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Derivative Instruments | 9 Months Ended
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Sep. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | Derivative Instruments Accounting for Derivative Instruments and Hedging Activities See Note 2 – “Significant Accounting Policies and Pronouncements” of the Company’s 2018 Annual Report for a detailed discussion of the accounting treatment for derivative instruments, including embedded derivatives. See Note 6 – “Fair Value of Assets and Liabilities” for additional disclosures related to the fair value hierarchy for derivative instruments, including embedded derivatives. Types of Derivatives Used by the Company Commonly used derivative instruments include, but are not necessarily limited to: credit default swaps, financial futures, equity options, foreign currency swaps, foreign currency forwards, interest rate swaps, synthetic guaranteed investment contracts (“GICs”), consumer price index (“CPI”) swaps, longevity swaps, mortality swaps and embedded derivatives. For detailed information on these derivative instruments and the related strategies, see Note 5 – “Derivative Instruments” of the Company’s 2018 Annual Report. Summary of Derivative Positions Derivatives, except for embedded derivatives and longevity and mortality swaps, are carried on the Company’s condensed consolidated balance sheets in other invested assets or other liabilities, at fair value. Longevity and mortality swaps are included on the condensed consolidated balance sheets in other assets or other liabilities, at fair value. Embedded derivative assets and liabilities on modified coinsurance (“modco”) or funds withheld arrangements are included on the condensed consolidated balance sheets with the host contract in funds withheld at interest, at fair value. Embedded derivative liabilities on indexed annuity and variable annuity products are included on the condensed consolidated balance sheets with the host contract in interest-sensitive contract liabilities, at fair value. The following table presents the notional amounts and gross fair value of derivative instruments prior to taking into account the netting effects of master netting agreements as of September 30, 2019 and December 31, 2018 (dollars in thousands):
|  |  |  | September 30, 2019 |  | December 31, 2018
|  | Primary Underlying Risk |  | Notional |  | Carrying Value/Fair Value |  | Notional |  | Carrying Value/Fair Value
|  |  | Amount |  | Assets |  | Liabilities |  | Amount |  | Assets |  | Liabilities
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | Interest rate |  | $ | 929,963 |  |  | $ | 84,306 |  |  | $ | 2,778 |  |  | $ | 1,040,588 |  |  | $ | 47,652 |  |  | $ | 961 |
Financial futures |  | Equity |  | 361,030 |  |  | — |  |  | — |  |  | 325,620 |  |  | — |  |  | — |
Foreign currency swaps |  | Foreign currency |  | 149,698 |  |  | — |  |  | 12,454 |  |  | 149,698 |  |  | 504 |  |  | 4,659 |
Foreign currency forwards |  | Foreign currency |  | 125,000 |  |  | 337 |  |  | — |  |  | 25,000 |  |  | — |  |  | 234 |
Consumer price index swaps |  | CPI |  | 422,068 |  |  | 360 |  |  | 33,245 |  |  | 385,580 |  |  | — |  |  | 11,384 |
Credit default swaps |  | Credit |  | 1,337,800 |  |  | 5,888 |  |  | 139 |  |  | 1,338,300 |  |  | 6,003 |  |  | 1,166 |
Equity options |  | Equity |  | 386,536 |  |  | 24,844 |  |  | — |  |  | 439,158 |  |  | 42,836 |  |  | — |
Longevity swaps |  | Longevity |  | 871,920 |  |  | 51,620 |  |  | — |  |  | 917,360 |  |  | 47,789 |  |  | — |
Mortality swaps |  | Mortality |  | 25,000 |  |  | — |  |  | 853 |  |  | 25,000 |  |  | — |  |  | 369 |
Synthetic guaranteed investment contracts |  | Interest rate |  | 13,919,866 |  |  | — |  |  | — |  |  | 13,397,729 |  |  | — |  |  | — |
Embedded derivatives in: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Modified coinsurance or funds withheld arrangements |  |  |  | — |  |  | 121,275 |  |  | — |  |  | — |  |  | 109,597 |  |  | — |
Indexed annuity products |  |  |  | — |  |  | — |  |  | 779,128 |  |  | — |  |  | — |  |  | 776,940 |
