Derivatives

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Accounting for Derivatives

See Notes 1 and 8 of the Notes to the Consolidated Financial Statements included in the 2022 Annual Report for a description of the Company’s accounting policies for derivatives and the fair value hierarchy for derivatives.

Types of Derivative Instruments and Derivative Strategies

The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to minimize its exposure to various market risks. Commonly used derivative instruments include, but are not necessarily limited to:

•Interest rate derivatives: swaps, floors, caps, swaptions and forwards;

•Foreign currency exchange rate derivatives: forwards and swaps;

•Equity market derivatives: options and total return swaps; and

•Credit derivatives: single and index reference credit default swaps and swaptions.

For detailed information on these contracts and the related strategies, see Note 7 of the Notes to the Consolidated Financial Statements included in the 2022 Annual Report.

Primary Risks Managed by Derivatives

The primary underlying risk exposure, gross notional amount and estimated fair value of derivatives, excluding embedded derivatives, held were as follows at:


		March 31, 2023						December 31, 2022
	Primary Underlying Risk Exposure	Gross Notional Amount		Estimated Fair Value				Gross Notional Amount		Estimated Fair Value
				Assets		Liabilities				Assets		Liabilities
		(In millions)
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate forwards	Interest rate	$	40	$	—	$	6	$	60	$	—	$	12
Foreign currency swaps	Foreign currency exchange rate	4,005		552		7		4,026		596		8
Total qualifying hedges		4,045		552		13		4,086		596		20
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate swaps	Interest rate	14,850		163		94		3,145		98		46
Interest rate floors	Interest rate	3,000		7		2		3,250		12		3
Interest rate caps	Interest rate	6,300		103		35		6,350		137		43

Interest rate options	Interest rate	32,388		60		133		28,688		22		232
Interest rate forwards	Interest rate	17,886		74		1,725		18,168		35		2,466
Foreign currency swaps	Foreign currency exchange rate	811		138		1		822		148		—
Foreign currency forwards	Foreign currency exchange rate	497		3		1		487		1		10

Credit default swaps — written	Credit	1,760		23		1		1,757		18		2
Credit default swaptions	Credit	—		—		—		100		—		—

Equity index options	Equity market	17,056		521		390		17,229		697		351

Equity total return swaps	Equity market	43,941		998		858		32,909		520		747

Total non-designated or non-qualifying derivatives		138,489		2,090		3,240		112,905		1,688		3,900
Total		$	142,534	$	2,642	$	3,253	$	116,991	$	2,284	$	3,920

Based on gross notional amounts, a substantial portion of the Company’s derivatives was not designated or did not qualify as part of a hedging relationship at both March 31, 2023 and December 31, 2022. The Company’s use of derivatives includes (i) derivatives that serve as macro hedges of the Company’s exposure to various risks and generally do not qualify for hedge accounting because they do not meet the criteria required under portfolio hedging rules; (ii) derivatives that economically hedge insurance liabilities and generally do not qualify for hedge accounting because they do not meet the criteria of being “highly effective” as outlined in Accounting Standards Codification 815 — Derivatives and Hedging; (iii) derivatives that economically hedge MRBs that do not qualify for hedge accounting because the changes in estimated fair value of the MRBs are already recorded in net income; and (iv) written credit default swaps that are used to create synthetic credit investments and that do not qualify for hedge accounting because they do not involve a hedging relationship.

The amount and location of gains (losses), including earned income, recognized for derivatives and gains (losses) pertaining to hedged items reported in net derivative gains (losses) were as follows:


	Net Derivative Gains (Losses) Recognized for Derivatives		Net Derivative Gains (Losses) Recognized for Hedged Items		Net Investment Income		Amount of Gains (Losses) Deferred in AOCI
	(In millions)
Three Months Ended March 31, 2023
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate	$	—	$	—	$	1	$	2
Foreign currency exchange rate	(1)		—		14		(42)
Total cash flow hedges	(1)		—		15		(40)
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate	610		—		—		—
Foreign currency exchange rate	(5)		10		—		—
Credit	10		—		—		—
Equity market	(109)		—		—		—
Embedded	(1,090)		—		—		—
Total non-qualifying hedges	(584)		10		—		—
Total	$	(585)	$	10	$	15	$	(40)
Three Months Ended March 31, 2022
Derivatives Designated as Hedging Instruments:



Cash flow hedges:
Interest rate	$	1	$	—	$	1	$	(21)
Foreign currency exchange rate	—		—		11		40
Total cash flow hedges	1		—		12		19
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate	(1,131)		—		—		—
Foreign currency exchange rate	20		(7)		—		—
Credit	(7)		—		—		—
Equity market	308		—		—		—
Embedded	763		—		—		—
Total non-qualifying hedges	(47)		(7)		—		—
Total	$	(46)	$	(7)	$	12	$	19

At March 31, 2023 and December 31, 2022, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions was less than one year and one year, respectively.

