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ACCOUNTING FOR DERIVATIVES | 9 Months Ended
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Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
ACCOUNTING FOR DERIVATIVES | ACCOUNTING FOR DERIVATIVES Our freestanding and embedded derivatives, which are not designated as hedging instruments, are held at fair value and are summarized as follows (dollars in millions):
|  | Fair value
|  | September 30, 2023 |  | December 31, 2022
Assets: |  |  |  |
Other invested assets: |  |  |  |
Fixed indexed call options |  | $ | 150.0 |  |  | $ | 56.7 |
Reinsurance receivables |  | (20.3) |  |  | (17.8) |
Total assets |  | $ | 129.7 |  |  | $ | 38.9 |
Liabilities: |  |  |  |
Embedded derivatives related to fixed indexed annuities at fair value: |  |  |  |
Policyholder account balances |  | $ | 1,676.1 |  |  | $ | 1,788.4 |
Future policy benefits |  | (462.7) |  |  | (491.4) |
Total liabilities |  | $ | 1,213.4 |  |  | $ | 1,297.0 |
We are required to establish an embedded derivative related to a modified coinsurance agreement pursuant to which we assume the risks of a block of health insurance business. The embedded derivative represents the mark-to-market adjustment for approximately $85 million in underlying investments held by the ceding reinsurer at September 30, 2023. Our fixed indexed annuity products provide a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the "participation rate") of the amount of increase in the value of a particular index, such as the Standard & Poor's 500 Index, over a specified period. We are generally able to change the participation rate at the beginning of each index period (typically on each policy anniversary date), subject to contractual minimums. The Company accounts for the options attributed to the policyholder for the estimated life of the contract as embedded derivatives. These accounting requirements often create volatility in the earnings from these products. We typically buy call options (including call spreads) referenced to the applicable indices in an effort to offset or hedge potential increases to policyholder benefits resulting from increases in the particular index to which the policy's return is linked. The notional amount of these options was $3.0 billion and $2.8 billion at September 30, 2023 and December 31, 2022, respectively. We purchase certain fixed maturity securities that contain embedded derivatives that are required to be held at fair value on the consolidated balance sheet. We have elected the fair value option to carry the entire security at fair value with changes in fair value recognized in net income. The following table provides the pre-tax impact recognized in net income for derivative instruments, which are not designated as hedges for the periods indicated (dollars in millions):
|  | Three months ended |  | Nine months ended
|  | September 30, |  | September 30,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
Net investment income (loss) from policyholder and other special-purpose portfolios: |  |  |  |  |  |  |  |
Fixed indexed call options |  | $ | (55.0) |  |  | $ | (34.7) |  |  | $ | 24.9 |  |  | $ | (165.7) |
Total investment gains (losses): |  |  |  |  |  |  |  |
Embedded derivative related to modified coinsurance agreement |  | (2.2) |  |  | (4.4) |  |  | (2.5) |  |  | (50.8) |
Total revenues from derivative instruments, not designated as hedges |  | (57.2) |  |  | (39.1) |  |  | 22.4 |  |  | (216.5) |
Insurance policy benefits: |  |  |  |  |  |  |  |
Embedded derivatives related to fixed indexed annuities |  | (125.8) |  |  | (129.1) |  |  | (37.7) |  |  | (525.5) |
Net pre-tax impact |  | $ | 68.6 |  |  | $ | 90.0 |  |  | $ | 60.1 |  |  | $ | 309.0 |
Derivative Counterparty Risk If the counterparties to the call options fail to meet their obligations, we may recognize a loss. We limit our exposure to such a loss by diversifying among several counterparties believed to be strong and creditworthy. At September 30, 2023, all of our counterparties were rated "A" or higher by S&P Global Ratings ("S&P"). The Company and its subsidiaries are parties to master netting arrangements with its counterparties related to entering into various derivative contracts. The following table summarizes information related to derivatives with master netting arrangements or collateral as of September 30, 2023 and December 31, 2022 (dollars in millions):
|  |  |  |  |  |  |  |  | Gross amounts not offset in the balance sheet |  |
|  |  | Gross amounts recognized |  | Gross amounts offset in the balance sheet |  | Net amounts of assets presented in the balance sheet |  | Non-cash collateral |  | Cash collateral received |  | Net amount
September 30, 2023: |  |
| Fixed indexed call options |  | $ | 150.0 |  |  | $ | — |  |  | $ | 150.0 |  |  | $ | 28.5 |  |  | $ | — |  |  | $ | 121.5 |
December 31, 2022: |  |  |  |  |  |  |  |  |  |  |  |
| Fixed indexed call options |  | 56.7 |  |  | — |  |  | 56.7 |  |  | — |  |  | — |  |  | 56.7 |

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