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Derivative Financial Instruments | 6 Months Ended
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Jun. 30, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | Note 5 - Derivative Financial Instruments Purpose of Derivatives We are exposed to certain risks relating to our ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk, risk related to matching duration for our assets and liabilities, foreign currency risk, and equity risk. Historically, we have utilized current and forward interest rate swaps, current and forward currency swaps, forward benchmark interest rate locks, currency forward contracts, forward contracts on specific fixed income securities, and total return swaps. Transactions hedging interest rate risk are primarily associated with our individual and group long-term care and individual and group disability products. All other product portfolios are periodically reviewed to determine if hedging strategies would be appropriate for risk management purposes. We do not use derivative financial instruments for speculative purposes. Derivatives designated as cash flow hedges and used to reduce our exposure to interest rate and duration risk are as follows: •Interest rate swaps were used to hedge interest rate risks and to improve the matching of assets and liabilities. An interest rate swap is an agreement in which we agree with other parties to exchange, at specified intervals, the difference between fixed rate and variable rate interest amounts. We used interest rate swaps to hedge the anticipated purchase of fixed maturity securities thereby protecting us from the potential adverse impact of declining interest rates on the associated policy reserves. We also used interest rate swaps to hedge the potential adverse impact of rising interest rates in anticipation of issuing fixed rate long-term debt. •Forward benchmark interest rate locks are used to minimize interest rate risk associated with the anticipated purchase of fixed maturity securities or the anticipated issuance of fixed rate long-term debt. A forward benchmark interest rate lock is a derivative contract without an initial investment where we and the counterparty agree to purchase or sell a specific benchmark interest rate fixed maturity bond at a future date at a predetermined price or yield. Derivatives designated as either cash flow or fair value hedges and used to reduce our exposure to foreign currency risk are as follows: •Foreign currency interest rate swaps are used to hedge the currency risk of certain foreign currency-denominated fixed maturity securities owned for portfolio diversification. Under these swap agreements, we agree to pay, at specified intervals, fixed rate foreign currency-denominated principal and interest payments in exchange for fixed rate payments in the functional currency of the operating segment. Derivatives not designated as hedging instruments and used to reduce our exposure to foreign currency risk and volatility of the underlying deferred assets in our non-qualified defined contribution plan are as follows: •Foreign currency interest rate swaps previously designated as hedges were used to hedge the currency risk of certain foreign currency-denominated fixed maturity securities owned for portfolio diversification. These derivatives were effective hedges prior to novation to a new counterparty. In conjunction with the novation, these derivatives were de-designated as hedges. We agree to pay, at specified intervals, fixed rate foreign currency-denominated principal and interest payments in exchange for fixed rate payments in the functional currency of the operating segment. We hold offsetting swaps wherein we agree to pay fixed rate principal and interest payments in the functional currency of the operating segment in exchange for fixed rate foreign currency-denominated payments. •Foreign currency forward contracts are used to minimize foreign currency risk. A foreign currency forward is a derivative without an initial investment where we and the counterparty agree to exchange a specific amount of currencies, at a specific exchange rate, on a specific date. We use these forward contracts to hedge the currency risk arising from foreign-currency denominated investments. •Total Return Swap s are used to economically hedge a portion of the liability related to our non-qualified defined contribution plan. A total return swap is an agreement in which we pay a floating rate of interest to the counterparty and receive the total return on a portfolio of mutual funds and exchange traded funds. These swaps are cash settled on the last day of every month and the notional is re-established each month based on plan participant actions. Derivative Risks The basic types of risks associated with derivatives are market risk (that the value of the derivative will be adversely impacted by changes in the market, primarily changes in interest rates, exchange rates, and equity prices) and credit risk (that the counterparty will not perform according to the terms of the contract). The market risk of the derivatives should generally offset the market risk associated with the hedged financial instrument or liability. To help limit the credit exposure of the derivatives, we enter into master netting agreements with our counterparties whereby contracts in a gain position can be offset against contracts in a loss position. We also typically enter into bilateral, cross-collateralization agreements with our counterparties to help limit the credit exposure of the derivatives. These agreements require the counterparty in a loss position to submit acceptable collateral with the other counterparty in the event the net loss position meets or exceeds an agreed upon amount. Credit exposure on derivatives is limited to the value of those contracts in a net gain position, including accrued interest receivable less collateral held. At June 30, 2024 and December 31, 2023, we had $0.1 million and $1.6 million credit exposure on derivatives, respectively. The table below summarizes the nature and amount of collateral received from and posted to our derivative counterparties.