At March 31, 2023 and December 31, 2022, the balance in AOCI associated with cash flow hedges was $598 million and $638 million, respectively.

Credit Derivatives

In connection with synthetically created credit investment transactions, the Company writes credit default swaps for which it receives a premium to insure credit risk. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the Company paying the counterparty the specified swap notional amount in exchange for the delivery of par quantities of the referenced credit obligation.

The estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps were as follows at:


	March 31, 2023					December 31, 2022
Rating Agency Designation of Referenced Credit Obligations (1)	Estimated Fair Value of Credit Default Swaps		Maximum Amount of Future Payments under Credit Default Swaps		Weighted Average Years to Maturity (2)	Estimated Fair Value of Credit Default Swaps		Maximum Amount of Future Payments under Credit Default Swaps		Weighted Average Years to Maturity (2)
	(Dollars in millions)
Aaa/Aa/A	$	8	$	544	2.0	$	7	$	544	2.2
Baa	13		1,188		5.1	8		1,185		5.0
Ba	2		24		3.7	2		24		4.0
Caa and Lower	(1)		4		2.7	(1)		4		3.0
Total	$	22	$	1,760	4.1	$	16	$	1,757	4.1

_______________

(1)The Company has written credit protection on both single name and index references. The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s, S&P and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.

(2)The weighted average years to maturity of the credit default swaps is calculated based on weighted average gross notional amounts.

Counterparty Credit Risk

The Company may be exposed to credit-related losses in the event of counterparty nonperformance on derivative instruments. Generally, the credit exposure is the fair value at the reporting date less any collateral received from the counterparty.

The Company manages its credit risk by: (i) entering into derivative transactions with creditworthy counterparties governed by master netting agreements; (ii) trading through regulated exchanges and central clearing counterparties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single party credit exposures which are subject to periodic management review.

See Note 8 for a description of the impact of credit risk on the valuation of derivatives.

The estimated fair values of net derivative assets and net derivative liabilities after the application of master netting agreements and collateral were as follows at:


			Gross Amounts Not Offset on the Consolidated Balance Sheets
	Gross Amount Recognized		Financial Instruments (1)		Collateral Received/Pledged (2)		Net Amount		Securities Collateral Received/Pledged (3)		Net Amount After Securities Collateral
	(In millions)
March 31, 2023
Derivative assets	$	2,597	$	(1,997)	$	(527)	$	73	$	(43)	$	30
Derivative liabilities	$	3,183	$	(1,997)	$	—	$	1,186	$	(1,186)	$	—
December 31, 2022
Derivative assets	$	2,308	$	(1,659)	$	(640)	$	9	$	(6)	$	3
Derivative liabilities	$	3,919	$	(1,659)	$	(7)	$	2,253	$	(2,251)	$	2

_______________

(1)Represents amounts subject to an enforceable master netting agreement or similar agreement.

(2)The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreement.

(3)Securities collateral received from counterparties is not reported on the consolidated balance sheets and may not be sold or re-pledged unless the counterparty is in default. Amounts do not include excess of collateral pledged or received.

The Company’s collateral arrangements generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the amount owed by that counterparty reaches a minimum transfer amount. Certain of these arrangements also include credit-contingent provisions which permit the party with positive fair value to terminate the derivative at the current fair value or demand immediate full collateralization from the party in a net liability position, in the event that the financial strength or credit rating of the party in a net liability position falls below a certain level.

The aggregate estimated fair values of derivatives in a net liability position containing such credit-contingent provisions and the aggregate estimated fair value of assets posted as collateral for such instruments were as follows at:


	March 31, 2023		December 31, 2022
	(In millions)
Estimated fair value of derivatives in a net liability position (1)	$	1,186	$	2,260
Estimated fair value of collateral provided (2):
Fixed maturity securities	$	4,057	$	4,894

_______________

(1)After taking into consideration the existence of netting agreements.

(2)Substantially all of the Company’s collateral arrangements provide for daily posting of collateral for the full value of the derivative contract. As a result, if the credit-contingent provisions of derivative contracts in a net liability position were triggered, minimal additional assets would be required to be posted as collateral or needed to settle the instruments immediately. Additionally, the Company is required to pledge initial margin for certain new over-the-counter (“OTC”) bilateral contracts between two counterparties (“OTC-bilateral”) derivative transactions to third-party custodians.