Variable annuity products |  |  |  | — |  |  | — |  |  | 210,041 |  |  | — |  |  | — |  |  | 167,925 |
Total non-hedging derivatives |  |  |  | 18,528,881 |  |  | 288,630 |  |  | 1,038,638 |  |  | 18,044,033 |  |  | 254,381 |  |  | 963,638 |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | Foreign currency/Interest rate |  | 435,000 |  |  | — |  |  | 34,467 |  |  | 435,000 |  |  | — |  |  | 27,257 |
Foreign currency swaps |  | Foreign currency |  | 366,193 |  |  | 26,384 |  |  | 7,615 |  |  | 494,461 |  |  | 51,311 |  |  | — |
Foreign currency forwards |  | Foreign currency |  | 1,025,548 |  |  | 43,441 |  |  | — |  |  | 911,197 |  |  | 50,974 |  |  | — |
Total hedging derivatives |  |  |  | 1,826,741 |  |  | 69,825 |  |  | 42,082 |  |  | 1,840,658 |  |  | 102,285 |  |  | 27,257 |
Total derivatives |  |  |  | $ | 20,355,622 |  |  | $ | 358,455 |  |  | $ | 1,080,720 |  |  | $ | 19,884,691 |  |  | $ | 356,666 |  |  | $ | 990,895 |
Fair Value Hedges The Company designates and reports certain foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated assets as fair value hedges when they meet the requirements of the general accounting principles for Derivatives and Hedging. The gain or loss on the hedged item attributable to a change in foreign currency and the offsetting gain or loss on the related foreign currency swaps as of September 30, 2019 and 2018, were (dollars in thousands):
Type of Fair Value Hedge |  | Hedged Item |  | Gains (Losses) Recognized for Derivatives |  | Gains (Losses) Recognized for Hedged Items
|  |  |  | Investment Related Gains (Losses)
For the three months ended September 30, 2019: |  |  |  |
Foreign currency swaps |  | Foreign-denominated fixed maturity securities |  | $ | (5,995 | ) |  | $ | 4,088 |
For the three months ended September 30, 2018: |  |  |  |
Foreign currency swaps |  | Foreign-denominated fixed maturity securities |  | $ | (2,258 | ) |  | $ | 2,832 |
For the nine months ended September 30, 2019: |  |  |  |
Foreign currency swaps |  | Foreign-denominated fixed maturity securities |  | $ | (10,422 | ) |  | $ | 4,503 |
For the nine months ended September 30, 2018: |  |  |  |
Foreign currency swaps |  | Foreign-denominated fixed maturity securities |  | $ | (5,284 | ) |  | $ | 9,666 |
Cash Flow Hedges Certain derivative instruments are designated as cash flow hedges when they meet the requirements of the general accounting principles for Derivatives and Hedging. The Company designates and accounts for the following as cash flow hedges: (i) certain interest rate swaps, in which the cash flows of assets and liabilities are variable based on a benchmark rate; and (ii) certain interest rate swaps, in which the cash flows of assets are denominated in different currencies, commonly referred to as cross-currency swaps. The following table presents the components of AOCI, before income tax, and the condensed consolidated income statement classification where the gain or loss is recognized related to cash flow hedges for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):
|  | Three months ended September 30,
|  | 2019 |  | 2018
Balance beginning of period |  | $ | (14,862 | ) |  | $ | 22,656 |
Gains (losses) deferred in other comprehensive income (loss) |  | (32,123 | ) |  | 6,671 |
Amounts reclassified to investment income |  | 38 |  |  | (50 | )
Amounts reclassified to interest expense |  | (255 | ) |  | (234 | )
Balance end of period |  | $ | (47,202 | ) |  | $ | 29,043 |
|  | Nine months ended September 30,
|  | 2019 |  | 2018
Balance beginning of period |  | $ | 8,788 |  |  | $ | 2,619 |
Gains (losses) deferred in other comprehensive income (loss) |  | (54,902 | ) |  | 26,586 |
Amounts reclassified to investment income |  | 19 |  |  | (270 | )
Amounts reclassified to interest expense |  | (1,107 | ) |  | 108 |
Balance end of period |  | $ | (47,202 | ) |  | $ | 29,043 |
