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Derivative and Hedging Instruments | 12 Months Ended
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Dec. 31, 2018
Text block [abstract] |
Derivative and Hedging Instruments | Note 4 Derivative and Hedging Instruments Derivatives are financial contracts, the value of which is derived from underlying interest rates, foreign exchange rates, other financial instruments, commodity prices or indices. The Company uses derivatives including swaps, forward and futures agreements, and options to manage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and equity market prices, and to replicate permissible investments. Swaps are over-the-counter (“OTC”) contractual agreements between the Company and a third party to exchange a series of cash flows based upon rates applied to a notional amount. For interest rate swaps, counterparties generally exchange fixed or floating interest rate payments based on a notional value in a single currency. Cross currency swaps involve the exchange of principal amounts between parties as well as the exchange of interest payments in one currency for the receipt of interest payments in another currency. Total return swaps are contracts that involve the exchange of payments based on changes in the values of a reference asset, including any returns such as interest earned on these assets, in return for amounts based on reference rates specified in the contract. Forward and futures agreements are contractual obligations to buy or sell a financial instrument, foreign currency or other underlying commodity on a predetermined future date at a specified price. Forward contracts are OTC contracts negotiated between counterparties, whereas futures agreements are contracts with standard amounts and settlement dates that are traded on regulated exchanges. Options are contractual agreements whereby the holder has the right, but not the obligation, to buy (call option) or sell (put option) a security, exchange rate, interest rate, or other financial instrument at a predetermined price/rate within a specified time. See variable annuity dynamic hedging strategy in the “Risk Management” section of the Company’s 2018 MD&A for an explanation of the Company’s dynamic hedging strategy for its variable annuity product guarantees. (a) Fair value of derivatives The pricing models used to value OTC derivatives are based on market standard valuation methodologies and the inputs to these models are consistent with what a market participant would use when pricing the instruments. Derivative valuations can be affected by changes in interest rates, currency exchange rates, financial indices, credit spreads, default risk (including the counterparties to the contract), and market volatility. The significant inputs to the pricing models for most OTC derivatives are inputs that are observable or can be corroborated by observable market data and are classified as Level 2. Inputs that are observable generally include interest rates, foreign currency exchange rates and interest rate curves. However, certain OTC derivatives may rely on inputs that are significant to the fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data and these derivatives are classified as Level 3. Inputs that are unobservable generally include broker quotes, volatilities and inputs that are outside of the observable portion of the interest rate curve or other relevant market measures. These unobservable inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what market participants would use when pricing such instruments. The Company’s use of unobservable inputs is limited and the impact on derivative fair values does not represent a material amount as evidenced by the limited amount of Level 3 derivatives. The credit risk of both the counterparty and the Company are considered in determining the fair value for all OTC derivatives after considering the effects of netting agreements and collateral arrangements. The following table presents gross notional amount and fair value of derivative instruments by the underlying risk exposure.
