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Derivative Instruments | 9 Months Ended
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Sep. 30, 2021
Derivative Instruments [Abstract] |
Derivative Instruments | 5. Derivative Instruments We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate risk, foreign currency exchange risk, equity market risk, basis risk and credit risk. We assess these risks by continually identifying and monitoring changes in our exposures that may adversely affect expected future cash flows and by evaluating hedging opportunities. Derivative activities are monitored by various management committees. The committees are responsible for overseeing the implementation of various hedging strategies that are developed through the analysis of financial simulation models and other internal and industry sources. The resulting hedging strategies are incorporated into our overall risk management strategies. See Note 14 for additional disclosures related to the fair value of our derivative instruments. Interest Rate Contracts We use derivative instruments as part of our interest rate risk management strategy. These instruments are economic hedges unless otherwise noted and include: Forward-Starting Interest Rate Swaps We use forward-starting interest rate swaps designated and qualifying as cash flow hedges to hedge our exposure to interest rate fluctuations related to the forecasted purchases of certain assets and anticipated issuances of fixed-rate securities. We also use forward-starting interest rate swaps to hedge the interest rate exposure within our life products related to the forecasted purchases of certain assets. Interest Rate Cap Corridors We use interest rate cap corridors to provide a level of protection from the effect of rising interest rates for certain life insurance products and annuity contracts. Interest rate cap corridors involve purchasing an interest rate cap at a specific cap rate and selling an interest rate cap with a higher cap rate. For each corridor, the amount of quarterly payments, if any, is determined by the rate at which the underlying index rate resets above the original capped rate. The corridor limits the benefit the purchaser can receive as the related interest rate index rises above the higher capped rate. There is no additional liability to us other than the purchase price associated with the interest rate cap corridor. Interest Rate Futures We use interest rate futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures contracts require payment between our counterparty and us on a daily basis for changes in the futures index price. Interest Rate Swap Agreements We use interest rate swap agreements to hedge the liability exposure on certain options in variable annuity products. We also use interest rate swap agreements designated and qualifying as cash flow hedges to hedge the interest rate risk of floating-rate bond coupon payments by replicating a fixed-rate bond. Finally, we use interest rate swap agreements designated and qualifying as fair value hedges to hedge against changes in the fair value of certain fixed-rate long-term debt and fixed maturity securities due to interest rate risks. Treasury and Reverse Treasury Locks We use treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to our issuance of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest rates. In addition, we use reverse treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to the anticipated purchase of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest rates. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities. Foreign Currency Contracts We use derivative instruments as part of our foreign currency risk management strategy. These instruments are economic hedges unless otherwise noted and include: Currency Futures We use currency futures to hedge foreign exchange risk associated with certain options in variable annuity products. Currency futures exchange one currency for another at a specified date in the future at a specified exchange rate. Foreign Currency Swaps We use foreign currency swaps to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. A foreign currency swap is a contractual agreement to exchange one currency for another at specified dates in the future at a specified exchange rate. We also use foreign currency swaps designated and qualifying as cash flow hedges to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. Foreign Currency Forwards We use foreign currency forwards to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. A foreign currency forward is a contractual