As of September 30, 2019, the before-tax deferred net gains (losses) on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are approximately $0.1 million and $(0.8) million in investment income and interest expense, respectively. The following table presents the effect of derivatives in cash flow hedging relationships on the condensed consolidated statements of income and the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):
Derivative Type |  | Gain (Loss) Deferred in AOCI |  | Gain (Loss) Reclassified into Income from AOCI
|  |  |  | Investment Income |  | Interest Expense
For the three months ended September 30, 2019: |  |  |  |  |  |
Interest rate |  | $ | (24,846 | ) |  | $ | — |  |  | $ | 255 |
Currency/Interest rate |  | (7,277 | ) |  | (38 | ) |  | — |
Total |  | $ | (32,123 | ) |  | $ | (38 | ) |  | $ | 255 |
For the three months ended September 30, 2018: |  |  |  |  |  |
Interest rate |  | $ | 7,490 |  |  | $ | — |  |  | $ | 234 |
Currency/Interest rate |  | (819 | ) |  | 50 |  |  | — |
Total |  | $ | 6,671 |  |  | $ | 50 |  |  | $ | 234 |
For the nine months ended September 30, 2019: |  |  |  |  |  |
Interest rate |  | $ | (46,816 | ) |  | $ | — |  |  | $ | 1,107 |
Currency/Interest rate |  | (8,086 | ) |  | (19 | ) |  | — |
Total |  | $ | (54,902 | ) |  | $ | (19 | ) |  | $ | 1,107 |
For the nine months ended September 30, 2018: |  |  |  |  |  |
Interest rate |  | $ | 27,217 |  |  | $ | — |  |  | $ | (108 | )
Currency/Interest rate |  | (631 | ) |  | 270 |  |  | — |
Total |  | $ | 26,586 |  |  | $ | 270 |  |  | $ | (108 | )
Hedges of Net Investments in Foreign Operations The Company uses foreign currency swaps and foreign currency forwards to hedge a portion of its net investment in certain foreign operations against adverse movements in exchange rates. The following table illustrates the Company’s net investments in foreign operations (“NIFO”) hedges for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):
|  | Derivative Gains (Losses) Deferred in AOCI
|  | For the three months ended September 30, |  | For the nine months ended September 30,
Type of NIFO Hedge (1) |  | 2019 |  | 2018 |  | 2019 |  | 2018
Foreign currency swaps |  | $ | 3,930 |  |  | $ | (5,877 | ) |  | $ | (5,563 | ) |  | $ | 11,125 |
Foreign currency forwards |  | 16,427 |  |  | (11,562 | ) |  | (7,669 | ) |  | 11,737 |
Total |  | $ | 20,357 |  |  | $ | (17,439 | ) |  | $ | (13,232 | ) |  | $ | 22,862 |
(1) | There were no sales or substantial liquidations of net investments in foreign operations that would have required the reclassification of gains or losses from accumulated other comprehensive income (loss) into investment income during the periods presented.
The cumulative foreign currency translation gain recorded in AOCI related to these hedges was $187.8 million and $201.0 million at September 30, 2019 and December 31, 2018, respectively. If a hedged foreign operation was sold or substantially liquidated, the amounts in AOCI would be reclassified to the condensed consolidated statements of income. A pro rata portion would be reclassified upon partial sale of a hedged foreign operation. Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging The Company uses various other derivative instruments for risk management purposes that either do not qualify or have not been qualified for hedge accounting treatment. The gain or loss related to the change in fair value for these derivative instruments is recognized in investment related gains (losses), net in the condensed consolidated statements of income, except where otherwise noted. A summary of the effect of non-hedging derivatives, including embedded derivatives, on the Company’s condensed consolidated statements of income for the three and nine months ended September 30, 2019 and 2018 is as follows (dollars in thousands):
|  |  |  | Gain (Loss) for the three months ended September 30,
Type of Non-hedging Derivative |  | Income Statement Location of Gain (Loss) |  | 2019 |  | 2018
Interest rate swaps |  | Investment related gains (losses), net |  | $ | 38,701 |  |  | $ | (12,228 | )
Financial futures |  | Investment related gains (losses), net |  | 322 |  |  | (6,544 | )
Foreign currency swaps |  | Investment related gains (losses), net |  | 867 |  |  | — |
