NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A — Business and Summary of Significant Accounting Policies
The following describes the business and significant accounting policies of F&G Annuities & Life, Inc. (“FGAL”) and its subsidiaries (collectively, “we”, “us”, “our”, the "Company" or “F&G”), which have been followed in preparing the accompanying Consolidated Financial Statements.
Description of the Business
We provide insurance solutions and issue a broad portfolio of annuity and life insurance products, including deferred annuities (fixed indexed and fixed rate annuities), immediate annuities, and indexed universal life ("IUL") insurance, through our retail distribution channels. We also provide funding agreements and pension risk transfer ("PRT") solutions through our institutional channels. F&G has one reporting segment, which is consistent with and reflects the manner by which our chief operating decision maker views and manages the business.
FGAL, a Delaware corporation, was formed on August 7, 2020, and following a series of reorganizations, became the parent company for the consolidated financial statements via a contribution agreement between Fidelity National Financial, Inc. (NYSE: FNF)("FNF") and FGAL on November 26, 2020. The prior parent company, FGL Holdings, a Cayman Islands exempted company, was incorporated in the Cayman Islands on January 2, 2020, and became the parent company effective June 1, 2020, in conjunction with the acquisition by FNF, as discussed below. The parent company prior to June 1, 2020, also named FGL Holdings, a Cayman Islands exempted company, was originally incorporated in the Cayman Islands on February 26, 2016, as a Special Purpose Acquisition Company ("SPAC") and was publicly traded on the New York Stock Exchange.
On June 1, 2020, FNF acquired 100% of the outstanding equity of FGL Holdings for approximately $2.7 billion pursuant to the Agreement and Plan of Merger, dated February 7, 2020, as amended (the "Merger Agreement"). In connection with the Merger, FNF issued approximately 24 million shares of FNF common stock and paid approximately $1.8 billion in cash to former holders of FGL Holdings ordinary and preferred shares. On August 26, 2020, FNF issued an additional 1 million shares of FNF common stock and paid approximately $100 million in cash to certain former owners of FGL Holdings common stock. At closing, all outstanding shares of FGL Holdings common stock, excluding shares associated with the liability to former owners, were converted into the right to receive the Merger Consideration (as defined in the Merger Agreement). Additionally, each outstanding FGL Holdings Option and FGL Holdings Phantom unit was canceled and converted into options to purchase FNF common stock and phantom units denominated in FNF common stock, and each outstanding warrant to purchase FGL Holdings common stock was converted into the right to purchase and receive upon exercise $8.18 in cash and .0833 shares of FNF common stock. At closing, FNF's subsidiaries' ownership of FGL Holdings common and preferred shares was converted into approximately 7 million shares of FNF common stock.
As a result of the Merger Agreement, our financial statement presentation includes the consolidated financial statements of FGL Holdings and its subsidiaries as "Predecessor" for the period prior to the completion of the merger, as well as the consolidated financial statements of FGAL and its subsidiaries after the merger under a new basis established under purchase accounting in accordance with generally accepted accounting principles in the United States ("GAAP").
On March 16, 2022, FNF announced its intention to partially spin off F&G through a dividend to FNF shareholders. On December 1, 2022, FNF distributed, on a pro rata basis, approximately 15% of the common stock of F&G. FNF retained control of F&G through ownership of approximately 85% of F&G common stock. Effective December 1, 2022, F&G commenced “regular-way” trading of its common stock on the New York Stock Exchange (“NYSE”) under the symbol “FG”.
Discontinued Operations
In connection with the FNF acquisition, certain third party offshore reinsurance businesses were deemed discontinued operations and are presented as such within our consolidated financial statements for all periods presented through the date of their disposition, in accordance with GAAP. On December 18, 2020, we sold F&G
Reinsurance Ltd (“F&G Re”) to Aspida Holdings Ltd (“Aspida”). On May 31, 2021, we sold third party reinsurance business held within Front Street Re Cayman Ltd (“FSRC”) to Archipelago Lexa (C) Limited. The transactions did not have a material impact to our GAAP financial results. Refer to Note R Discontinued Operations for more information.
