Derivative Financial Instruments

3 Months Ended

Mar. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The carrying amounts of derivative instruments, including derivative instruments embedded in indexed annuities and IUL contracts, and reinsurance is as follows:


	March 31, 2024		December 31, 2023
Assets:	(In millions)
Derivative investments:
Call options	$	1,015	$	739
Interest rate swaps	9		57

Foreign currency forward	—		1
Other long-term investments:
Other embedded derivatives	30		28
Prepaid expenses and other assets:
Reinsurance related embedded derivatives	134		152
Total	$	1,188	$	977


Liabilities:
Contractholder funds:
Indexed annuities/IUL embedded derivatives	$	4,679	$	4,258


Accounts payable and accrued liabilities:



Interest rate swaps	19		—


Total	$	4,698	$	4,258

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


	Three months ended
	March 31, 2024		March 31, 2023
	(In millions)
Net investment gains (losses):
Call options	$	250	$	55
Interest rate swaps	(80)		—
Futures contracts	6		5
Foreign currency forwards	3		(1)
Other derivatives and embedded derivatives	3		1
Reinsurance related embedded derivatives	(18)		(19)
Total net investment gains	$	164	$	41

Benefits and other changes in policy reserves:
Indexed annuities/IUL embedded derivatives increase	$	421	$	454

Additional Disclosures

See descriptions of the fair value methodologies used for derivative financial instruments in Note C - Fair Value of Financial Instruments.

Indexed Annuities/IUL Embedded Derivative, Call Options and Futures

We have indexed annuities 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 indexed annuities/IUL embedded derivatives are 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 Operations.

We purchase derivatives consisting of a combination of call options and futures contracts (specifically for indexed annuity contracts) on the applicable market indices to fund the index credits due to indexed annuity/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 indexed annuities/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 indexed annuities/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 unaudited Condensed Consolidated Statements of Operations. 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 indexed annuities/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 unaudited Condensed Consolidated Statements of Operations.

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 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 Operations.

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 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 tables.


		March 31, 2024
		(In millions)
Counterparty	Credit Rating (Fitch/Moody's/S&P) (a)	Notional Amount		Fair Value		Collateral		Net Credit Risk
Merrill Lynch	AA/*/A+	$	4,340	$	132	$	93	$	39

Morgan Stanley	AA-/Aa3/A+	4,353		159		166		—
Barclay's Bank	A+/A1/A+	6,389		124		122		2
Canadian Imperial Bank of Commerce	AA-/A2/A-	5,552		163		163		—
Wells Fargo	AA-/Aa2/A+	1,313		69		70		—
Goldman Sachs	A+/A1/A+	2,340		45		44		1
Credit Suisse	A+/A3/A+	16		1		1		—
Truist	A/A2/A	3,185		135		134		1
Citibank	A+/Aa3/A+	1,145		25		26		—
JP Morgan	AA/Aa2/A+	3,888		152		149		3
Total		$	32,521	$	1,005	$	968	$	46


		December 31, 2023
		(In millions)
Counterparty	Credit Rating (Fitch/Moody's/S&P) (a)	Notional Amount		Fair Value		Collateral		Net Credit Risk
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

(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 March 31, 2024 and December 31, 2023, counterparties posted $968 million and $775 million, respectively, of collateral of which $740 million and $588 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 unaudited Condensed 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 $46 million at March 31, 2024 and $39 million at December 31, 2023.

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 379 and 439 futures contracts at March 31, 2024 and December 31, 2023, 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 both March 31, 2024 and December 31, 2023.