As at December 31, |  | 2018 |  |  |  |  |  | 2017 |
|  |  |  | Notional amount |  |  | Fair value |  |  |  |  |  | Notional amount |  |  | Fair value |
Type of hedge |  | Instrument type |  | Assets |  |  | Liabilities |  |  |  |  |  | Assets |  |  | Liabilities |
Qualifying hedge accounting relationships |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value hedges |  | Interest rate swaps |  | $ | 519 |  |  | $ | – |  |  | $ | 13 |  |  |  |  |  |  | $ | 548 |  |  | $ | – |  |  | $ | 20 |
|  | Foreign currency swaps |  |  | 91 |  |  |  | 5 |  |  |  | – |  |  |  |  |  |  |  | 84 |  |  |  | 1 |  |  |  | 4 |
Cash flow hedges |  | Foreign currency swaps |  |  | 1,834 |  |  |  | 80 |  |  |  | 367 |  |  |  |  |  |  |  | 1,757 |  |  |  | 20 |  |  |  | 333 |
|  | Forward contracts |  |  | 80 |  |  |  | – |  |  |  | 9 |  |  |  |  |  |  |  | 165 |  |  |  | – |  |  |  | 4 |
|  | Equity contracts |  |  | 101 |  |  |  | – |  |  |  | 12 |  |  |  |  |  |  |  | 125 |  |  |  | 16 |  |  |  | 1 |
Net investment hedges |  | Foreign currency forwards |  |  | 1,864 |  |  |  | 21 |  |  |  | 65 |  |  |  |  |  |  |  | – |  |  |  | – |  |  |  | – |
Total derivatives in qualifying hedge accounting relationships |  |  | 4,489 |  |  |  | 106 |  |  |  | 466 |  |  |  |  |  |  |  | 2,679 |  |  |  | 37 |  |  |  | 362 |
Derivatives not designated in qualifying hedge accounting relationships |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Interest rate swaps |  |  | 300,704 |  |  |  | 11,204 |  |  |  | 5,675 |  |  |  |  |  |  |  | 246,270 |  |  |  | 12,984 |  |  |  | 6,251 |
|  | Interest rate futures |  |  | 14,297 |  |  |  | – |  |  |  | – |  |  |  |  |  |  |  | 11,551 |  |  |  | – |  |  |  | – |
|  | Interest rate options |  |  | 11,736 |  |  |  | 314 |  |  |  | – |  |  |  |  |  |  |  | 10,093 |  |  |  | 312 |  |  |  | – |
|  | Foreign currency swaps |  |  | 23,156 |  |  |  | 747 |  |  |  | 1,341 |  |  |  |  |  |  |  | 16,321 |  |  |  | 494 |  |  |  | 1,122 |
|  | Currency rate futures |  |  | 4,052 |  |  |  | – |  |  |  | – |  |  |  |  |  |  |  | 3,157 |  |  |  | – |  |  |  | – |
|  | Forward contracts |  |  | 29,248 |  |  |  | 670 |  |  |  | 158 |  |  |  |  |  |  |  | 20,341 |  |  |  | 915 |  |  |  | 65 |
|  | Equity contracts |  |  | 15,492 |  |  |  | 653 |  |  |  | 163 |  |  |  |  |  |  |  | 13,597 |  |  |  | 813 |  |  |  | 22 |
|  | Credit default swaps |  |  | 652 |  |  |  | 9 |  |  |  | – |  |  |  |  |  |  |  | 606 |  |  |  | 14 |  |  |  | – |
|  | Equity futures |  |  | 10,908 |  |  |  | – |  |  |  | – |  |  |  |  |  |  |  | 12,158 |  |  |  | – |  |  |  | – |
Total derivatives not designated in qualifying hedge accounting relationships |  |  | 410,245 |  |  |  | 13,597 |  |  |  | 7,337 |  |  |  |  |  |  |  | 334,094 |  |  |  | 15,532 |  |  |  | 7,460 |
Total derivatives |  | $ | 414,734 |  |  | $ | 13,703 |  |  | $ | 7,803 |  |  |  |  |  |  | $ | 336,773 |  |  | $ | 15,569 |  |  | $ | 7,822 |
The following table presents fair values of derivative instruments by the remaining term to maturity. The fair values disclosed below do not incorporate the impact of master netting agreements. Refer to note 9.
|  | Remaining term to maturity |  |  |  |
As at December 31, 2018 |  | Less than 1 year |  |  | 1 to 3 years |  |  | 3 to 5 years |  |  | Over 5 years |  |  | Total |
Derivative assets |  | $ | 649 |  |  | $ | 671 |  |  | $ | 795 |  |  | $ | 11,588 |  |  | $ | 13,703 |
Derivative liabilities |  |  | 359 |  |  |  | 229 |  |  |  | 227 |  |  |  | 6,988 |  |  |  | 7,803 |
|  |  | Remaining term to maturity |  |  |  |  |
As at December 31, 2017 |  |  | Less than 1 year |  |  |  | 1 to 3 years |  |  |  | 3 to 5 years |  |  |  | Over 5 years |  |  |  | Total |
Derivative assets |  | $ | 605 |  |  | $ | 822 |  |  | $ | 889 |  |  | $ | 13,253 |  |  | $ | 15,569 |
Derivative liabilities |  |  | 224 |  |  |  | 149 |  |  |  | 168 |  |  |  | 7,281 |  |  |  | 7,822 |
The following table presents gross notional amount by the remaining term to maturity, total fair value (including accrued interest), credit risk equivalent and risk-weighted amount by contract type.