Recent Developments
7.40% F&G Senior Notes
On January 13, 2023, F&G completed its issuance and sale of $500 million aggregate principal amount of its 7.40% Senior Notes due 2028 (the "7.40% F&G Notes"). F&G intends to use the net proceeds from the offering for general corporate purposes, including to support the growth of assets under management and for F&G's future liquidity requirements.
Dividends
On December 8, 2022, F&G announced that its Board of Directors declared an inaugural quarterly cash dividend of $0.20 per share of common stock pursuant to the previously announced dividend program in which the Company intends to pay quarterly cash dividends on its common stock at an initial aggregate amount of approximately $100 million per year. The dividend was paid January 31, 2023, to stockholders of record as of January 17, 2023. Going forward, starting next quarter, F&G expects to announce the record date and payment date for each dividend, subject to quarterly review and approval by its Board of Directors and any required regulatory approvals, following completion of the relevant fiscal quarter and with payment in the third month of each subsequent quarter, based on the Company’s view of the prevailing and prospective macroeconomic conditions, regulatory landscape and business performance.
F&G Distribution
As noted above, on December 1, 2022, FNF distributed, on a pro rata basis, approximately 15% of the common stock of F&G.
Revolving Credit Facility
On November 22, 2022, we entered into a Credit Agreement (the “Credit Agreement”) with certain lenders (the “Lenders”) and Bank of America, N.A. as administrative agent (in such capacity, the “Administrative Agent”), swing line lender and an issuing bank, pursuant to which the Lenders have made available an unsecured revolving credit facility in an aggregate principal amount of $550 million to be used for working capital and general corporate purposes. As of December 31, 2022, the revolving credit facility was fully drawn with $550 million outstanding. A net partial revolver paydown of $35 million was made on January 6, 2023 and, on February 21, 2023, we entered into an amendment with the Lenders to increase the available aggregate principal amount of the Credit Agreement by $115 million to $665 million. For further information related to the revolving credit facility, refer to Note E Notes Payable.
Stock Split, Increase to Authorized shares and Exchange Agreement with FNF
On June 24, 2022, the following actions previously approved by the F&G board of directors became effective: (i) a stock split in a ratio of 105,000 for 1. FNF, as the sole shareholder, received, in the form of a dividend, 104,999 additional shares of common stock for each share of common stock held. Earnings per share has been retrospectively adjusted to reflect as if the split occurred as of June 1, 2020 in accordance with GAAP; (ii) an increase in the number of authorized shares of common stock from one thousand (1,000) to five hundred million (500,000,000); (iii) an exchange agreement with FNF pursuant to which F&G transferred shares of its common stock to FNF in exchange for the $400 million FNF Promissory Note, after which the note was retired. There was no gain or loss recorded with respect to the exchange agreement. For the twelve months ended December 31, 2022, interest expense on the FNF Promissory Note was approximately $6 million.
Also refer to Note S Subsequent Events.
Principles of Consolidation and Basis of Presentation
The accompanying Consolidated Financial Statements are prepared in accordance with GAAP and include our accounts as well as our wholly owned subsidiaries. All intercompany profits, transactions and balances have been eliminated.
We are involved in certain entities that are considered variable interest entities ("VIEs") as defined under GAAP. Our involvement with VIEs is primarily to invest in assets that allow us to gain exposure to a broadly diversified portfolio of asset classes. A VIE is an entity that does not have sufficient equity to finance its own activities without additional financial support, where investors lack certain characteristics of a controlling financial interest, or where the entity is structured with non-substantive voting rights. We assess our relationships with VIEs to evaluate if we are the primary beneficiary of the VIE. If we determine we are the primary beneficiary of a VIE, we consolidate the assets and liabilities of the VIE in our Consolidated Financial Statements. See Note C Investments for additional information on our investments in VIEs.