agreement to exchange one currency for another at specified dates in the future at a specified current exchange rate. Equity Market Contracts We use derivative instruments as part of our equity market risk management strategy that are economic hedges and include: Call Options Based on the S&P 500® Index and Other Indices We use call options to hedge the liability exposure on certain options in variable annuity products and indexed variable annuity products. Our indexed annuity and IUL contracts permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500 Index or other indices. Contract holders may elect to rebalance index options at renewal dates. At the end of each indexed term, which can be up to six years, we have the opportunity to re-price the indexed component by establishing participation rates, caps, spreads and specified rates, subject to contractual guarantees. We use call options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period. Consumer Price Index Swaps We use consumer price index swaps to hedge the liability exposure on certain options in fixed annuity products. Consumer price index swaps are contracts entered into at no cost and whose payoff is the difference between the consumer price index inflation rate and the fixed-rate determined as of inception. Equity Futures We use equity futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures contracts require payment between our counterparty and us on a daily basis for changes in the futures index price. Put Options We use put options to hedge the liability exposure on certain options in variable annuity products. Put options are contracts that require counterparties to pay us at a specified future date the amount, if any, by which a specified equity index is less than the strike rate stated in the agreement, applied to a notional amount. Total Return Swaps We use total return swaps to hedge the liability exposure on certain options in variable annuity products and indexed variable annuity products. In addition, we use total return swaps to hedge a portion of the liability related to our deferred compensation plans. We receive the total return on a portfolio of indexes and pay a floating-rate of interest. Credit Contracts We use derivative instruments as part of our credit risk management strategy that are economic hedges and include: Credit Default Swaps – Buying Protection We use credit default swaps (“CDSs”) to hedge the liability exposure on certain options in variable annuity products. We buy CDSs to hedge against a drop in bond prices due to credit concerns of certain bond issuers. A CDS allows us to put the bond back to the counterparty at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring. CDSs – Selling Protection We use CDSs to hedge the liability exposure on certain options in variable annuity products. We sell CDSs to offer credit protection to contract holders and investors. The CDSs hedge the contract holders and investors against a drop in bond prices due to credit concerns of certain bond issuers. A CDS allows the investor to put the bond back to us at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring. Embedded Derivatives We have embedded derivatives that include: GLB Reserves Embedded Derivatives Certain features of these guarantees have elements of both insurance benefits accounted for under the Financial Services – Insurance – Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB Accounting Standards Codification (“ASC”) (“benefit reserves”) and embedded derivatives accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC (“embedded derivative reserves”). We calculate the value of the benefit reserves and the embedded derivative reserves based on the specific characteristics of each guaranteed living benefit (“GLB”) feature. We use a hedging strategy designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest rates and volatility associated with GLBs offered in our variable annuity products, including products with guaranteed withdrawal benefit and guaranteed income benefit features. Changes in the value of the hedge contracts due to changes in equity markets, interest rates and implied volatilities hedge the income statement effect of changes in embedded derivative GLB reserves caused by those same factors. We rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions, these hedge positions may not be totally effective in offsetting changes in the embedded derivative reserve due to, among other things, differences in timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets and interest rates, market volatility, contract holder