Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk exposure results from interest rate fluctuations, equity price movements and changes in credit spreads.
Risk Management
Our Actuarial, Asset-Liability Management and Finance functions provide first-line management of our market risk exposures, our Risk function provides risk control and oversight and our Internal Audit team provides independent assurance. Our Enterprise Risk Management Framework contemplates a wide range of market risks and focuses on exposures and risk limits on a consolidated basis for the Company.
We have an Asset Liability Management Committee (“ALCO”) that maintains a written asset-liability management policy, which is approved by our board of directors. The membership of ALCO includes the Chief Executive Officer, Chief Risk Officer, Chief Financial Officer, Chief Actuary and Head of Asset-Liability Management. ALCO regularly reviews all material financial risks in accordance with our asset-liability management policy. If market risks exceed predetermined tolerances, ALCO is required to inform the Finance and Risk Committee of our board of directors. ALCO proposes how best to mitigate or address such risks. Our Enterprise Risk Management Framework is more fully discussed in “Part I – Item 1. Business – Risk Management.”
Market Risk—Fair Value Exposures
We have exposure to market risk through our annuity and insurance operations, general account investment activities and risk management activities. For the purpose of this Item, we define “market risk” as changes in fair value resulting from changes in interest rates or equity market prices. We regularly analyze our exposures to interest rates and equity markets. As a result of this analysis, we have determined that the estimated fair values of certain assets and liabilities may be materially impacted by changes in interest rates and equity markets. Our exposures to interest rates and equity markets also impact our business, financial condition, results of operations and cash flows other than through changes in fair value. See “Part I – Item 1A. Risk Factors – Risks Related to Conditions in the Global Financial Markets and Economy.”
Interest Rates
Our market risk exposure to changes in interest rates principally arises from investments in fixed-income securities (primarily publicly-traded corporate and government bonds and asset-backed securities), interest-rate derivative instruments and embedded derivatives associated with variable and fixed index annuity guaranteed benefits.
Equity Markets
Our market risk exposure to changes in equity markets principally arises from investments in equity securities, equity derivative instruments and embedded derivatives associated with variable annuity, fixed index annuity guaranteed benefits, and RILA.
Variable Annuity Equity Market Risk
Equity market risk arises from the variable annuities we offer principally in the following ways:
• Core contract charges and investment management fees are generally calculated based on the account value. Our customers typically allocate a significant portion of their account value to separate account investment options that hold equity securities. Increases or decreases in the value of the referenced equity securities will increase or decrease the associated core contract charges and investment management fees.
• As of December 31, 2021, 77% of our total variable annuity account value included a return of premium death benefit and 12% of our total variable annuity account value included an enhanced GMDB selection. Decreases in equity markets increase the likelihood that a customer’s account value will be insufficient to cover the benefit paid to the beneficiary at the time of a claim following the customer’s death. As a result, the risk associated with such payouts is dependent on both the equity market performance and the time of the claim.
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• As of December 31, 2021, 76% of total variable annuity account value included either a GMWB for Life or GMWB selection. These benefits guarantee minimum payments based on a fixed annual percentage of the benefit base. These withdrawals may continue even if the account value subsequently falls to zero. When equity markets decrease, we generally expect account values to decline, and the account value therefore to be able to fund relatively fewer guaranteed withdrawals. Conversely, increases in equity markets generally increase account values and extend the number of withdrawals the account value is able to fund.
See “Part I – Item 1. Business – Our Product Offerings by Segment – Retail Annuities” for additional information about variable annuity guaranteed living benefit and guaranteed death benefit riders.
In addition to equity market declines, certain other equity market changes could also increase our losses. For example, certain of our guaranteed living benefits and guaranteed death benefits include provisions that step up the benefit base if the account value exceeds the benefit base at specified time intervals (generally annually or quarterly). Therefore, if equity markets increase over the short-term but return to lower levels in the longer-term, those step-up provisions could increase the benefit base relative to the account value, resulting in additional benefit payments paid by us compared to a scenario where equity markets had remained flat over time. The fees attributable to guaranteed benefits are generally calculated based on the benefit base, so the scenario in which equity markets increase and then later decrease will also result in relatively higher fee income.
Fixed Index Annuity Equity Market Risk
We sell fixed index annuities where the crediting rate to the contract holder is determined by reference to equity market performance. A higher equity market return over a given period will credit more interest to the account value of those annuities, though the final amounts credited are generally capped at specified maximum possible crediting rates.
We also offer an optional lifetime withdrawal guarantee benefit on our fixed index annuities, which allows contract holders to withdraw a specified amount each year until death, or until the contract holder’s account value is exhausted. See “Part I – Item 1. Business – Our Product Offerings by Segment – Retail Annuities” for additional information about fixed index annuity guaranteed living benefit riders. The equity market risk exposure on these benefits differs from comparable benefits offered on variable annuities, because declines in equity markets only reduce the interest credited to the customer’s account value for that period and not the account value itself. As a result, declines in equity markets do not shorten the time remaining before we expect to make payments on these guarantees. However, increasing equity markets will result in higher amounts credited to the customer’s account value, thereby extending the number of annual guaranteed withdrawals funded from the account value.