|  | Remaining term to maturity (notional amounts) |  |  |  |  |  | Fair value |  |  |  |  |  |  |  |  |  |
As at December 31, 2018 |  | Under 1 year |  |  | 1 to 5 years |  |  | Over 5 years |  |  | Total |  |  |  |  |  | Positive |  |  | Negative |  |  | Net |  |  |  |  |  | Credit risk equivalent(1) |  |  |  |  |  | Risk- weighted amount(2) |
Interest rate contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
OTC swap contracts |  | $ | 3,495 |  |  | $ | 22,568 |  |  | $ | 121,817 |  |  | $ | 147,880 |  |  |  |  |  |  | $ | 11,750 |  |  | $ | (6,477 | ) |  | $ | 5,273 |  |  |  |  |  |  | $ | 5,301 |  |  |  |  |  |  | $ | 787 |
Cleared swap contracts |  |  | 5,723 |  |  |  | 16,140 |  |  |  | 131,480 |  |  |  | 153,343 |  |  |  |  |  |  |  | 95 |  |  |  | (96 | ) |  |  | (1 | ) |  |  |  |  |  |  | – |  |  |  |  |  |  |  | – |
Forward contracts |  |  | 10,258 |  |  |  | 14,300 |  |  |  | 648 |  |  |  | 25,206 |  |  |  |  |  |  |  | 637 |  |  |  | (126 | ) |  |  | 511 |  |  |  |  |  |  |  | 259 |  |  |  |  |  |  |  | 37 |
Futures |  |  | 14,297 |  |  |  | – |  |  |  | – |  |  |  | 14,297 |  |  |  |  |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  |  |  |  |  | – |  |  |  |  |  |  |  | – |
Options purchased |  |  | 1,166 |  |  |  | 4,981 |  |  |  | 5,589 |  |  |  | 11,736 |  |  |  |  |  |  |  | 317 |  |  |  | – |  |  |  | 317 |  |  |  |  |  |  |  | 376 |  |  |  |  |  |  |  | 58 |
Subtotal |  |  | 34,939 |  |  |  | 57,989 |  |  |  | 259,534 |  |  |  | 352,462 |  |  |  |  |  |  |  | 12,799 |  |  |  | (6,699 | ) |  |  | 6,100 |  |  |  |  |  |  |  | 5,936 |  |  |  |  |  |  |  | 882 |
Foreign exchange |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Swap contracts |  |  | 1,024 |  |  |  | 6,281 |  |  |  | 17,776 |  |  |  | 25,081 |  |  |  |  |  |  |  | 807 |  |  |  | (1,736 | ) |  |  | (929 | ) |  |  |  |  |  |  | 2,309 |  |  |  |  |  |  |  | 256 |
Forward contracts |  |  | 5,926 |  |  |  | 60 |  |  |  | – |  |  |  | 5,986 |  |  |  |  |  |  |  | 54 |  |  |  | (106 | ) |  |  | (52 | ) |  |  |  |  |  |  | 108 |  |  |  |  |  |  |  | 13 |
Futures |  |  | 4,052 |  |  |  | – |  |  |  | – |  |  |  | 4,052 |  |  |  |  |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  |  |  |  |  | – |  |  |  |  |  |  |  | – |
Credit derivatives |  |  | 143 |  |  |  | 509 |  |  |  | – |  |  |  | 652 |  |  |  |  |  |  |  | 10 |  |  |  | – |  |  |  | 10 |  |  |  |  |  |  |  | – |  |  |  |  |  |  |  | – |
Equity contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Swap contracts |  |  | 2,728 |  |  |  | 142 |  |  |  | – |  |  |  | 2,870 |  |  |  |  |  |  |  | 29 |  |  |  | (57 | ) |  |  | (28 | ) |  |  |  |  |  |  | 303 |  |  |  |  |  |  |  | 38 |