behavior, divergence between the performance of the underlying funds and the hedging indices, divergence between the actual and expected performance of the hedge instruments and our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off. Indexed Annuity and IUL Contracts Embedded Derivatives Our indexed annuity and IUL contracts permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500® Index or other indices. Contract holders may elect to rebalance index options at renewal dates. At the end of each indexed term, which can be up to six years, we have the opportunity to re-price the indexed component by establishing participation rates, caps, spreads and specified rates, subject to contractual guarantees. We use options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period. Reinsurance Related Embedded Derivatives We have certain modified coinsurance (“Modco”) and coinsurance with funds withheld reinsurance agreements with embedded derivatives related to the withheld assets of the related funds. These derivatives are considered total return swaps with contractual returns that are attributable to various assets and liabilities associated with these reinsurance agreements. We have derivative instruments with off-balance-sheet risks whose notional or contract amounts exceed the related credit exposure. Outstanding derivative instruments with off-balance-sheet risks (in millions) were as follows: As of September 30, 2021 As of December 31, 2020 Notional Fair Value Notional Fair Value Amounts Asset Liability Amounts Asset Liability Qualifying Hedges Cash flow hedges: Interest rate contracts (1)$ 2,729 $ 53 $ 395 $ 2,177 $ 87 $ 563 Foreign currency contracts (1) 3,745 259 54 3,089 147 151 Total cash flow hedges 6,474 312 449 5,266 234 714 Fair value hedges: Interest rate contracts (1) 1,159 - 220 1,161 - 272 Non-Qualifying Hedges Interest rate contracts (1) 78,941 1,211 190 135,434 1,587 159 Foreign currency contracts (1) 369 6 1 304 1 8 Equity market contracts (1) 93,188 5,217 1,651 74,610 3,486 1,952 Credit contracts (1) 32 - - 51 - - Embedded derivatives: GLB direct (2) - 1,698 - - 450 - GLB ceded (2) - 55 146 - 82 - Reinsurance related (3) - - 304 - - 392 Indexed annuity and IUL contracts (2) (4) - 495 4,804 - 550 3,594 Total derivative instruments$ 180,163 $ 8,994 $ 7,765 $ 216,826 $ 6,390 $ 7,091 (1)Reported in derivative investments and other liabilities on our Consolidated Balance Sheets. (2)Reported in other assets and other liabilities on our Consolidated Balance Sheets.(3)Reported in reinsurance related embedded derivatives on our Consolidated Balance Sheets.(4)Reported in future contract benefits on our Consolidated Balance Sheets. The maturity of the notional amounts of derivative instruments (in millions) was as follows: Remaining Life as of September 30, 2021 Less Than 1 - 5 6 - 10 11 - 30 Over 30 1 Year Years Years Years Years Total Interest rate contracts (1)$ 2,508 $ 49,605 $ 16,004 $ 13,499 $ 1,213 $ 82,829 Foreign currency contracts (2) 195 563 1,582 1,732 42 4,114 Equity market contracts 59,551 16,253 7,023 1,623 8,738 93,188 Credit contracts - 32 - - - 32 Total derivative instruments with notional amounts$ 62,254 $ 66,453 $ 24,609 $ 16,854 $ 9,993 $ 180,163 (1)As of September 30, 2021, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was April 20, 2067.(2)As of September 30, 2021, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was June 16, 2061. The following amounts (in millions) were recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges: Cumulative Fair Value Hedging Adjustment Included in the Amortized Cost of the Amortized Cost of the Hedged Hedged Assets / (Liabilities) Assets / (Liabilities) As of As of As of As of September 30, December 31, September 30, December 31, 2021 2020 2021 2020 Line Item in the Consolidated Balance Sheets in which the Hedged Item is Included Fixed maturity AFS securities, at fair value$ 762 $ 824 $ 212 $ 271 Long-term debt (1) (849) (900) 26 (25) (1)Includes $(360) million and $(370) million of unamortized adjustments from discontinued hedges as of September 30, 2021, and December 31, 2020, respectively. The change in our unrealized gain (loss) on derivative instruments within accumulated other comprehensive income (loss) (“AOCI”) (in millions) was as follows: For the Nine Months Ended September 30, 2021 2020 Unrealized Gain (Loss) on Derivative Instruments Balance as of beginning-of-year$ (402)$ (11)Other comprehensive income (loss): Unrealized holding gains (losses) arising during the period: Cash flow hedges: Interest rate contracts 116 (432)Foreign currency contracts 113 213 Change in foreign currency exchange rate adjustment 129 (16)Change in DAC, VOBA, DSI and DFEL - (64)Income tax benefit (expense) (76) 62 Less: Reclassification adjustment for gains (losses) included in net income (loss): Cash flow hedges: Interest rate contracts (1) 2 2 Interest rate contracts (2) (18) (16)Foreign currency contracts (1) 34 46 Foreign currency contracts (3) (2) 6 Associated amortization of DAC, VOBA, DSI and DFEL (1) (8)Income tax benefit (expense) (3) (6)Balance as of end-of-period$ (132)$ (272) (1)The OCI offset is reported within net investment income on our Consolidated Statements of Comprehensive Income (Loss).