|  | June 30, 2024 |  | December 31, 2023
|  | (in millions of dollars)
Carrying Value of Collateral Received from Counterparties |  |  |  |
Cash |  | $ | 3.5 |  |  | $ | 11.1 |
Fixed Maturity Securities |  | 17.0 |  |  | 26.3 |
|  | $ | 20.5 |  |  | $ | 37.4 |
Carrying Value of Collateral Posted to Counterparties |  |  |  |
Cash |  | $ | — |  |  | $ | — |
Fixed Maturity Securities |  | 80.7 |  |  | 39.8 |
|  | $ | 80.7 |  |  | $ | 39.8 |
See Note 4 for further discussion of our master netting agreements. All of our derivative instruments contain provisions that require us to maintain specified issuer credit ratings and financial strength ratings. Should our ratings fall below these specified levels, we would be in violation of the provisions, and our derivatives counterparties could terminate our contracts and request immediate payment. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a liability position was $173.6 million and $116.2 million at June 30, 2024 and December 31, 2023, respectively. Cash Flow Hedges As of June 30, 2024 and December 31, 2023, we had $146.0 million and $149.5 million, respectively, notional amount of receive fixed, pay fixed, open current and forward foreign currency interest rate swaps to hedge fixed income foreign currency-denominated securities. As of June 30, 2024 and December 31, 2023, we had $2,405.0 million and $1,905.0 million, respectively, notional amount of forward benchmark interest rate locks to hedge the anticipated purchase of fixed maturity securities. As of June 30, 2024, we expect to amortize approximately $10.8 million of net deferred gains on derivative instruments during the next twelve months. This amount will be reclassified from AOCI into earnings and reported on the same income statement line item as the hedged item. The income statement line items that will be affected by this amortization are net investment income and interest and debt expense. Additional amounts that may be reclassified from AOCI into earnings to offset the earnings impact of foreign currency translation of hedged items are not estimable. As of June 30, 2024, we are hedging the variability of future cash flows associated with forecasted transactions through the year 2063. Fair Value Hedges As of June 30, 2024 and December 31, 2023, we had $694.1 million and $642.5 million, respectively, notional amount of receive fixed, pay fixed, open current and forward foreign currency interest rate swaps to hedge fixed income foreign currency-denominated securities. The following table summarizes the carrying amount of hedged assets and the related cumulative basis adjustments related to our fair value hedges:
| Carrying Amount of Hedged Assets |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
| June 30, 2024 |  | December 31, 2023 |  | June 30, 2024 |  | December 31, 2023
| (in millions of dollars)
Fixed maturity securities: |  |  |  |  |  |  |
Receive fixed functional currency interest, pay fixed foreign currency interest | $ | 549.4 |  |  | $ | 529.2 |  |  | $ | (25.6) |  |  | $ | (6.1) |
For the three and six months ended June 30, 2024, $11.2 million and $1.3 million, respectively, of the derivative instruments' gain (loss) related to cross-currency basis spread and forward points was excluded from the assessment of hedge effectiveness. For the three and six months ended June 30, 2023, $(9.7) million and $(7.2) million, respectively, of the derivative instruments' gain (loss) related to cross-currency basis spread and forward points was excluded from the assessment of hedge effectiveness. There were no instances wherein we discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge. Derivatives not Designated as Hedging Instruments At both June 30, 2024 and December 31, 2023, we held $132.0 million notional amount of receive fixed, pay fixed, foreign currency interest rate swaps. These derivatives are not designated as hedges, and as such, changes in fair value related to these derivatives are reported in earnings as a component of net investment gain or loss. As of June 30, 2024 and December 31, 2023, we held $54.6 million and $52.5 million, respectively, notional amount of foreign currency forwards to mitigate the foreign currency risk associated with specific securities owned. These derivatives are not designated as hedges, and as such, changes in fair value related to these derivatives are reported in earnings as a component of net investment gain or loss. As of June 30, 2024 and December 31, 2023, we held $116.1 million and $102.2 million, respectively, notional amount of total return swaps to mitigate the volatility associated with changes in the fair value of the underlying notional assets in our non-qualified defined contribution plan. This derivative is an economic hedge not designated as a hedging instrument, and changes in fair value are reported as a component of other expenses in our income statement. We have an embedded derivative in a modified coinsurance arrangement for which we include in our net investment gains and losses, a calculation intended to estimate the value of the option of our reinsurance counterparty to cancel the reinsurance contract with us. However, neither party can unilaterally terminate the reinsurance agreement except in extreme circumstances resulting from regulatory supervision, delinquency proceedings, or other direct regulatory action. Cash settlements or collateral related to this embedded derivative are not required at any time during the reinsurance contract or at termination of the reinsurance contract. There are no credit-related counterparty triggers, and any accumulated embedded derivative gain or loss reduces to zero over time as the reinsured business winds down. Locations and Amounts of Derivative Financial Instruments The following tables summarize the notional amounts and fair values of derivative financial instruments, as reported in our consolidated balance sheets. Derivative assets are included in other long-term investments, while derivative liabilities are included in other liabilities within our consolidated balance sheets. The notional amounts represent the basis upon which our counterparty pay and receive amounts are calculated.