Futures |  |  | 10,908 |  |  |  | – |  |  |  | – |  |  |  | 10,908 |  |  |  |  |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  |  |  |  |  | – |  |  |  |  |  |  |  | – |
Options purchased |  |  | 6,142 |  |  |  | 6,581 |  |  |  | – |  |  |  | 12,723 |  |  |  |  |  |  |  | 621 |  |  |  | (118 | ) |  |  | 503 |  |  |  |  |  |  |  | 2,277 |  |  |  |  |  |  |  | 316 |
Subtotal including accrued interest |  |  | 65,862 |  |  |  | 71,562 |  |  |  | 277,310 |  |  |  | 414,734 |  |  |  |  |  |  |  | 14,320 |  |  |  | (8,716 | ) |  |  | 5,604 |  |  |  |  |  |  |  | 10,933 |  |  |  |  |  |  |  | 1,505 |
Less accrued interest |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  |  |  |  |  | 617 |  |  |  | (913 | ) |  |  | (296 | ) |  |  |  |  |  |  | – |  |  |  |  |  |  |  | – |
Total |  | $ | 65,862 |  |  | $ | 71,562 |  |  | $ | 277,310 |  |  | $ | 414,734 |  |  |  |  |  |  | $ | 13,703 |  |  | $ | (7,803 | ) |  | $ | 5,900 |  |  |  |  |  |  | $ | 10,933 |  |  |  |  |  |  | $ | 1,505 |
|  | Remaining term to maturity (notional amounts) |  |  |  |  |  | Fair value |  |  |  |  |  |  |  |  |  |
As at December 31, 2017 |  | Under 1 year |  |  | 1 to 5 years |  |  | Over 5 years |  |  | Total |  |  |  |  |  | Positive |  |  | Negative |  |  | Net |  |  |  |  |  | Credit risk equivalent(1) |  |  |  |  |  | Risk- weighted amount(2) |
Interest rate contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
OTC swap contracts |  | $ | 7,161 |  |  | $ | 19,141 |  |  | $ | 112,412 |  |  | $ | 138,714 |  |  |  |  |  |  | $ | 13,379 |  |  | $ | (6,867 | ) |  | $ | 6,512 |  |  |  |  |  |  | $ | 6,588 |  |  |  |  |  |  | $ | 809 |
Cleared swap contracts |  |  | 1,615 |  |  |  | 12,928 |  |  |  | 93,561 |  |  |  | 108,104 |  |  |  |  |  |  |  | 245 |  |  |  | (206 | ) |  |  | 39 |  |  |  |  |  |  |  | – |  |  |  |  |  |  |  | – |
Forward contracts |  |  | 6,036 |  |  |  | 10,614 |  |  |  | 675 |  |  |  | 17,325 |  |  |  |  |  |  |  | 903 |  |  |  | (38 | ) |  |  | 865 |  |  |  |  |  |  |  | 285 |  |  |  |  |  |  |  | 35 |
Futures |  |  | 11,551 |  |  |  | – |  |  |  | – |  |  |  | 11,551 |  |  |  |  |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  |  |  |  |  | – |  |  |  |  |  |  |  | – |
Options purchased |  |  | 816 |  |  |  | 3,856 |  |  |  | 5,421 |  |  |  | 10,093 |  |  |  |  |  |  |  | 312 |  |  |  | – |  |  |  | 312 |  |  |  |  |  |  |  | 471 |  |  |  |  |  |  |  | 61 |
Subtotal |  |  | 27,179 |  |  |  | 46,539 |  |  |  | 212,069 |  |  |  | 285,787 |  |  |  |  |  |  |  | 14,839 |  |  |  | (7,111 | ) |  |  | 7,728 |  |  |  |  |  |  |  | 7,344 |  |  |  |  |  |  |  | 905 |
