Derivative Financial Instruments

12 Months Ended

Dec. 31, 2023

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:


	December 31, 2023		December 31, 2022
Assets:	(In millions)
Derivative investments:
Call options	$	739	$	244
Interest rate swaps	57		—

Foreign currency forward	1		—
Other long-term investments:
Other embedded derivatives	28		23
Prepaid expenses and other assets:
Reinsurance related embedded derivatives	152		279
	$	977	$	546


Liabilities:
Contractholder funds:
FIA/ IUL embedded derivatives	$	4,258	$	3,115







	$	4,258	$	3,115

The change in fair value of derivative instruments included within Recognized gains and losses, net, in the accompanying Consolidated Statements of Earnings is as follows:


	Year ended December 31,
	2023		2022		2021
Net investment gains (losses):	(In millions)
Call options	$	92	$	(862)	$	597
Interest rate swaps	48		—		—
Futures contracts	9		(7)		8
Foreign currency forwards	(2)		12		10
Other derivatives and embedded derivatives	5		(10)		5
Reinsurance related embedded derivatives	(128)		352		34
Total net investment gains (losses)	$	24	$	(515)	$	654

Benefits and other changes in policy reserves:
FIA/ IUL embedded derivatives increase (decrease)	$	1,143	$	(768)	$	479

Additional Disclosures

FIA/IUL Embedded Derivative, 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, in the accompanying Consolidated Statements of Earnings. 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.

Interest Rate Swaps

We utilize interest rate swaps to reduce market risks from interest rate changes on our earnings associated with our floating rate investments. With an interest rate swap, we agree with another party to exchange the difference between fixed-rate and floating-rate interest amounts tied to an agreed upon notional principal at specified intervals. The interest rate swaps are marked to fair value with the change in fair value, including accrued interest and related periodic cash flows received or paid, included as a component of Recognized gains and losses, net, in the accompanying Consolidated Statements of Earnings.

Reinsurance Related Embedded Derivatives

F&G cedes certain business on a coinsurance funds withheld basis. Investment results for the assets that support the coinsurance that are segregated within the funds withheld account are passed directly to the reinsurer pursuant to the contractual terms of the reinsurance agreement, which creates embedded derivatives considered to be total return swaps. These total return swaps are not clearly and closely related to the underlying reinsurance contract and thus require bifurcation. The fair value of the total return swaps is based on the change in fair value of the underlying assets held in the funds withheld account. These 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 Consolidated Balance Sheets and the related gains or losses are reported in Recognized gains and losses, net, on the Consolidated Statements of Earnings.

Credit Risk

We are exposed to credit loss in the event of non-performance by our counterparties on the call options and interest rate swaps and reflect assumptions regarding this non-performance risk in the fair value of the these derivatives. 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 and interest rate swaps we hold is presented in the following table:


		December 31, 2023
Counterparty	Credit Rating (Fitch/Moody's/S&P) (a)	Notional Amount		Fair Value		Collateral		Net Credit Risk
		(In millions)
Merrill Lynch	AA/*/A+	$	4,408	$	96	$	59	$	37

Morgan Stanley	AA-/Aa3/A+	3,466		102		116		—
Barclay's Bank	A+/A1/A+	6,236		102		100		2
Canadian Imperial Bank of Commerce	AA-/A2/A-	5,983		147		148		—
Wells Fargo	AA-/Aa2/A+	1,443		58		60		—
Goldman Sachs	A+/A1/A+	1,919		45		45		—
Credit Suisse	A+/A3/A+	92		4		4		—
Truist	A+/A2/A	2,759		124		124		—
Citibank	A+/Aa3/A+	1,073		27		28		—
JP Morgan	AA/Aa2/A+	2,589		91		91		—
Total		$	29,968	$	796	$	775	$	39


		December 31, 2022
Counterparty	Credit Rating (Fitch/Moody's/S&P)(a)	Notional Amount		Fair Value		Collateral		Net Credit Risk
		(In millions)
Merrill Lynch	AA/*/A+	$	3,563	$	23	$	—	$	23

Morgan Stanley	*/Aa3/A+	1,699		14		19		—
Barclay's Bank	A+/A1/A	6,049		65		59		6
Canadian Imperial Bank of Commerce	AA/Aa2/A+	5,169		68		64		4
Wells Fargo	A+/A1/BBB+	1,361		17		17		—
Goldman Sachs	A/A2/BBB+	1,133		9		10		—
Credit Suisse	BBB+/A3/A-	1,039		5		5		—
Truist	A+/A2/A	2,489		35		36		—
Citibank	A+/Aa3/A+	795		8		9		—

Total		$	23,297	$	244	$	219	$	33

(a) 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 derivative 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 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 December 31, 2023 and December 31, 2022, counterparties posted $775 million and $219 million, respectively, of collateral, of which $588 million and $178 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 Sheets. Accordingly, the maximum amount of loss due to credit risk that we would incur if parties to the derivatives failed completely to perform according to the terms of the contracts was $39 million at December 31, 2023, and $33 million at December 31, 2022.

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 439 and 409 futures contracts at December 31, 2023 and December 31, 2022, 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 $4 million and $3 million at December 31, 2023 and December 31, 2022, respectively.