| June 30, 2024
|  |  | Derivative Assets |  | Derivative Liabilities
| Notional Amount |  | Fair Value |  | Fair Value
| (in millions of dollars)
Designated as Hedging Instruments |  |  |  |  |
Cash Flow Hedges |  |  |  |  |
Forward Benchmark Interest Rate Locks | $ | 2,405.0 |  |  | $ | 21.1 |  |  | $ | 143.7 |
Foreign Currency Interest Rate Swaps | 146.0 |  |  | 16.1 |  |  | 2.3 |
Total Cash Flow Hedges | 2,551.0 |  |  | 37.2 |  |  | 146.0 |
Fair Value Hedges |  |  |  |  |
Foreign Currency Interest Rate Swaps | 694.1 |  |  | 53.4 |  |  | 11.0 |
Total Designated as Hedging Instruments | $ | 3,245.1 |  |  | $ | 90.6 |  |  | $ | 157.0 |
Not Designated as Hedging Instruments |  |  |  |  |
Foreign Currency Forwards | $ | 54.6 |  |  | $ | 3.2 |  |  | $ | — |
Foreign Currency Interest Rate Swaps | 132.0 |  |  | — |  |  | 16.6 |
Total Return Swaps | 116.1 |  |  | — |  |  | — |
Embedded Derivative in Modified Coinsurance Arrangement | — |  |  | 5.4 |  |  | — |
Total Not Designated as Hedging Instruments | $ | 302.7 |  |  | $ | 8.6 |  |  | $ | 16.6 |
Total Derivatives | $ | 3,547.8 |  |  | $ | 99.2 |  |  | $ | 173.6 |
| December 31, 2023
|  |  | Derivative Assets |  | Derivative Liabilities
| Notional Amount |  | Fair Value |  | Fair Value
| (in millions of dollars)
Designated as Hedging Instruments |  |  |  |  |
Cash Flow Hedges |  |  |  |  |
Forward Benchmark Interest Rate Locks | $ | 1,905.0 |  |  | $ | 44.5 |  |  | $ | 77.8 |
Foreign Currency Interest Rate Swaps | 149.5 |  |  | 14.2 |  |  | 4.5 |
Total Cash Flow Hedges | 2,054.5 |  |  | 58.7 |  |  | 82.3 |
Fair Value Hedges |  |  |  |  |
Foreign Currency Interest Rate Swaps | 642.5 |  |  | 38.2 |  |  | 16.7 |
Total Designated as Hedging Instruments | $ | 2,697.0 |  |  | $ | 96.9 |  |  | $ | 99.0 |
Not Designated as Hedging Instruments |  |  |  |  |
Foreign Currency Forwards | $ | 52.5 |  |  | $ | 3.0 |  |  | $ | 0.2 |
Foreign Currency Interest Rate Swaps | 132.0 |  |  | — |  |  | 17.0 |
Total Return Swaps | 102.2 |  |  | — |  |  | — |
Embedded Derivative in Modified Coinsurance Arrangement | — |  |  | — |  |  | 1.5 |
Total Not Designated as Hedging Instruments | $ | 286.7 |  |  | $ | 3.0 |  |  | $ | 18.7 |
Total Derivatives | $ | 2,983.7 |  |  | $ | 99.9 |  |  | $ | 117.7 |
The following tables summarize the location of gains and losses of derivative financial instruments designated as hedging instruments, as reported in our consolidated statements of income.