Foreign exchange |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Swap contracts |  |  | 999 |  |  |  | 4,481 |  |  |  | 12,682 |  |  |  | 18,162 |  |  |  |  |  |  |  | 510 |  |  |  | (1,483 | ) |  |  | (973 | ) |  |  |  |  |  |  | 1,874 |  |  |  |  |  |  |  | 200 |
Forward contracts |  |  | 3,046 |  |  |  | 135 |  |  |  | – |  |  |  | 3,181 |  |  |  |  |  |  |  | 12 |  |  |  | (31 | ) |  |  | (19 | ) |  |  |  |  |  |  | 101 |  |  |  |  |  |  |  | 12 |
Futures |  |  | 3,157 |  |  |  | – |  |  |  | – |  |  |  | 3,157 |  |  |  |  |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  |  |  |  |  | – |  |  |  |  |  |  |  | – |
Credit derivatives |  |  | 38 |  |  |  | 568 |  |  |  | – |  |  |  | 606 |  |  |  |  |  |  |  | 14 |  |  |  | – |  |  |  | 14 |  |  |  |  |  |  |  | – |  |  |  |  |  |  |  | – |
Equity contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Swap contracts |  |  | 2,612 |  |  |  | 169 |  |  |  | – |  |  |  | 2,781 |  |  |  |  |  |  |  | 60 |  |  |  | (14 | ) |  |  | 46 |  |  |  |  |  |  |  | 337 |  |  |  |  |  |  |  | 35 |
Futures |  |  | 12,158 |  |  |  | – |  |  |  | – |  |  |  | 12,158 |  |  |  |  |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  |  |  |  |  | – |  |  |  |  |  |  |  | – |
Options purchased |  |  | 4,693 |  |  |  | 6,148 |  |  |  | 100 |  |  |  | 10,941 |  |  |  |  |  |  |  | 769 |  |  |  | (10 | ) |  |  | 759 |  |  |  |  |  |  |  | 2,606 |  |  |  |  |  |  |  | 305 |
Subtotal including accrued interest |  |  | 53,882 |  |  |  | 58,040 |  |  |  | 224,851 |  |  |  | 336,773 |  |  |  |  |  |  |  | 16,204 |  |  |  | (8,649 | ) |  |  | 7,555 |  |  |  |  |  |  |  | 12,262 |  |  |  |  |  |  |  | 1,457 |
Less accrued interest |  |  | – |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  |  |  |  |  | 635 |  |  |  | (827 | ) |  |  | (192 | ) |  |  |  |  |  |  | – |  |  |  |  |  |  |  | – |
Total |  | $ | 53,882 |  |  | $ | 58,040 |  |  | $ | 224,851 |  |  | $ | 336,773 |  |  |  |  |  |  | $ | 15,569 |  |  | $ | (7,822 | ) |  | $ | 7,747 |  |  |  |  |  |  | $ | 12,262 |  |  |  |  |  |  | $ | 1,457 |
(1) | Credit risk equivalent is the sum of replacement cost and the potential future credit exposure. Replacement cost represents the current cost of replacing all contracts with a positive fair value. The amounts take into consideration legal contracts that permit offsetting of positions. The potential future credit exposure is calculated based on a formula prescribed by OSFI.
(2) | Risk-weighted amount represents the credit risk equivalent, weighted according to the creditworthiness of the counterparty, as prescribed by OSFI.