(2)The OCI offset is reported within interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss).(3)The OCI offset is reported within realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). The effects of qualifying and non-qualifying hedges (in millions) on the Consolidated Statements of Comprehensive Income (Loss) were as follows: Gain (Loss) Recognized in Income For the Three Months Ended September 30, 2021 2020 Realized Net Interest Realized Net Interest Gain Investment and Debt Gain Investment and Debt (Loss) Income Expense (Loss) Income Expense Total Line Items in which the Effects of Fair Value or Cash Flow Hedges are Recorded$ 85 $ 1,576 $ 73 $ 629 $ 1,458 $ 66 Qualifying Hedges Gain or (loss) on fair value hedging relationships: Interest rate contracts: Hedged items - (10) 8 - (21) 19 Derivatives designated as hedging instruments - 10 (8) - 21 (19)Gain or (loss) on cash flow hedging relationships: Interest rate contracts: Amount of gain or (loss) reclassified from AOCI into income - 1 (6) - 1 (8)Foreign currency contracts: Amount of gain or (loss) reclassified from AOCI into income - 13 - (2) 24 - Non-Qualifying Hedges Interest rate contracts (149) - - (374) - - Equity market contracts 387 - - 949 - - Credit contracts - - - 1 - - Embedded derivatives: GLB (61) - - 1,690 - - Reinsurance related 24 - - (88) - - Indexed annuity and IUL contracts 33 - - (105) - - ‎ Gain (Loss) Recognized in Income For the Nine Months Ended September 30, 2021 2020 Realized Net Interest Realized Net Interest Gain Investment and Debt Gain Investment and Debt (Loss) Income Expense (Loss) Income Expense Total Line Items in which the Effects of Fair Value or Cash Flow Hedges are Recorded$ (97)$ 4,670 $ 204 $ (43)$ 4,005 $ 218 Qualifying Hedges Gain or (loss) on fair value hedging relationships: Interest rate contracts: Hedged items - (59) 51 - 100 106 Derivatives designated as hedging instruments - 59 (51) - (100) (106)Gain or (loss) on cash flow hedging relationships: Interest rate contracts: Amount of gain or (loss) reclassified from AOCI into income - 2 (18) - 2 (16)Foreign currency contracts: Amount of gain or (loss) reclassified from AOCI into income (2) 34 - 6 46 - Non-Qualifying Hedges Interest rate contracts (876) - - 1,795 - - Foreign currency contracts (1) - - - - - Equity market contracts 2,342 - - 565 - - Credit contracts - - - (4) - - Embedded derivatives: GLB 1,075 - - (1,326) - - Reinsurance related 88 - - (7) - - Indexed annuity and IUL contracts (1,296) - - 396 - - As of September 30, 2021, $46 million of the deferred net gains (losses) on derivative instruments in AOCI were expected to be reclassified to earnings during the next 12 months. This reclassification would be due primarily to interest rate variances related to our interest rate swap agreements. For the nine months ended September 30, 2021 and 2020, there were no material reclassifications to earnings due to hedged firm commitments no longer deemed probable or due to hedged forecasted transactions that had not occurred by the end of the originally specified time period. As of September 30, 2021, we did not have any exposure related to CDSs for which we are the seller. Information related to our CDSs for which we are the seller (dollars in millions) was as follows: As of December 31, 2020 Credit Reason Nature Rating of Number Maximum for of Underlyingof Fair PotentialCredit Contract Type Maturity Entering RecourseObligation (1)Instruments Value (2) PayoutBasket CDSs 12/20/2025 (3) (4) BBB+ 1 $ 1 $ 51 (1)Represents average credit ratings based on the midpoint of the applicable ratings among Moody’s, S&P and Fitch Ratings, as scaled to the corresponding S&P ratings.(2)Broker quotes are used to determine the market value of our CDSs.(3)CDSs were entered into in order to hedge the liability exposure on certain variable annuity products.