Investments
Fixed Maturity Securities Available-for-Sale
Fixed maturity securities are purchased to support our investment strategies, which are developed based on factors including rate of return, maturity, credit risk, duration, tax considerations and regulatory requirements. Our investments in fixed maturity securities have been designated as available-for-sale ("AFS") and are carried at fair value, net of allowance for expected credit losses, with unrealized gains and losses included within accumulated other comprehensive income (loss) ("AOCI"), net of associated adjustments for deferred acquisition costs ("DAC"), value of business acquired ("VOBA"), deferred sales inducements ("DSI"), unearned revenue ("UREV"), Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts, (“SOP 03-1”) reserves, and deferred income taxes. Fair values for fixed maturity securities are principally a function of current market conditions and are primarily valued based on quoted prices in markets that are not active or model inputs that are observable or unobservable. We recognize investment income on fixed maturities based on the effective interest method, which results in the recognition of a constant rate of return on the investment equal to the prevailing rate at the time of purchase or at the time of subsequent adjustments of book value. Realized gains and losses on sales of our fixed maturity securities are determined on the first-in first-out cost basis. We generally record security transactions on a trade date basis except for private placements, which are recorded on a settlement date basis. Realized gains and losses on sales of fixed maturity securities are reported within Recognized gains and losses, net in the accompanying Consolidated Statements of Earnings. Fixed maturity securities AFS are subject to an allowance for credit loss and changes in the allowance are reported in net earnings as a component of Recognized gains and losses, net. For details on our policy around allowance for expected credit losses on available-for-sale securities, refer to Note C Investments.
Preferred and Equity Securities
Equity and preferred securities held are carried at fair value as of the balance sheet dates. The fair values of our equity and preferred securities are based on quoted prices in active markets, or are valued based on quoted prices in markets that are not active, model inputs that are observable or unobservable or based on net asset value (“NAV”). Changes in fair value and realized gains and losses on sales of our preferred and equity securities are reported within Recognized gains and losses, net in the accompanying Consolidated Statements of Earnings. Recognized gains and losses on sales of our preferred and equity securities are credited or charged to earnings on a trade date basis, unless the security is a private placement in which case settlement date basis is used. Interest and dividend income from these investments is reported in Interest and investment income in the accompanying Consolidated Statements of Earnings.
Derivative Financial Instruments
We hedge certain portions of our exposure to product related equity market risk by entering into derivative transactions (primarily call options). All such derivative instruments are recognized as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value. The changes in fair value are reported within Recognized gains and losses, net in the accompanying Consolidated Statements of Earnings.
We purchase financial instruments and issue products that may contain embedded derivative instruments. If it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract for measurement purposes. The embedded derivative is carried at fair value, which is determined through a combination of market observable inputs such as market value of option and interest swap rates and unobservable inputs such as the mortality multiplier, surrender and withdrawal rates and non-performance spread. The changes in fair value are reported within Benefits and other changes in policy reserves in the accompanying Consolidated Statements of Earnings. See a description of the fair value methodology used in Note B Fair Value of Financial Instruments.
Reinsurance Related Embedded Derivatives
As discussed in Note J Reinsurance, F&G entered into reinsurance agreements with Kubera Insurance (SAC) Ltd. ("Kubera"), effective December 31, 2018, and Aspida Life Re Ltd. ("Aspida Re"), effective January 1, 2021, and amended in August 2021 and September 2022, to cede a quota share of certain deferred annuity and multi-year guaranteed annuities ("MYGA"), respectively, and GAAP and statutory reserves on a coinsurance funds withheld basis, net of applicable existing reinsurance. Effective October 31, 2021, the Kubera agreement was novated from Kubera to Somerset Reinsurance Ltd. ("Somerset"), a certified third-party reinsurer. Funds withheld arrangements allow the Company to retain legal ownership of assets backing reinsurance arrangements until they are earned by the reinsurer while passing credit risk associated with the assets in the funds withheld account to the reinsurer. These arrangements create embedded derivatives considered to be total return swaps with contractual returns that are attributable to the assets and liabilities associated with the reinsurance arrangement. The fair value of the total return swap is based on the change in fair value of the underlying assets held in the funds withheld portfolio. Investment results for the assets that support the coinsurance with funds withheld reinsurance arrangement, including gains and losses from sales, are passed directly to the reinsurer pursuant to contractual terms of the reinsurance arrangement. These total return swaps are not clearly and closely related to the underlying reinsurance contract and thus require bifurcation. The reinsurance related embedded derivative is reported in Prepaid expenses and other assets if in a net gain position, or Accounts payable and accrued liabilities, if in a net loss position on the Consolidated Balance Sheets and the related gains or losses are reported in Recognized gains and losses, net, on the Consolidated Statements of Earnings.