The total notional amount of $415 billion (2017 – $337 billion) includes $136 billion (2017 – $114 billion) related to derivatives utilized in the Company’s variable annuity guarantee dynamic hedging and macro equity risk hedging programs. Due to the Company’s variable annuity hedging practices, a large number of trades are in offsetting positions, resulting in materially lower net fair value exposure to the Company than what the gross notional amount would suggest. Fair value and the fair value hierarchy of derivative instruments
As at December 31, 2018 |  | Fair value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Derivative assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | 12,155 |  |  | $ | – |  |  | $ | 11,537 |  |  | $ | 618 |
Foreign exchange contracts |  |  | 886 |  |  |  | – |  |  |  | 876 |  |  |  | 10 |
Equity contracts |  |  | 653 |  |  |  | – |  |  |  | 621 |  |  |  | 32 |
Credit default swaps |  |  | 9 |  |  |  | – |  |  |  | 9 |  |  |  | – |
Total derivative assets |  | $ | 13,703 |  |  | $ | – |  |  | $ | 13,043 |  |  | $ | 660 |
Derivative liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | 5,815 |  |  | $ | – |  |  | $ | 5,318 |  |  | $ | 497 |
Foreign exchange contracts |  |  | 1,814 |  |  |  | – |  |  |  | 1,813 |  |  |  | 1 |
Equity contracts |  |  | 174 |  |  |  | – |  |  |  | 118 |  |  |  | 56 |
Total derivative liabilities |  | $ | 7,803 |  |  | $ | – |  |  | $ | 7,249 |  |  | $ | 554 |
As at December 31, 2017 |  | Fair value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Derivative assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | 14,199 |  |  | $ | – |  |  | $ | 13,181 |  |  | $ | 1,018 |
Foreign exchange contracts |  |  | 527 |  |  |  | – |  |  |  | 527 |  |  |  | – |
Equity contracts |  |  | 829 |  |  |  | – |  |  |  | 768 |  |  |  | 61 |
Credit default swaps |  |  | 14 |  |  |  | – |  |  |  | 14 |  |  |  | – |
Total derivative assets |  | $ | 15,569 |  |  | $ | – |  |  | $ | 14,490 |  |  | $ | 1,079 |
Derivative liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | 6,309 |  |  | $ | – |  |  | $ | 6,012 |  |  | $ | 297 |
Foreign exchange contracts |  |  | 1,490 |  |  |  | – |  |  |  | 1,490 |  |  |  | – |
Equity contracts |  |  | 23 |  |  |  | – |  |  |  | 10 |  |  |  | 13 |
Total derivative liabilities |  | $ | 7,822 |  |  | $ | – |  |  | $ | 7,512 |  |  | $ | 310 |
The following table presents a roll forward for net derivative contracts measured at fair value using significant unobservable inputs (Level 3).
For the years ended December 31, |  | 2018 |  |  | 2017 |
Balance at the beginning of the year |  | $ | 769 |  |  | $ | 163 |
Net realized / unrealized gains (losses) included in: |  |  |  |  |  |  |  |
Net income(1) |  |  | (666 | ) |  |  | 1,082 |
OCI(2) |  |  | (48 | ) |  |  | (9 | )
Purchases |  |  | 12 |  |  |  | 22 |
Settlements |  |  | 18 |  |  |  | (103 | )
Transfers |  |  |  |  |  |  |  |
Into Level 3(3) |  |  | 9 |  |  |  | – |
Out of Level 3(3) |  |  | (13 | ) |  |  | (363 | )
Currency movement |  |  | 25 |  |  |  | (23 | )
Balance at the end of the year |  | $ | 106 |  |  | $ | 769 |
Change in unrealized gains (losses) on instruments still held |  | $ | (460 | ) |  | $ | 832 |
(1) | These amounts are included in investment income on the Consolidated Statements of Income.
(2) | These amounts are included in AOCI on the Consolidated Statements of Financial Position.
(3) | For derivatives transferred into and out of Level 3, the Company uses the fair value of the items at the end and beginning of the period, respectively. Transfers into Level 3 occur when the inputs used to price the assets and liabilities lack observable market data (versus the previous year). Transfers out of Level 3 occur when the inputs used to price the assets and liabilities become available from observable market data.
(b) Hedging relationships The Company uses derivatives for economic hedging purposes. In certain circumstances, these hedges also meet the requirements of hedge accounting. Risk management strategies eligible for hedge accounting are designated as fair value hedges, cash flow hedges or net investment hedges, as described below. Fair value hedges The Company uses interest rate swaps to manage its exposure to changes in the fair value of fixed rate financial instruments due to changes in interest rates. The Company also uses cross currency swaps to manage its exposure to foreign exchange rate fluctuations, interest rate fluctuations, or both. The Company recognizes gains and losses on derivatives and the related hedged items in fair value hedges in investment income. These investment gains (losses) are shown in the following table.
