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Derivative Financial Instruments
 6 Months Ended
Jun. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments Derivative Financial Instruments
The carrying amounts of derivative instruments, including derivative instruments embedded in FIA and reinsurance contracts, as of June 30, 2021 and December 31, 2020 is as follows (in millions):
June 30, 2021December 31, 2020
Assets:
Derivative investments:
Call options$690 $548 
Futures contracts1 — 
Foreign currency forward1 — 
Other long-term investments:
Other embedded derivatives30 27 
$722 $575 
Liabilities:
Contractholder funds:
FIA embedded derivative$3,759 $3,404 
Accounts payable and accrued liabilities:
Reinsurance related embedded derivative107 101 
$3,866 $3,505 
 
The change in fair value of derivative instruments included in the accompanying unaudited Condensed Consolidated Statements of Earnings is as follows (in millions):
Three Months EndedThree Months EndedSix Months Ended
June 30, 2021June 30, 2020June 30, 2021
Net investment gains (losses):
Call options$257 $12 $279 
Futures contracts4 2 4 
Foreign currency forward— — 4 
Other derivatives and embedded derivatives3 1 3 
Reinsurance related embedded derivatives (27)(21)— 
Total net investment gains (losses)$237 $(6)$290 
Benefits and other changes in policy reserves:
FIA embedded derivatives$466 $100 $355 
Additional Disclosures
FIA Embedded Derivative and Call Options and Futures
We have FIA Contracts that permit the holder to elect an interest rate return or an equity index linked component, where interest credited to the contracts is linked to the performance of various equity indices, primarily the S&P 500 Index. This feature represents an embedded derivative under GAAP. The FIA embedded derivative is valued at fair value and included in the liability for contractholder funds in the accompanying unaudited Condensed Consolidated Balance Sheets with changes in fair value included as a component of Benefits and other changes in policy reserves in the unaudited Condensed Consolidated Statements of Earnings. See a description of the fair value methodology used in Note C Fair Value of Financial Instruments.
We purchase derivatives consisting of a combination of call options and futures contracts on the applicable market indices to fund the index credits due to FIA contractholders. The call options are one, two, three, and five year options purchased to match the funding requirements of the underlying policies. On the respective anniversary dates of the index policies, the index used to compute the interest credit is reset and we purchase new call options to fund the next index credit. We manage the cost of these purchases through the terms of our FIA contracts, which permit us to change caps, spreads or participation rates, subject to guaranteed minimums, on each contract’s anniversary date. The change in the fair value of the call options and futures contracts is generally designed to offset the portion of the change in the fair value of the FIA embedded derivative related to index performance through the current credit period. The call options and futures contracts are marked to fair value with the change in fair value included as a component of Recognized gains and losses, net. The change in fair value of the call options and futures contracts includes the gains and losses recognized at the expiration of the instrument term or upon early termination and the changes in fair value of open positions.
Other market exposures are hedged periodically depending on market conditions and our risk tolerance. Our FIA hedging strategy economically hedges the equity returns and exposes us to the risk that unhedged market exposures result in divergence between changes in the fair value of the liabilities and the hedging assets. We use a variety of techniques, including direct estimation of market sensitivities, to monitor this risk daily. We intend to continue to adjust the hedging strategy as market conditions and our risk tolerance changes.
Credit Risk
We are exposed to credit loss in the event of non-performance by our counterparties on the call options and reflect assumptions regarding this non-performance risk in the fair value of the call options. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts less collateral held. We maintain a policy of requiring all derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement.
