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Derivative Instruments | 3 Months Ended
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Mar. 31, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | Derivative Instruments None of our derivatives qualify for hedge accounting, thus, any change in the fair value of the derivatives is recognized immediately in the consolidated statements of operations. The fair value of our derivative instruments, including derivative instruments embedded in fixed index annuity contracts, presented in the consolidated balance sheets are as follows:
| March 31, 2022 |  | December 31, 2021
| (Dollars in thousands)
Assets |  |  |
Derivative instruments |  |  |
Call options | $ | 640,578 |  |  | $ | 1,276,574 |
Warrants | 1,835 |  |  | 906 |
| $ | 642,413 |  |  | $ | 1,277,480 |
Liabilities |  |  |
Policy benefit reserves - annuity products |  |  |
Fixed index annuities - embedded derivatives, net | $ | 6,770,915 |  |  | $ | 7,964,961 |
Funds withheld for reinsurance liabilities |  |  |
Reinsurance related embedded derivative | (204,806) |  |  | (2,362) |
| $ | 6,566,109 |  |  | $ | 7,962,599 |
The changes in fair value of derivatives included in the unaudited consolidated statements of operations are as follows:
|  |  | Three Months Ended March 31,
|  |  |  |  | 2022 |  | 2021
|  |  |  |  | (Dollars in thousands)
Change in fair value of derivatives: |  |  |  |  |  |  |
Call options |  |  |  |  | $ | (478,448) |  |  | $ | 396,276 |
Warrants |  |  |  |  | 929 |  |  | 29 |
|  |  |  |  | $ | (477,519) |  |  | $ | 396,305 |
Change in fair value of embedded derivatives: |  |  |  |  |  |  |
Fixed index annuities - embedded derivatives |  |  |  |  | $ | (1,308,123) |  |  | $ | (377,121) |
Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting |  |  |  |  | 116,918 |  |  | 94,708 |
Reinsurance related embedded derivative |  |  |  |  | (202,444) |  |  | — |
|  |  |  |  | $ | (1,393,649) |  |  | $ | (282,413) |
The amounts presented as "Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting" represents the total change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date, less the change in fair value of our fixed index annuities embedded derivatives that is presented as Level 3 liabilities in Note 2 - Fair Values of Financial Instruments. We have fixed index annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index. When fixed index annuity deposits are received, a portion of the deposit is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to fixed index annuity policyholders. Substantially all such call options are one year options purchased to match the funding requirements of the underlying policies. The call options are marked to fair value with the change in fair value included as a component of revenues. The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term and the changes in fair value for open positions. On the respective anniversary dates of the index policies, the index used to compute the index credit is reset and we purchase new call options to fund the next index credit. We manage the cost of these purchases through the terms of our fixed index annuities, which permit us to change caps, participation rates, and/or asset fees, subject to guaranteed minimums on each policy's anniversary date. By adjusting caps, participation rates, or asset fees, we can generally manage option costs except in cases where the contractual features would prevent further modifications. Our strategy attempts to mitigate potential risk of loss due to the nonperformance of the counterparties to these call options through a regular monitoring process which evaluates the program's effectiveness. We do not purchase call options that would require payment or collateral to another institution and our call options do not contain counterparty credit-risk-related contingent features. We are exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, we purchase our option contracts from multiple counterparties and evaluate the creditworthiness of all counterparties prior to purchase of the contracts. All non-exchange traded options have been purchased from nationally recognized financial institutions with a Standard and Poor's credit rating of A- or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. We also have credit support agreements that allow us to request the counterparty to provide collateral to us when the fair value of our exposure to the counterparty exceeds specified amounts. The notional amount and fair value of our call options by counterparty and each counterparty's current credit rating are as follows:
|  |  |  |  |  | March 31, 2022 |  | December 31, 2021
Counterparty |  | Credit Rating (S&P) |  | Credit Rating (Moody's) |  | Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
|  |  |  |  |  | (Dollars in thousands)
Bank of America |  | A+ |  | Aa2 |  | $ | 3,392,015 |  |  | $ | 25,419 |  |  | $ | 3,556,256 |  |  | $ | 99,229 |
Barclays |  | A |  | A1 |  | 4,021,050 |  |  | 96,179 |  |  | 4,213,658 |  |  | 157,865 |
Canadian Imperial Bank of Commerce |  | A+ |  | Aa2 |  | 3,496,022 |  |  | 78,800 |  |  | 3,956,329 |  |  | 141,540 |
Citibank, N.A. |  | A+ |  | Aa3 |  | 2,573,024 |  |  | 16,407 |  |  | 3,190,833 |  |  | 115,860 |
Credit Suisse |  | A+ |  | A1 |  | 3,655,865 |  |  | 40,370 |  |  | 3,716,868 |  |  | 113,295 |
J.P. Morgan |  | A+ |  | Aa2 |  | 5,181,335 |  |  | 47,659 |  |  | 4,482,832 |  |  | 105,899 |
Morgan Stanley |  | A+ |  | Aa3 |  | 2,911,156 |  |  | 11,199 |  |  | 2,223,743 |  |  | 47,950 |
Royal Bank of Canada |  | AA- |  | A1 |  | 4,247,259 |  |  | 85,839 |  |  | 3,567,972 |  |  | 100,472 |
Societe Generale |  | A |  | A1 |  | 2,373,286 |  |  | 39,953 |  |  | 2,548,072 |  |  | 86,494 |
Truist |  | A |  | A2 |  | 2,170,979 |  |  | 52,640 |  |  | 2,547,808 |  |  | 94,924 |
Wells Fargo |  | A+ |  | Aa2 |  | 5,917,801 |  |  | 141,532 |  |  | 5,820,381 |  |  | 206,403 |
Exchange traded |  |  |  |  |  | 281,721 |  |  | 4,581 |  |  | 266,601 |  |  | 6,643 |
|  |  |  |  |  | $ | 40,221,513 |  |  | $ | 640,578 |  |  | $ | 40,091,353 |  |  | $ | 1,276,574 |
As of March 31, 2022 and December 31, 2021, we held $0.7 billion and $1.3 billion, respectively, of cash and cash equivalents and other investments from counterparties for derivative collateral, which is included in Other liabilities on our Consolidated Balance Sheets. This derivative collateral limits the maximum amount of economic loss due to credit risk that we would incur if parties to the call options failed completely to perform according to the terms of the contracts to $4.6 million and $8.5 million at March 31, 2022 and December 31, 2021, respectively. The future index credits on our fixed index annuities are treated as a "series of embedded derivatives" over the expected life of the applicable contract. We do not purchase call options to fund the index liabilities which may arise after the next policy anniversary date. We must value both the call options and the related forward embedded options in the policies at fair value. We cede certain fixed index annuity product liabilities to a third party reinsurer on a modified coinsurance basis which results in an embedded derivative. The obligation to pay the total return on the assets supporting liabilities associated with this reinsurance agreement represents a total return swap. The fair value of the total return swap is based on the unrealized gains and losses of the underlying assets held in the modified coinsurance portfolio. The reinsurance related embedded derivative is reported in Funds withheld for reinsurance liabilities on the Consolidated Balance Sheets and the change in the fair value of the embedded derivative is reported in Change in fair value of embedded derivatives on the Consolidated Statements of Operations.

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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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