Foreign currency forwards |  | Investment related gains (losses), net |  | 337 |  |  | (58 | )
CPI swaps |  | Investment related gains (losses), net |  | (8,235 | ) |  | (4,223 | )
Credit default swaps |  | Investment related gains (losses), net |  | 1,961 |  |  | 4,689 |
Equity options |  | Investment related gains (losses), net |  | 243 |  |  | (9,793 | )
Longevity swaps |  | Other revenues |  | 2,063 |  |  | 2,426 |
Mortality swaps |  | Other revenues |  | — |  |  | 473 |
Subtotal |  |  |  | 36,259 |  |  | (25,258 | )
Embedded derivatives in: |  |  |  |  |  |
Modified coinsurance or funds withheld arrangements |  | Investment related gains (losses), net |  | 8,508 |  |  | (2,081 | )
Indexed annuity products |  | Interest credited |  | (44,972 | ) |  | (25,347 | )
Variable annuity products |  | Investment related gains (losses), net |  | (42,233 | ) |  | 32,133 |
Total non-hedging derivatives |  |  |  | $ | (42,438 | ) |  | $ | (20,553 | )
|  |  |  | Gain (Loss) for the nine months ended September 30,
Type of Non-hedging Derivative |  | Income Statement Location of Gain (Loss) |  | 2019 |  | 2018
Interest rate swaps |  | Investment related gains (losses), net |  | $ | 96,079 |  |  | $ | (47,399 | )
Financial futures |  | Investment related gains (losses), net |  | (29,641 | ) |  | (7,312 | )
Foreign currency swaps |  | Investment related gains (losses), net |  | (4,790 | ) |  | — |
Foreign currency forwards |  | Investment related gains (losses), net |  | 571 |  |  | 3 |
CPI swaps |  | Investment related gains (losses), net |  | (23,898 | ) |  | (996 | )
Credit default swaps |  | Investment related gains (losses), net |  | 21,539 |  |  | 5,371 |
Equity options |  | Investment related gains (losses), net |  | (27,269 | ) |  | (15,207 | )
Longevity swaps |  | Other revenues |  | 6,390 |  |  | 6,983 |
Mortality swaps |  | Other revenues |  | (484 | ) |  | (326 | )
Subtotal |  |  |  | 38,497 |  |  | (58,883 | )
Embedded derivatives in: |  |  |  |  |  |
Modified coinsurance or funds withheld arrangements |  | Investment related gains (losses), net |  | 11,678 |  |  | 20,335 |
Indexed annuity products |  | Interest credited |  | (50,361 | ) |  | 6,523 |
Variable annuity products |  | Investment related gains (losses), net |  | (42,116 | ) |  | 62,242 |
Total non-hedging derivatives |  |  |  | $ | (42,302 | ) |  | $ | 30,217 |
Credit Derivatives The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of credit default swaps sold by the Company at September 30, 2019 and December 31, 2018 (dollars in thousands):
|  | September 30, 2019 |  | December 31, 2018
Rating Agency Designation of Referenced Credit Obligations(1) |  | Estimated Fair Value of Credit Default Swaps |  | Maximum Amount of Future Payments under Credit Default Swaps(2) |  | Weighted Average Years to Maturity(3) |  | Estimated Fair Value of Credit Default Swaps |  | Maximum Amount of Future Payments under Credit Default Swaps(2) |  | Weighted Average Years to Maturity(3)
AAA/AA+/AA/AA-/A+/A/A- |  |  |  |  |  |  |  |  |  |  |  |
Single name credit default swaps |  | $ | 1,018 |  |  | $ | 117,500 |  |  | 1.6 |  | $ | 1,953 |  |  | $ | 152,000 |  |  | 2.2
Credit default swaps referencing indices |  | 342 |  |  | 240,000 |  |  | 10.2 |  | — |  |  | — |  |  | 0.0
Subtotal |  | 1,360 |  |  | 357,500 |  |  | 7.4 |  | 1,953 |  |  | 152,000 |  |  | 2.2
BBB+/BBB/BBB- |  |  |  |  |  |  |  |  |  |  |  |
Single name credit default swaps |  | 4,103 |  |  | 337,700 |  |  | 2.0 |  | 2,930 |  |  | 353,700 |  |  | 2.2
Credit default swaps referencing indices |  | 111 |  |  | 632,600 |  |  | 2.9 |  | (76 | ) |  | 817,600 |  |  | 6.4
Subtotal |  | 4,214 |  |  | 970,300 |  |  | 2.6 |  | 2,854 |  |  | 1,171,300 |  |  | 5.1
BB+/BB/BB- |  |  |  |  |  |  |  |  |  |  |  |
Single name credit default swaps |  | 175 |  |  | 10,000 |  |  | 2.7 |  | 30 |  |  | 15,000 |  |  | 0.7
Subtotal |  | 175 |  |  | 10,000 |  |  | 2.7 |  | 30 |  |  | 15,000 |  |  | 0.7
Total |  | $ | 5,749 |  |  | $ | 1,337,800 |  |  | 3.9 |  | $ | 4,837 |  |  | $ | 1,338,300 |  |  | 4.7
(1) | The rating agency designations are based on ratings from Standard and Poor’s (“S&P”).
