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Derivative Financial Instruments | 9 Months Ended
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Sep. 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 September 30, 2021 and December 31, 2020 is as follows (in millions):
| September 30, 2021 |  | December 31, 2020 |  |
Assets: |  |  |  |  |
Derivative investments: |  |  |  |  |
Call options | $ | 580 |  |  | $ | 548 |  |  |
Futures contracts | — |  |  | — |  |  |
Foreign currency forward | 1 |  |  | — |  |  |
Other long-term investments: |  |  |  |  |
Other embedded derivatives | 30 |  |  | 27 |  |  |
| $ | 611 |  |  | $ | 575 |  |  |
Liabilities: |  |  |  |  |
Contractholder funds: |  |  |  |  |
FIA embedded derivative | $ | 3,439 |  |  | $ | 3,404 |  |  |
Accounts payable and accrued liabilities: |  |  |  |  |
Reinsurance related embedded derivative | 84 |  |  | 101 |  |  |
| $ | 3,523 |  |  | $ | 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 Ended |  | Nine Months Ended |  | Four Months Ended
| September 30, 2021 |  | September 30, 2020 |  | September 30, 2021 |  | September 30, 2020
Net investment gains (losses): |  |  |  |  |  |  |
Call options | $ | (6) |  |  | $ | 43 |  |  | $ | 273 |  |  | $ | 55 |
Futures contracts | — |  |  | 7 |  |  | 4 |  |  | 9 |
Foreign currency forward | 3 |  |  | (4) |  |  | 7 |  |  | (4) |
Other derivatives and embedded derivatives | (1) |  |  | 2 |  |  | 2 |  |  | 3 |
Reinsurance related embedded derivatives | 23 |  |  | (14) |  |  | 23 |  |  | (35) |
Total net investment gains (losses) | $ | 19 |  |  | $ | 34 |  |  | $ | 309 |  |  | $ | 28 |
Benefits and other changes in policy reserves: |  |  |  |  |  |  |
FIA embedded derivatives | $ | (320) |  |  | $ | 209 |  |  | $ | 35 |  |  | $ | 309 |
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. Also refer to Managements Estimates in Note A Basis of Financial Statements regarding the implementation of a new actuarial valuation system and assumption updates during the three-months ended September 30, 2021. The system implementation and assumption review process included refinements in the calculation of the fair value of the embedded derivative component of our fixed index annuities. 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 September 30, 2021 and December 31, 2020, is presented in the following table (in millions):
|  |  | September 30, 2021
Counterparty | Credit Rating (Fitch/Moody's/S&P) (1) |  | Notional Amount |  | Fair Value |  | Collateral |  | Net Credit Risk
Merrill Lynch | AA/*/A+ |  | $ | 2,180 |  |  | $ | 67 |  |  | $ | 27 |  |  | $ | 40 |
Morgan Stanley | */Aa3/A+ |  | 2,051 |  |  | 61 |  |  | 67 |  |  | — |
Barclay's Bank | A+/A1/A |  | 5,508 |  |  | 154 |  |  | 165 |  |  | — |
Canadian Imperial Bank of Commerce | AA/Aa2/A+ |  | 2,499 |  |  | 87 |  |  | 94 |  |  | — |
Wells Fargo | A+/A1/BBB+ |  | 2,575 |  |  | 87 |  |  | 90 |  |  | — |
Goldman Sachs | A/A2/BBB+ |  | 383 |  |  | 11 |  |  | 13 |  |  | — |
Credit Suisse | A/A1/A+ |  | 2,184 |  |  | 78 |  |  | 89 |  |  | — |
Truist | A+/A2/A |  | 1,135 |  |  | 35 |  |  | 37 |  |  | — |
Total |  |  | $ | 18,515 |  |  | $ | 580 |  |  | $ | 582 |  |  | $ | 40 |
|  |  | December 31, 2020
Counterparty | Credit Rating (Fitch/Moody's/S&P) (1) |  | Notional Amount |  | Fair Value |  | Collateral |  | Net Credit Risk
Merrill Lynch | AA-/*/A+ |  | $ | 1,932 |  |  | $ | 75 |  |  | $ | 32 |  |  | $ | 43 |
Morgan Stanley | A/A2/BBB+ |  | 1,503 |  |  | 40 |  |  | 41 |  |  | — |
Barclay's Bank | A+/A1/A |  | 4,639 |  |  | 180 |  |  | 169 |  |  | 11 |
Canadian Imperial Bank of Commerce | AA/Aa2/A+ |  | 2,276 |  |  | 86 |  |  | 85 |  |  | 1 |
Wells Fargo | A+/A2/BBB+ |  | 2,900 |  |  | 106 |  |  | 105 |  |  | 1 |
Goldman Sachs | A/A3/BBB+ |  | 634 |  |  | 15 |  |  | 15 |  |  | — |
Credit Suisse | A/Aa3/A+ |  | 1,373 |  |  | 27 |  |  | 25 |  |  | 2 |
Truist | A+/A2/A |  | 652 |  |  | 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 our 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 does not 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 September 30, 2021 and December 31, 2020, respectively, counterparties posted $582 million and $491 million of collateral of which $429 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 $40 million at September 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 354 and 384 futures contracts at September 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 $3 million and $4 million at September 30, 2021 and December 31, 2020, respectively. Reinsurance Related Embedded Derivatives F&G entered into a reinsurance agreement with Kubera effective December 31, 2018, to cede certain deferred annuity business on a coinsurance funds withheld basis, net of applicable existing reinsurance. Additionally, F&G entered into a reinsurance agreement with Aspida effective January 1, 2021, to cede a quota share of certain deferred annuity business on a funds withheld basis. Fair value movements in the funds withheld balances associated with these arrangements creates an obligation for FGL Insurance to pay Kubera and Aspida at a later date, which results in embedded derivatives. These embedded derivatives are considered total return swaps with contractual returns that are attributable to the assets and liabilities associated with the reinsurance arrangements. 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 arrangements, including gains and losses from sales, were passed directly to the reinsurers pursuant to contractual terms of the reinsurance arrangements. The reinsurance related embedded derivatives are 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.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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