RILA Equity Market Risk
We sell RILA where the crediting rate to the contract holder is determined by reference to equity market performance. Similar to fixed index annuities, a higher equity market return over a given period will credit more interest to the account value of those annuities, though the final amounts credited are generally capped at specified maximum possible crediting rates. Unlike fixed index annuities, and similar to variable annuities, a lower equity market return over a given period may result in a reduction to the account value. Unlike variable annuities, the amount of the reduction is limited by a floor (which defines the maximum amount of market loss to which the contract holder is exposed) or buffer (which defines the amount of the market loss not credited to the contract holder).
We also offer a return of premium death benefit on our RILA. Decreases in equity markets increase the likelihood that a customer’s account value will be insufficient to cover the benefit paid to the beneficiary at the time of a claim following the customer’s death. As a result, the risk associated with such payouts is dependent on both the equity market performance and the time of the claim. See “Part I – Item 1. Business – Our Product Offerings by Segment – Retail Annuities” for additional information about RILA.
Our Hedging Approach and Evaluating Hedge Effectiveness
Our hedging program seeks to balance three objectives: protecting against the economic impact of adverse market conditions, protecting our statutory capital and stabilizing our statutory distributable earnings throughout market cycles.
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Our core dynamic hedging program seeks to offset changes in economic liability associated with variable annuity guaranteed benefits due to market movements, while our macro hedging program seeks to protect statutory capital under a range of stress scenarios. Our hedging program is described in more detail in “Part I – Item 1. Business – Risk Management – Financial Risk.”
Depending on market conditions and our capital position, we may favor the use of one type of hedging instrument over another. When evaluating the effectiveness of our hedge program we look at the combined net effect of our hedge assets and the liabilities these assets are intended to hedge. We consider our hedge program effective if it is successful in keeping the net effect of these assets and liabilities within our defined risk measures and limits. This analysis of hedge positioning relative to the liabilities these assets are intended to hedge provides our management team a view on the effectiveness of the hedging program.
For our equity market exposure, we compare the impact of changes to equity markets on our hedge assets relative to the liabilities these assets are intended to hedge. For example, in periods with increasing equity markets, we expect significant losses on our equity hedges, but as increasing equity markets also generally increase contract holder account values, we expect a related decrease in the likelihood or level of future payments we need to make on our guaranteed benefits. Likewise, in periods of decreasing markets we expect significant increases in the value of our equity hedges, but also would expect liabilities for future guaranteed benefit payments to increase.
For our interest rate exposure, similar to equity market risk, we evaluate the level of interest rate hedge coverage by comparing the impacts of interest rate movements on our hedge assets relative to the liabilities these assets are intended to hedge. The types of derivative instruments we use to manage interest rate risk are different from those we use to manage equity market risk. We also recognize the sensitivity of our equity hedges to interest rates, but believe their contribution to the overall interest rate hedge is small due to their relatively short duration of these derivatives.
Risk Measurement—Sensitivity Analysis
In the following discussion and analysis, we measure market risk related to our market sensitive assets and liabilities based on changes in interest rates and equity market prices utilizing an internal sensitivity analysis. Due to our current portfolio structure and holdings, foreign currency movements are not material to the Company. This analysis estimates the potential changes in estimated fair value or carrying value with respect to our reserves based on a hypothetical 50 basis point parallel shift (increase or decrease) in risk-free interest rates and a 10% change (increase or decrease) in equity market prices. In performing the analysis summarized below, we used market rates and balance sheet positions as of December 31, 2021 and 2020, respectively. We modeled the impact of changes in market rates and prices on the estimated fair values of our market sensitive assets and liabilities as follows:
• the net present values of our interest rate sensitive exposures resulting from a parallel 50 basis point shift (increase or decrease) in interest rates; and
• the estimated fair value of our equity positions due to a 10% change (increase or decrease) in equity market prices.
The sensitivity analysis reflects hypothetical scenarios and is an estimate as of a specific point in time based on asset and liability positioning on that date. These hypothetical scenarios do not represent management’s view of future market changes and should not be viewed as predictive of our future financial performance. Actual results in any particular period may vary from the amounts indicated in the table below as a result of changes in the composition of our assets and liabilities, market conditions, management actions and other factors.
The sensitivity analysis reflects changes in fair value resulting from changes in interest rates or equity market levels and does not reflect changes in the economic value of assets or liabilities.
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The market risk information is limited by the assumptions and parameters established in creating the related sensitivity analysis, including:
• interest-rate sensitive liabilities do not include $73.3 billion and $79.0 billion of policy and contract liabilities as of December 31, 2021 and 2020, respectively, which are accounted for on a book value basis under U.S. GAAP;
• interest-rate sensitive assets do not include assets accounted for on a book value basis under U.S. GAAP, which primarily consist of $11.5 billion and $10.7 billion of mortgage loans as of December 31, 2021 and 2020, respectively;
• the analysis excludes the effect of market or interest rate impacts on assets and liabilities related our funds withheld reinsurance treaties;
• the analysis excludes real estate holdings;
• the analysis excludes the impact of changes in DAC and income taxes; and
• the analysis assumes that the composition of assets and liabilities remains unchanged upon measurement, and excludes the impacts of management actions.
