The amount subject to credit risk is limited to the current fair value of the instruments which are in a gain position. The credit risk is presented without giving effect to any netting agreements and does not reflect actual or expected losses. The total estimated fair value represents the total amount that the Corporation and its subsidiaries would receive (or pay) to terminate all agreements at year-end. However, this would not result in a gain or loss to the Corporation and its subsidiaries as the derivative instruments which correlate to certain assets and liabilities provide offsetting gains or losses.
I NTER EST R ATE CO NTR ACTS
Interest rate swaps, futures and options are used as part of a portfolio of assets to manage interest rate risk associated with investment activities and insurance and investment contract liabilities and to reduce the impact of fluctuating interest rates on the mortgage banking operations and intermediary operations. Interest rate swap agreements require the periodic exchange of payments without the exchange of the notional principal amount on which payments are based.
Call options grant the Corporation and its subsidiaries the right to enter into a swap with predetermined fixed-rate payments over a predetermined time period on the exercise date. Call options are used to manage the variability in future interest payments due to a change in credited interest rates and the related potential change in cash flows due to surrenders. Call options are also used to hedge minimum rate guarantees.
FO R EI G N EXCHAN G E CO NTR ACTS
Cross-currency swaps are used in combination with other investments to manage foreign currency risk associated with investment activities and insurance and investment contract liabilities. Under these swaps, principal amounts and fixed and floating interest payments may be exchanged in different currencies. The Corporation and its subsidiaries may also enter into certain foreign exchange forward contracts to hedge certain product liabilities, cash and cash equivalents, cash flows and other investments.
OTH ER D ERIVATIVE CO NTR ACTS
Equity index swaps, futures and options are used to hedge certain product liabilities. Equity index swaps are also used as substitutes for cash instruments and are used to periodically hedge the market risk associated with certain fee income. Equity put options are used to manage the potential credit risk impact of significant declines in certain equity markets.
Forward agreements and total return swaps are used to manage exposure to fluctuations in the total return of common shares related to deferred compensation arrangements. Total return swap and forward agreements require the exchange of net contractual payments periodically or at maturity without the exchange of the notional principal amounts on which the payments are based. Certain of these instruments are not designated as hedges. Changes in fair value are recorded in operating and administrative expenses in the statements of earnings for those instruments not designated as hedges.
EN FO RCE AB LE MASTER N ET TI N G AG R EEM ENTS O R SI M I L AR AG R EEM ENTS
The following disclosure shows the potential effect on the Corporation’s balance sheets on financial instruments that have been shown in a gross position where right of set-off exists under certain circumstances that do not qualify for netting on the balance sheets.
The Corporation and its subsidiaries enter into the International Swaps and Derivative Association’s master agreements for transacting over-the-counter derivatives. The Corporation and its subsidiaries receive and pledge collateral according to the related International Swaps and Derivative Association’s Credit Support Annexes. The International Swaps and Derivative Association’s master agreements do not meet the criteria for offsetting on the balance sheets because they create a right of set-off that is enforceable only in the event of default, insolvency, or bankruptcy.
For exchange-traded derivatives subject to derivative clearing agreements with exchanges and clearing houses, there is no provision for set-off at default.
Initial margin is excluded from the table below as it would become part of a pooled settlement process.
Lifeco’s reverse repurchase agreements are also subject to right of set-off in the event of default. These transactions and agreements include master netting arrangements which provide for the netting of payment obligations between Lifeco and its counterparties in the event of default.
NOTE 27 DERIVATIVE FINANCIAL INSTRUMENTS
(CONTINUED)RELATED AMOUNTS NOT SET OFF IN THE BALANCE SHEETS
DECEMBER 31, 2013
GROSS AMOUNT OF FINANCIAL INSTRUMENTS PRESENTED IN THE BALANCE SHEET
OFFSETTING COUNTERPARTY POSITION
FINANCIAL COLLATERAL RECEIVED / PLEDGED
NET EXPOSURE
FINANCIAL INSTRUMENTS (ASSETS)
Derivative financial instruments 655 (271) (23) 361
Reverse repurchase agreements [3] 87 – (87) –
Total financial instruments (assets) 742 (271) (110) 361
FINANCIAL INSTRUMENTS (LIABILITIES)
Derivative instruments 782 (271) (199) 312
Total financial instruments (liabilities) 782 (271) (199) 312
RELATED AMOUNTS NOT SET OFF IN THE BALANCE SHEETS
DECEMBER 31, 2012
GROSS AMOUNT OF FINANCIAL INSTRUMENTS PRESENTED IN THE BALANCE SHEET
OFFSETTING COUNTERPARTY POSITION
FINANCIAL COLLATERAL RECEIVED / PLEDGED
NET EXPOSURE
FINANCIAL INSTRUMENTS (ASSETS)
Derivative financial instruments 1,061 (275) (25) 761
Reverse repurchase agreements [3] 101 – (101) –
Total financial instruments (assets) 1,162 (275) (126) 761
FINANCIAL INSTRUMENTS (LIABILITIES)
Derivative instruments 413 (275) (96) 42
Total financial instruments (liabilities) 413 (275) (96) 42
[1] Includes counterparty amounts recognized on the balance sheets where the Corporation has a potential offsetting position (as described above) but does not meet the criteria for offsetting on the balance sheets, excluding collateral.
[2] Financial collateral presented above excludes overcollateralization and, for exchange-traded derivatives, initial margin. Financial collateral received on reverse repurchase agreements is held by a third party. Total financial collateral, including initial margin and overcollateralization, received on derivative assets was
$23 million ($25 million at December 31, 2012), received on reverse repurchase agreements was $89 million ($103 million at December 31, 2012), and pledged on derivative liabilities was $222 million ($118 million at December 31, 2012).
[3] Assets related to reverse repurchase agreements are included in bonds in the balance sheets.
[1] [2]
[1] [2]