| Three Months Ended June 30
| 2024 |  | 2023
| Net Investment Income |  | Net Investment Gain (Loss) |  | Interest and Debt Expense |  | Net Investment Income |  | Net Investment Gain (Loss) |  | Interest and Debt Expense
| (in millions of dollars)
Total Income and Expense Presented in the Consolidated Statements of Income of Which Hedged Items are Recorded | $ | 545.1 |  |  | $ | (10.4) |  |  | $ | 49.9 |  |  | $ | 531.1 |  |  | $ | 0.9 |  |  | $ | 48.9 |
Gain (Loss) on Cash Flow Hedging Relationships |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swaps: |  |  |  |  |  |  |  |  |  |  |
Hedged items | 22.6 |  |  | — |  |  | 0.8 |  |  | 49.0 |  |  | 0.8 |  |  | 0.8 |
Derivatives Designated as Hedging Instruments | 4.8 |  |  | — |  |  | — |  |  | 9.0 |  |  | — |  |  | — |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |  |  |  |
Hedged items | 2.0 |  |  | 0.3 |  |  | — |  |  | 2.5 |  |  | — |  |  | — |
Derivatives Designated as Hedging Instruments | 0.1 |  |  | (0.2) |  |  | — |  |  | (0.1) |  |  | 0.1 |  |  | — |
Forward Benchmark Interest Rate Locks: |  |  |  |  |  |  |  |  |  |  |
Hedged items | 9.9 |  |  | — |  |  | — |  |  | 3.1 |  |  | — |  |  | — |
Derivatives Designated as Hedging Instruments | (0.2) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Gain (Loss) on Fair Value Hedging Relationships |  |  |  |  |  |  |  |  |  |  |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |  |  |  |
Hedged items | 4.3 |  |  | (2.0) |  |  | — |  |  | 3.2 |  |  | 3.3 |  |  | — |
Derivatives Designated as Hedging Instruments | 4.2 |  |  | 2.0 |  |  | — |  |  | 2.3 |  |  | (3.3) |  |  | — |
| Six Months Ended June 30
| 2024 |  | 2023
| Net Investment Income |  | Net Investment Gain (Loss) |  | Interest and Debt Expense |  | Net Investment Income |  | Net Investment Gain (Loss) |  | Interest and Debt Expense
| (in millions of dollars)
Total Income and Expense Presented in the Consolidated Statements of Income of Which Hedged Items are Recorded | $ | 1,058.6 |  |  | $ | (11.6) |  |  | $ | 99.4 |  |  | $ | 1,039.9 |  |  | $ | 1.0 |  |  | $ | 97.0 |
Gain (Loss) on Cash Flow Hedging Relationships |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swaps: |  |  |  |  |  |  |  |  |  |  |
Hedged items | 70.2 |  |  | — |  |  | 1.5 |  |  | 98.5 |  |  | 0.8 |  |  | 1.5 |
Derivatives Designated as Hedging Instruments | 10.8 |  |  | — |  |  | — |  |  | 19.4 |  |  | — |  |  | — |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |  |  |  |
Hedged items | 4.2 |  |  | 0.3 |  |  | — |  |  | 5.0 |  |  | — |  |  | — |
Derivatives Designated as Hedging Instruments | (0.4) |  |  | (0.2) |  |  | — |  |  | 0.2 |  |  | 0.1 |  |  | — |
Forward Benchmark Interest Rate Locks: |  |  |  |  |  |  |  |  |  |  |
Hedged items | 18.9 |  |  | — |  |  | — |  |  | 3.8 |  |  | — |  |  | — |
Derivatives Designated as Hedging Instruments | (0.4) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Gain (Loss) on Fair Value Hedging Relationships |  |  |  |  |  |  |  |  |  |  |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |  |  |  |
Hedged items | 8.5 |  |  | (19.6) |  |  | — |  |  | 6.4 |  |  | 6.5 |  |  | — |
Derivatives Designated as Hedging Instruments | 7.3 |  |  | 19.6 |  |  | — |  |  | 3.6 |  |  | (6.5) |  |  | — |
The following table summarizes the location of gains and losses of derivative financial instruments designated as cash flow hedging instruments, as reported in our consolidated statements of comprehensive income (loss).
| Three Months Ended June 30 |  | Six Months Ended June 30
| 2024 |  | 2023 |  | 2024 |  | 2023
| (in millions of dollars)
Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives |  |  |  |  |  |  |
Forwards | $ | (50.5) |  |  | $ | (30.7) |  |  | $ | (105.6) |  |  | $ | (0.8) |
Foreign Exchange Contracts | 0.6 |  |  | (2.5) |  |  | 3.8 |  |  | (2.7) |
Total | $ | (49.9) |  |  | $ | (33.2) |  |  | $ | (101.8) |  |  | $ | (3.5) |
The following table summarizes the location of gains and losses on our derivatives not designated as hedging instruments, as reported in our consolidated statements of income.
| Three Months Ended June 30 |  | Six Months Ended June 30
| 2024 |  | 2023 |  | 2024 |  | 2023
| (in millions of dollars)
Net Investment Gain (Loss) |  |  |  |  |  |  |
Foreign Exchange Contracts | $ | 0.4 |  |  | $ | 0.6 |  |  | $ | 2.0 |  |  | $ | — |
Embedded Derivative in Modified Coinsurance Arrangement | 0.8 |  |  | 5.2 |  |  | 6.9 |  |  | 5.5 |
Total | $ | 1.2 |  |  | $ | 5.8 |  |  | $ | 8.9 |  |  | $ | 5.5 |
Other Expenses |  |  |  |  |  |  |
(Gain) Loss on Total Return Swaps | $ | (0.8) |  |  | $ | (4.2) |  |  | $ | (8.7) |  |  | $ | (8.8) |

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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://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/815/tableOfContent + Details
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