Information regarding our exposure to credit loss on the call options we hold as of June 30, 2021 and December 31, 2020, is presented in the following table (in millions):
June 30, 2021
CounterpartyCredit Rating
(Fitch/Moody's/S&P) (1)		Notional
Amount		Fair ValueCollateralNet Credit Risk
Merrill Lynch AA/*/A+ $1,899 $87 $45 $42 
Morgan Stanley */Aa3/A+ 1,561 77 79 — 
Barclay's Bank A+/A1/A 5,342 154 144 10 
Canadian Imperial Bank of Commerce AA/Aa2/A+ 2,263 99 98 1 
Wells Fargo A+/A2/BBB+ 2,436 93 92 1 
Goldman Sachs A/A2/BBB+ 307 11 11 — 
Credit Suisse A/A1/A+ 2,559 124 122 2 
Truist A+/A2/A 1,197 45 45 — 
Total$17,564 $690 $636 $56 
December 31, 2020
CounterpartyCredit Rating
(Fitch/Moody's/S&P) (1)		Notional
Amount		Fair ValueCollateralNet Credit Risk
Merrill LynchAA-/*/A+$1,932 $75 $32 $43 
Morgan StanleyA/A2/BBB+1,503 40 41 — 
Barclay's BankA+/A1/A4,639 180 169 11 
Canadian Imperial Bank of CommerceAA/Aa2/A+2,276 86 85 1 
Wells FargoA+/A2/BBB+2,900 106 105 1 
Goldman SachsA/A3/BBB+634 15 15 — 
Credit SuisseA/Aa3/A+1,373 27 25 2 
TruistA+/A2/A652 19 19 — 
Total$15,909 $548 $491 $58 

(1) An * represents credit ratings that were not available.
Collateral Agreements
We are required to maintain minimum ratings as a matter of routine practice as part of its over-the-counter derivative agreements on ISDA forms. Under some ISDA agreements, we have agreed to maintain certain financial strength ratings. A downgrade below these levels provides the counterparty under the agreement the right to terminate the open option contracts between the parties, at which time any amounts payable by us or the counterparty would be dependent on the market value of the underlying option contracts. Our current rating doesn't allow any counterparty the right to terminate ISDA agreements. In certain transactions, both us and the counterparty have entered into a collateral support agreement requiring either party to post collateral when the net exposures exceed pre-determined thresholds. For all counterparties, except Merrill Lynch, this threshold is set to zero. As of June 30, 2021 and December 31, 2020, respectively, counterparties posted $636 million and $491 million of collateral of which $424 million and $415 million is included in cash and cash equivalents with an associated payable for this collateral included in accounts payable and accrued liabilities on the unaudited Condensed Consolidated Balance Sheet. Accordingly, the maximum amount of loss due to credit risk that we would incur if parties to the call options failed completely to perform according to the terms of the contracts was $56 million at June 30, 2021 and $58 million at December 31, 2020.
We are required to pay counterparties the effective federal funds rate each day for cash collateral posted to F&G for daily mark to market margin changes.  We reinvest derivative cash collateral to reduce the interest cost. Cash collateral is invested in overnight investment sweep products which are included in cash and cash equivalents in the accompanying unaudited Condensed Consolidated Balance Sheets.
We held 369 and 384 futures contracts at June 30, 2021 and December 31, 2020, respectively. The fair value of the futures contracts represents the cumulative unsettled variation margin (open trade equity, net of cash settlements). We provide cash collateral to the counterparties for the initial and variation margin on the futures contracts which is included in cash and cash equivalents in the accompanying unaudited Condensed Consolidated Balance Sheets. The amount of cash collateral held by the counterparties for such contracts was $4 million at June 30, 2021 and December 31, 2020.
Reinsurance Related Embedded Derivatives
FGL Insurance entered into a reinsurance agreement with Kubera effective December 31, 2018, to cede certain MYGA and deferred annuity statutory reserve on a coinsurance funds withheld basis, net of applicable existing reinsurance. Fair value movements in the funds withheld balances associated with this arrangement create an obligation for FGL Insurance to pay Kubera at a later date, which results in an embedded derivative. This embedded derivative is considered a total return swap with contractual returns that are attributable to the assets and liabilities associated with this reinsurance arrangement. The fair value of the total return swap is based on the change in fair value of the underlying assets held in the funds withheld portfolio. Investment results for the assets that support the coinsurance with funds withheld reinsurance arrangement, including gains and losses from sales, were passed directly to the reinsurer pursuant to contractual terms of the reinsurance arrangement. The reinsurance related embedded derivative is reported in prepaid expenses and other assets if in
a net gain position, or accounts payable and accrued liabilities, if in a net loss position, on the unaudited Condensed Consolidated Balance Sheets and the related gains or losses are reported in Recognized gains and losses, net on the unaudited Condensed Consolidated Statements of Earnings.