For the year ended December 31, 2018 |  | Hedged items in qualifying fair value hedging relationships |  | Gains (losses) recognized on derivatives |  |  | Gains (losses) recognized for hedged items |  |  | Ineffectiveness recognized in investment income |
Interest rate swaps |  | Fixed rate assets |  | $ | 1 |  |  | $ | (1 | ) |  | $ | – |
|  | Fixed rate liabilities |  |  | 3 |  |  |  | (3 | ) |  |  | – |
Foreign currency swaps |  | Fixed rate assets |  |  | 7 |  |  |  | (5 | ) |  |  | 2 |
Total |  |  |  | $ | 11 |  |  | $ | (9 | ) |  | $ | 2 |
For the year ended December 31, 2017 |  | Hedged items in qualifying fair value hedging relationships |  | Gains (losses) recognized on derivatives |  |  | Gains (losses) recognized for hedged items |  |  | Ineffectiveness recognized in investment income |
Interest rate swaps |  | Fixed rate assets |  | $ | 2 |  |  | $ | (3 | ) |  | $ | (1) |
|  | Fixed rate liabilities |  |  | (17 | ) |  |  | 17 |  |  |  | – |
Foreign currency swaps |  | Fixed rate assets |  |  | (2 | ) |  |  | 4 |  |  |  | 2 |
Total |  |  |  | $ | (17 | ) |  | $ | 18 |  |  | $ | 1 |
Cash flow hedges The Company uses interest rate swaps to hedge the variability in cash flows from variable rate financial instruments and forecasted transactions. The Company also uses cross currency swaps and foreign currency forward contracts to hedge the variability from foreign currency financial instruments and foreign currency expenses. Total return swaps are used to hedge the variability in cash flows associated with certain stock-based compensation awards. Inflation swaps are used to reduce inflation risk generated from inflation-indexed liabilities. The effects of derivatives in cash flow hedging relationships on the Consolidated Statements of Income and the Consolidated Statements of Comprehensive Income are shown in the following table.
For the year ended December 31, 2018 |  | Hedged items in qualifying cash flow hedging relationships |  | Gains (losses) deferred in AOCI on derivatives |  |  | Gains (losses) reclassified from AOCI into investment income |  |  | Ineffectiveness recognized in investment income |
Interest rate swaps |  | Forecasted liabilities |  | $ | – |  |  | $ | (20 | ) |  | $ | – |
Foreign currency swaps |  | Fixed rate assets |  |  | – |  |  |  | (1 | ) |  |  | – |
|  | Floating rate liabilities |  |  | (36 | ) |  |  | (62 | ) |  |  | – |
|  | Fixed rate liabilities |  |  | 60 |  |  |  | 62 |  |  |  | – |
Forward contracts |  | Forecasted expenses |  |  | (8 | ) |  |  | (2 | ) |  |  | – |
Equity contracts |  | Stock-based compensation |  |  | (21 | ) |  |  | 27 |  |  |  | – |
Total |  |  |  | $ | (5 | ) |  | $ | 4 |  |  | $ | – |
For the year ended December 31, 2017 |  | Hedged items in qualifying cash flow hedging relationships |  | Gains (losses) deferred in AOCI on derivatives |  |  | Gains (losses) reclassified from AOCI into investment income |  |  | Ineffectiveness recognized in investment income |
Interest rate swaps |  | Forecasted liabilities |  | $ | – |  |  | $ | (17 | ) |  | $ | – |
Foreign currency swaps |  | Fixed rate assets |  |  | 3 |  |  |  | (1 | ) |  |  | – |
|  | Floating rate liabilities |  |  | 95 |  |  |  | 50 |  |  |  | – |
|  | Fixed rate liabilities |  |  | 35 |  |  |  | 7 |  |  |  | – |
Forward contracts |  | Forecasted expenses |  |  | 10 |  |  |  | (10 | ) |  |  | – |
Equity contracts |  | Stock-based compensation |  |  | 20 |  |  |  | 29 |  |  |  | – |
Total |  |  |  | $ | 163 |  |  | $ | 58 |  |  | $ | – |
The Company anticipates that net losses of approximately $31 will be reclassified from AOCI to net income within the next 12 months. The maximum time frame for which variable cash flows are hedged is 18 years. Hedges of net investments in foreign operations The Company primarily uses forward currency contracts, cross currency swaps and non-functional currency denominated debt to manage its foreign currency exposures to net investments in foreign operations. The effects of net investment hedging relationships on the Consolidated Statements of Income and the Consolidated Statements of Other Comprehensive Income are shown in the following table.