(4)Sellers do not have the right to demand indemnification or compensation from third parties in case of a loss (payment) on the contract. Details underlying the associated collateral of our CDSs for which we are the seller if credit risk-related contingent features were triggered (in millions) were as follows: As of As of September 30,December 31, 2021 2020 Maximum potential payout $ - $ 51 Less: Counterparty thresholds - - Maximum collateral potentially required to post $ - $ 51 Certain of our CDS agreements contain contractual provisions that allow for the netting of collateral with our counterparties related to all of our collateralized financing transactions that we have outstanding. If these netting agreements were not in place, we would have been required to post collateral if the market value was less than zero. Credit Risk We are exposed to credit losses in the event of non-performance by our counterparties on various derivative contracts and reflect assumptions regarding the credit or non-performance risk (“NPR”). The NPR is based upon assumptions for each counterparty’s credit spread over the estimated weighted average life of the counterparty exposure, less collateral held. As of September 30, 2021, the NPR adjustment was zero. The credit risk associated with such agreements is minimized by entering into agreements with financial institutions with long-standing, superior performance records. Additionally, we maintain a policy of requiring derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement. We are required to maintain minimum ratings as a matter of routine practice in negotiating ISDA agreements. Under some ISDA agreements, our insurance subsidiaries have agreed to maintain certain financial strength or claims-paying ratings. A downgrade below these levels could result in termination of derivative contracts, at which time any amounts payable by us would be dependent on the market value of the underlying derivative contracts. In certain transactions, we and the counterparty have entered into a credit support annex requiring either party to post collateral when net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. The amount of such exposure is essentially the net replacement cost or market value less collateral held for such agreements with each counterparty if the net market value is in our favor. We did not have any exposure as of September 30, 2021, or December 31, 2020. The amounts recognized (in millions) by S&P credit rating of counterparty, for which we had the right to reclaim cash collateral or were obligated to return cash collateral, were as follows: As of September 30, 2021 As of December 31, 2020 Collateral Collateral Collateral Collateral Posted by Posted by Posted by Posted by S&P Counter- LNC Counter- LNC Credit Party (Held by Party (Held by Rating of (Held by Counter- (Held by Counter- Counterparty LNC) Party) LNC) Party) AA- $ 1,940 $ (274)$ 1,233 $ (371)A+ 2,527 (254) 1,119 (445)A 60 - 53 - A- 421 (172) 571 (245) $ 4,948 $ (700)$ 2,976 $ (1,061) Balance Sheet Offsetting Information related to the effects of offsetting (in millions) was as follows: As of September 30, 2021 Embedded Derivative Derivative Instruments Instruments Total Financial Assets Gross amount of recognized assets $ 7,393 $ 2,248 $ 9,641 Gross amounts offset (1,914) - (1,914)Net amount of assets (1) 5,479 2,248 7,727 Gross amounts not offset: Cash collateral (4,948) - (4,948)Non-cash collateral (224) - (224)Net amount $ 307 $ 2,248 $ 2,555 Financial Liabilities Gross amount of recognized liabilities $ 1,032 $ 5,254 $ 6,286 Gross amounts offset (3) - (3)Net amount of liabilities 1,029 5,254 6,283 Gross amounts not offset: Cash collateral (700) - (700)Non-cash collateral - - - Net amount $ 329 $ 5,254 $ 5,583 (1)Includes deferred premiums of $651 million reported in other assets on our Consolidated Balance Sheets. As of December 31, 2020 Embedded Derivative Derivative Instruments Instruments Total Financial Assets Gross amount of recognized assets $ 4,978 $ 1,082 $ 6,060 Gross amounts offset (1,869) - (1,869)Net amount of assets 3,109 1,082 4,191 Gross amounts not offset: Cash collateral (2,976) - (2,976)Non-cash collateral (56) - (56)Net amount $ 77 $ 1,082 $ 1,159 Financial Liabilities Gross amount of recognized liabilities $ 1,456 $ 3,986 $ 5,442 Gross amounts offset (330) - (330)Net amount of liabilities 1,126 3,986 5,112 Gross amounts not offset: Cash collateral (1,061) - (1,061)Non-cash collateral - - - Net amount $ 65 $ 3,986 $ 4,051

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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 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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