Derivative Financial Instruments

12 Months Ended

Dec. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The carrying amounts of derivative instruments, including derivative instruments embedded in FIA and IUL contracts, and reinsurance is as follows (in millions):


	December 31, 2021		December 31, 2020
Assets:
Derivative investments:
Call options	$	816	$	548


Other long-term investments:
Other embedded derivatives	33		27


	$	849	$	575


Liabilities:
Contractholder funds:
FIA/ IUL embedded derivatives	$	3,883	$	3,404


Accounts payable and accrued liabilities:


Reinsurance related embedded derivatives	73		101

	$	3,956	$	3,505

The change in fair value of derivative instruments included in the accompanying Consolidated Statements of Earnings is as follows (in millions):


	Year Ended	Seven Months Ended
		December 31, 2021		December 31, 2020
Net investment gains (losses):
Call options		$	597	$	229
Futures contracts		8		15
Foreign currency forwards		9		(7)
Other derivatives and embedded derivatives		5		8
Reinsurance related embedded derivatives		34		(53)
Total net investment gains		$	653	$	192

Benefits and other changes in policy reserves:
FIA/ IUL embedded derivatives		$	479	$	552

Additional Disclosures

FIA/ IUL Embedded Derivative and Call Options and Futures

We have FIA and IUL 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/IUL embedded derivatives are valued at fair value and included in the liability for contractholder funds in the accompanying Consolidated Balance Sheets with changes in fair value included as a component of Benefits and other changes in policy reserves in the Consolidated Statements of Earnings. See a description of the fair value methodology used in Note D Fair Value of Financial Instruments.

We purchase derivatives consisting of a combination of call options and futures contracts (specifically for FIA contracts) on the applicable market indices to fund the index credits due to FIA/ IUL 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 indexed 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/IUL 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/IUL embedded derivatives 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/IUL 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 is presented in the following table (in millions):


		December 31, 2021
Counterparty	Credit Rating (Fitch/Moody's/S&P) (1)	Notional Amount		Fair Value		Collateral		Net Credit Risk
Merrill Lynch	AA/*/A+	$	3,307	$	128	$	86	$	42

Morgan Stanley	*/Aa3/A+	2,184		86		92		—
Barclay's Bank	A+/A1/A	5,197		231		233		—
Canadian Imperial Bank of Commerce	AA/Aa2/A+	2,936		147		151		—
Wells Fargo	A+/A1/BBB+	2,445		89		90		—
Goldman Sachs	A/A2/BBB+	307		10		10		—
Credit Suisse	A/A1/A+	1,485		74		75		—
Truist	A+/A2/A	1,543		51		53		—
Total		$	19,404	$	816	$	790	$	42

		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 we 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 December 31, 2021 and 2020, counterparties posted $790 million and $491 million, respectively, of collateral, of which $576 million and $415 million, respectively, is included in cash and cash equivalents with an associated payable for this collateral included in accounts payable and accrued liabilities on the 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 $42 million at December 31, 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 Consolidated Balance Sheets.

We held 329 and 384 futures contracts at December 31, 2021 and 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 Consolidated Balance Sheets. The amount of cash collateral held by the counterparties for such contracts was $3 million and $4 million at December 31, 2021 and 2020, respectively.

Reinsurance Related Embedded DerivativesAs discussed in Note O Reinsurance, F&G entered into a reinsurance agreement with Kubera, effective December 31, 2018, to cede certain MYGA and deferred annuity business on a coinsurance funds withheld basis, net of applicable existing reinsurance. Effective October 31, 2021, this agreement was novated from Kubera to Somerset, a certified third party reinsurer. Additionally, F&G entered into a reinsurance agreement with Aspida Re 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 Somerset and Aspida Re 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.