For the year ended December 31, 2018 |  | Gains (losses) deferred in AOCI on derivatives |  |  | Gains (losses) reclassified from AOCI into investment income |  |  | Ineffectiveness recognized in investment income |
Non-functional currency denominated debt |  | $ | (469 | ) |  | $ | – |  |  | $ | – |
Foreign currency forward |  |  | 9 |  |  |  | – |  |  |  | – |
Total |  | $ | (460 | ) |  | $ | – |  |  | $ | – |
For the year ended December 31, 2017 |  | Gains (losses) deferred in AOCI on derivatives |  |  | Gains (losses) reclassified from AOCI into investment income |  |  | Ineffectiveness recognized in investment income |
Non-functional currency denominated debt |  | $ | 355 |  |  | $ | – |  |  | $ | – |
Total |  | $ | 355 |  |  | $ | – |  |  | $ | – |
(c) Derivatives not designated in qualifying hedge accounting relationships Derivatives used in portfolios supporting insurance contract liabilities are generally not designated in qualifying hedge accounting relationships because the change in the value of the insurance contract liabilities economically hedged by these derivatives is also recorded through net income. Since changes in fair value of these derivatives and related hedged risks are recognized in investment income as they occur, they generally offset the change in hedged risk to the extent the hedges are economically effective. Interest rate and cross currency swaps are used in the portfolios supporting insurance contract liabilities to manage duration and currency risks. Investment income on derivatives not designated in qualifying hedge accounting relationships
For the years ended December 31, |  | 2018 |  |  | 2017 |
Interest rate swaps |  | $ | (1,894 | ) |  | $ | (927 | )
Interest rate futures |  |  | (298 | ) |  |  | 372 |
Interest rate options |  |  | (52 | ) |  |  | (96 | )
Foreign currency swaps |  |  | (122 | ) |  |  | 529 |
Currency rate futures |  |  | 3 |  |  |  | (92 | )
Forward contracts |  |  | (355 | ) |  |  | 1,231 |
Equity futures |  |  | 742 |  |  |  | (2,190 | )
Equity contracts |  |  | (276 | ) |  |  | 153 |
Credit default swaps |  |  | (6 | ) |  |  | (4 | )
Total |  | $ | (2,258) |  |  | $ | (1,024 | )
(d) Embedded derivatives Certain insurance contracts contain features that are classified as embedded derivatives and are measured separately at FVTPL including reinsurance contracts related to guaranteed minimum income benefits and contracts containing certain credit and interest rate features. Certain reinsurance contracts related to guaranteed minimum income benefits contain embedded derivatives requiring separate measurement at FVTPL as the financial component contained in the reinsurance contracts does not contain significant insurance risk. As at December 31, 2018, reinsurance ceded guaranteed minimum income benefits had a fair value of $1,148 (2017 – $1,079) and reinsurance assumed guaranteed minimum income benefits had a fair value of $114 (2017 – $100). Claims recovered under reinsurance ceded contracts offset claims expenses and claims paid on the reinsurance assumed are reported as contract benefits. The Company’s credit and interest rate embedded derivatives promise to pay the returns on a portfolio of assets to the contract holder. These embedded derivatives contain a credit and interest rate risk that is a financial risk embedded in the underlying insurance contract. As at December 31, 2018, these embedded derivatives had a fair value of $53 (2017 – $123). Other financial instruments classified as embedded derivatives but exempt from separate measurement at fair value include variable universal life and variable life products, minimum guaranteed credited rates, no lapse guarantees, guaranteed annuitization options, CPI indexing of benefits, and segregated fund minimum guarantees other than reinsurance ceded/assumed guaranteed minimum income benefits. These embedded derivatives are measured and reported within insurance contract liabilities and are exempt from separate fair value measurement as they contain insurance risk and/or are closely related to the insurance host contract.

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