterparties is A- as of June 30, 2024 (December 31, 2023 – BBB), and all derivatives have been appropriately collateralized by the Company and the counterparties in accordance with the terms of the derivative agreements. The Company holds collateral in cash and notes secured by U.S. government-backed assets. The non-performance risk is the net counterparty exposure based on fair value of open contracts less fair value of collateral held. The Company maintains master netting agreements with its current active trading partners. A right of offset has been applied to cash collateral that supports credit risk and has been recorded in the statements of financial position as an offset to “Other invested assets” with an associated payable to “Other liabilities” for non-cash and excess collateral. A right of offset has also been applied to derivative assets and liabilities with the same counterparty under the same master netting agreement, and such derivative instruments are presented on a net basis in the statements of financial position. Information regarding the Company’s exposure to credit loss on the derivatives it holds, including the effect of rights of offset, is presented below:
AS OF JUN. 30, 2024 US$ MILLIONS |  | Gross amount of derivative instruments 1 |  | Gross amounts offset in the statements of financial position 2 |  | Net amount presented on the statements of financial position |  | Collateral (received) pledged in cash 3 |  | Collateral (received) pledged in invested assets 3 |  | Exposure net of collateral
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |
Equity-indexed options |  | $ | 1,619 |  |  | $ | (8) |  |  | $ | 1,611 |  |  | $ | (1,587) |  |  | $ | (21) |  |  | $ | 3 |
Foreign exchange forwards |  | 11 |  |  | (7) |  |  | 4 |  |  | — |  |  | — |  |  | 4 |
Bond futures |  | 10 |  |  | (10) |  |  | — |  |  | — |  |  | — |  |  | — |
Cross currency swaps |  | 12 |  |  | (12) |  |  | — |  |  | — |  |  | — |  |  | — |
Interest rate swaps |  | 27 |  |  | (22) |  |  | 5 |  |  | — |  |  | — |  |  | 5 |
Total derivative assets |  | $ | 1,679 |  |  | $ | (59) |  |  | $ | 1,620 |  |  | $ | (1,587) |  |  | $ | (21) |  |  | $ | 12 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Equity-indexed options |  | $ | (8) |  |  | $ | 8 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Foreign exchange forwards |  | (18) |  |  | 7 |  |  | (11) |  |  | — |  |  | — |  |  | (11) |
Bond futures |  | (13) |  |  | 10 |  |  | (3) |  |  | 3 |  |  | — |  |  | — |
Cross currency swaps |  | (12) |  |  | 12 |  |  | — |  |  | — |  |  | — |  |  | — |
Interest rate swaps |  | (22) |  |  | 22 |  |  | — |  |  | — |  |  | — |  |  | — |
Total derivative liabilities |  | $ | (73) |  |  | $ | 59 |  |  | $ | (14) |  |  | $ | 3 |  |  | $ | — |  |  | $ | (11) |
1. Represents derivative assets and liabilities on a gross basis, which are not offset under enforceable master netting agreements that meet all offsetting criteria.
2. Represents netting of derivative exposures covered by qualifying master netting agreements.
3. Excludes a portion of collaterals held in cash and invested assets that are excess collateral. As of June 30, 2024, the Company held excess collateral of $52 million.
AS OF DEC. 31, 2023 US$ MILLIONS |  | Gross amount of derivative instruments 1 |  | Gross amounts offset in the statements of financial position 2 |  | Net amount presented on the statements of financial position |  | Collateral (received) pledged in cash 3 |  | Collateral (received) pledged in invested assets 3 |  | Exposure net of collateral
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |
Equity-indexed options |  | $ | 322 |  |  | $ | — |  |  | $ | 322 |  |  | $ | (209) |  |  | $ | (17) |  |  | $ | 96 |
Foreign exchange forwards |  | 16 |  |  | (4) |  |  | 12 |  |  | — |  |  | — |  |  | 12 |
Bond futures |  | 65 |  |  | (65) |  |  | — |  |  | — |  |  | — |  |  | — |
Cross currency swaps |  | 12 |  |  | (12) |  |  | — |  |  | — |  |  | — |  |  | — |
Interest rate swaps |  | 29 |  |  | (21) |  |  | 8 |  |  | — |  |  | — |  |  | 8 |
Total derivative assets |  | $ | 444 |  |  | $ | (102) |  |  | $ | 342 |  |  | $ | (209) |  |  | $ | (17) |  |  | $ | 116 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forwards |  | (8) |  |  | 4 |  |  | (4) |  |  | — |  |  | — |  |  | (4) |
Bond futures |  | (73) |  |  | 65 |  |  | (8) |  |  | — |  |  | — |  |  | (8) |
Cross currency swaps |  | (12) |  |  | 12 |  |  | — |  |  | — |  |  | — |  |  | — |
Interest rate swaps |  | (21) |  |  | 21 |  |  | — |  |  | — |  |  | — |  |  | — |
Total derivative liabilities |  | $ | (114) |  |  | $ | 102 |  |  | $ | (12) |  |  | $ | — |  |  | $ | — |  |  | $ | (12) |
1. Represents derivative assets and liabilities on a gross basis, which are not offset under enforceable master netting agreements that meet all offsetting criteria.
2. Represents netting of derivative exposures covered by qualifying master netting agreements.
3. Excludes a portion of collaterals held in cash and invested assets that are excess collateral. As of December 31, 2023, the Company held excess collateral of $4 million.
Embedded Derivatives The fair values of embedded derivatives that have been separated from their host contracts, presented in the statements of financial position, are shown below:
AS OF US$ MILLIONS |  | Location in the statements of financial position |  | June 30, 2024 |  | December 31, 2023
|  | Carrying Amount / Fair Value |  | Carrying Amount / Fair Value
|  | Assets |  | Liabilities |  | Assets |  | Liabilities
Modco arrangement |  | Reinsurance funds withheld |  | $ | 34 |  |  | $ | — |  |  | $ | (46) |  |  | $ | — |
Indexed annuity and variable annuity product |  | Policyholders’ account balances |  | — |  |  | (1,196) |  |  | — |  |  | (1,104) |
Funds withheld arrangement |  | Funds withheld for reinsurance liabilities |  | — |  |  | (34) |  |  | — |  |  | — |
|  |  |  | $ | 34 |  |  | $ | (1,230) |  |  | $ | (46) |  |  | $ | (1,104) |
The following represents the amount of gains (losses) related to embedded derivatives recorded in the statements of operations:
FOR THE PERIODS ENDED JUN. 30 US$ MILLIONS |  | Location in the statements of operations |  | Three Months Ended |  | Six Months Ended
|  | 2024 |  | 2023 |  | 2024 |  | 2023
Modco arrangement |  | Net investment results from reinsurance funds withheld |  | $ | 141 |  |  | $ | 27 |  |  | $ | 276 |  |  | $ | (10) |
Indexed annuity and variable annuity product |  | Change in fair value of insurance-related derivatives and embedded derivatives |  | (237) |  |  | (39) |  |  | (294) |  |  | (134) |
Funds withheld arrangement |  | Change in fair value of insurance-related derivatives and embedded derivatives |  | (35) |  |  | — |  |  | (34) |  |  | — |
|  |  |  | $ | (131) |  |  | $ | (12) |  |  | $ | (52) |  |  | $ | (144) |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/815/tableOfContent + Details
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