(2) | Assumes the value of the referenced credit obligations is zero.
(3) | The weighted average years to maturity of the credit default swaps is calculated based on weighted average notional amounts.
Netting Arrangements and Credit Risk Certain of the Company’s derivatives are subject to enforceable master netting arrangements and reported as a net asset or liability in the condensed consolidated balance sheets. The Company nets all derivatives that are subject to such arrangements. The Company has elected to include all derivatives, except embedded derivatives, in the tables below, irrespective of whether they are subject to an enforceable master netting arrangement or a similar agreement. See Note 4 – “Investments” for information regarding the Company’s securities borrowing, lending, repurchase and repurchase/reverse repurchase programs. The following table provides information relating to the Company’s derivative instruments as of September 30, 2019 and December 31, 2018 (dollars in thousands):
|  |  |  |  |  |  |  | Gross Amounts Not Offset in the Balance Sheet |  |
|  | Gross Amounts Recognized |  | Gross Amounts Offset in the Balance Sheet |  | Net Amounts Presented in the Balance Sheet |  | Financial Instruments (1) |  | Cash Collateral Pledged/ Received |  | Net Amount
September 30, 2019: |  |  |  |  |  |  |  |  |  |  |  |
Derivative assets |  | $ | 237,180 |  |  | $ | (43,461 | ) |  | $ | 193,719 |  |  | $ | — |  |  | $ | (205,890 | ) |  | $ | (12,171 | )
Derivative liabilities |  | 91,551 |  |  | (43,461 | ) |  | 48,090 |  |  | (81,090 | ) |  | (60,080 | ) |  | (93,080 | )
December 31, 2018: |  |  |  |  |  |  |  |  |  |  |  |
Derivative assets |  | $ | 247,069 |  |  | $ | (18,581 | ) |  | $ | 228,488 |  |  | $ | — |  |  | $ | (235,611 | ) |  | $ | (7,123 | )
Derivative liabilities |  | 46,030 |  |  | (18,581 | ) |  | 27,449 |  |  | (71,376 | ) |  | (24,080 | ) |  | (68,007 | )
(1) | Includes initial margin posted to a central clearing partner.
The Company may be exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments with a positive fair value. Generally, the credit exposure of the Company’s derivative contracts is limited to the fair value at the reporting date plus or minus any collateral posted or held by the Company. The Company had no credit exposure related to its derivative contracts, as of September 30, 2019 and December 31, 2018, as the net amount of collateral pledged to the Company from counterparties exceeded the fair value of the derivative contracts. Derivatives may be exchange-traded or they may be privately negotiated contracts, which are referred to as over-the-counter (“OTC”) derivatives. Certain of the Company’s OTC derivatives are cleared and settled through central clearing counterparties (“OTC cleared”) and others are bilateral contracts between two counterparties. The Company manages its credit risk related to OTC derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master netting agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. The Company is only exposed to the default of the central clearing counterparties for OTC cleared derivatives, and these transactions require initial and daily variation margin collateral postings. Exchange-traded derivatives are settled on a daily basis, thereby reducing the credit risk exposure in the event of non-performance by counterparties to such financial instruments.

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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 + Details
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