Given the limitations described above, we use models as tools and not as substitutes for the experience and judgment of our management. Based on the fair values of the financial instruments and our analysis of the impacts of the measured changes in market rates and prices, we have determined that our interest rate and equity market exposures are material.
The table below provides detail regarding the potential change in estimated fair value of our debt securities and the carrying value of our fixed index and variable annuity guarantee liabilities due to a 50 basis point parallel increase and decrease in the yield curve by type of asset or liability (in millions):
December 31, 2021 December 31, 2020
Fair Impact of Impact of Fair Impact of Impact of
Value +50 bps -50 bps Value +50 bps -50 bps
Change Change Change Change
Debt Securities (1)
Floating Rate $ 2,418 $ (17) $ 4 $ 1,738 $ 8 $ (9)
Fixed Rate $ 31,698 $ (1,567) $ 1,067 $ 34,128 $ (1,687) $ 1,049
(1) Includes debt securities that are classified as available-for-sale or trading and includes securities at fair value under the fair value option.
December 31, 2021 December 31, 2020
Carrying Value Impact of +50 bps Change Impact of -50 bps Change Carrying Value Impact of +50 bps Change Impact of -50 bps Change
Fixed Index and Variable Annuity Guarantee Liabilities $ 4,031 $ (2,646) $ 2,997 $ 6,949 $ (2,760) $ 3,201
The carrying value of variable and fixed index annuity guarantee liabilities reflects the present value of projected benefit payments less the present value of attributed fees. These benefit payments and fees are subject to differing degrees of discounting, as benefit payments are generally projected to occur further in the future as compared to attributed fees. As a result, the degree of sensitivity between the present values of projected fees as compared to the present values of projected benefit payments may result in disproportionate sensitivity impacts relative to the liability carrying value.
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The table below provides additional detail regarding the potential change in estimated fair value of our equity investment portfolio and carrying value of our fixed index and variable annuity guarantee liabilities due to a 10% increase and decrease in equity market prices by type of asset or liability (in millions):
December 31, 2021 December 31, 2020
Fair Impact of Impact of Fair Impact of Impact of
Value 10% -10% Value 10% -10%
Change Change Change Change
Equity Securities and Limited Partnerships $ 2,279 $ (228) $ 228 $ 2,017 $ 202 $ (202)
December 31, 2021 December 31, 2020
Carrying Impact of Impact of Carrying Impact of Impact of
Value 10% -10% Value 10% -10%
Change Change Change Change
Fixed Index and Variable Annuity Guarantee Liabilities $ 4,031 $ (663) $ 1,526 $ 6,949 $ (795) $ 1,535
The carrying value of our annuity guarantee liabilities reflect our contract holders’ exposure to equity market declines. When equity markets increase, this exposure and the related liability declines.
The table below provides details regarding the potential change in estimated fair value of our derivative instruments due to a 50 basis point parallel increase and decrease in the yield curve by type of derivative instrument, as well as the potential change in estimated fair value of our derivative instruments due to a 10% increase and decrease in equity prices (in millions):
Interest Rate Sensitivity
Notional Weighted Impact of Fair Impact of
Amount Average Term +50 bps Value -50 bps
(Years) Change Change
December 31, 2021
Swaps $ 10,995 6.99 $ (226) $ 450 $ 238
Swaptions $ 19,000 2.07 $ (427) $ 133 $ 416
Treasury Futures $ 912 0.25 $ (66) $ — $ 73
Total $ (719) $ 583 $ 727
December 31, 2020
Swaps $ 7,995 7.54 $ (258) $ 772 $ 262
Swaptions $ 1,000 0.92 $ (40) $ 100 $ 53
Treasury Futures $ 8,524 0.22 $ (524) $ — $ 557
Total $ (822) $ 872 $ 872
Equity Sensitivity
Notional Weighted Impact of Fair Impact of
Amount Average Term +10% Value -10%
(Years) Change Change
December 31, 2021
Options $ 48,500 0.20 $ 1,550 $ 756 $ (114)
Calls $ 21,000 0.20 $ 1,672 $ 606 $ (569)
Puts $ 27,500 0.20 $ (123) $ 150 $ 454
Equity Futures $ 18,258 0.21 $ (1,826) $ — $ 1,826
Total $ (276) $ 756 $ 1,712
December 31, 2020
Options $ 53,300 0.14 $ 2,288 $ 1,305 $ (576)
Calls $ 26,300 0.13 $ 2,416 $ 1,127 $ (1,048)
Puts $ 27,000 0.14 $ (128) $ 178 $ 472
Equity Futures $ 27,651 0.22 $ (2,751) $ — $ 2,751
Total $ (463) $ 1,305 $ 2,175
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