Mortgage Loans
Our investment in mortgage loans consists of commercial and residential mortgage loans on real estate, which are reported at amortized cost, less allowance for expected credit losses. For details on our policy around allowance for expected credit losses on mortgage loans, refer to Note C Investments.
Commercial mortgage loans are continuously monitored by reviewing appraisals, operating statements, rent revenues, annual inspection reports, loan specific credit quality, property characteristics, market trends and other factors.
Commercial mortgage loans are rated for the purpose of quantifying the level of risk. Loans are placed on a watch list when the debt service coverage ("DSC") ratio falls below certain thresholds and the loan-to-value ("LTV") ratios exceeds certain thresholds. Loans on the watchlist are closely monitored for collateral deficiency or other credit events that may lead to a potential loss of principal or interest. We define delinquent mortgage loans as 30 days past due, consistent with industry practice.
Residential mortgage loans have a primary credit quality indicator of either a performing or nonperforming loan. We define nonperforming residential mortgage loans as those that are 90 or more days past due and/or in
nonaccrual status, which is assessed monthly. Generally, nonperforming residential mortgage loans have a higher risk of experiencing a credit loss. We consider residential mortgage loans that are 90 or more days past due and have an LTV greater than 90% to be foreclosure probable.
Interest on loans is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs, as well as premiums and discounts, are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. Loan commitment fees are deferred and amortized on an effective yield basis over the term of the loan. Interest income, amortization of premiums and discounts, prepayment fees, and loan commitment fees are reported in Interest and investment income in the accompanying Consolidated Statements of Earnings.
Short-term investments
Short-term investments consist of financial instruments with an original maturity of one year or less when purchased and include short-term fixed maturity securities and money market instruments, which are carried at fair value, and short-term loans, which are carried at amortized cost, which approximates fair value.
Investments in Unconsolidated Affiliates
We primarily account for our investments in unconsolidated affiliates (primarily limited partnerships) using the equity method, where the cost is initially recorded as an investment in the entity. Adjustments to the carrying amount reflect our pro rata ownership percentage of the operating results as indicated by NAV in the limited partnership financial statements. Income from investments in unconsolidated affiliates is included within Interest and investment income in the accompanying Consolidated Statements of Earnings. Recognition of income and adjustments to the carrying amount are delayed due to the availability of the related financial statements, which are obtained from the general partner generally on a one to three-month delay. Management meets quarterly with the general partner to determine whether any credit or other market events have occurred since prior quarter financial statements to ensure any material events are properly included in current quarter valuation and investment income.
Interest and investment income
Dividends and interest income are recorded in Interest and investment income and recognized when earned. Income or losses upon call or prepayment of fixed maturity securities are recognized in Interest and investment income. Amortization of premiums and accretion of discounts on investments in fixed maturity securities are reflected in Interest and investment income over the contractual terms of the investments, and for callable investments at a premium, based on the earliest call date of the investments, in a manner that produces a constant effective yield.
For mortgage-backed and asset-backed securities, included in the fixed maturity securities portfolios, one of two models may be used to recognize interest income. For higher rated securities, interest income will be estimated based on an effective yield that considers cash flows received to date plus current expectations of future cash flows. For all other securities, interest income will be estimated based upon an effective yield that considers current expectations of future cash flows. For both interest income models, the estimated future cash flows include assumptions regarding the performance of the underlying collateral pool.
Interest and investment income is presented net of investment expenses and the effects of certain reinsurance contracts.
Cash and Cash Equivalents
Highly liquid instruments purchased as part of cash management with original maturities of three months or less are considered cash equivalents. The carrying amounts reported in the Consolidated Balance Sheets for these instruments approximate fair value.
Fair Value of Financial Instruments
The fair values of financial instruments presented in the Consolidated Financial Statements are estimates of the fair values at a specific point in time using available market information and appropriate valuation methodologies. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. See a description of the fair value methodology used in Note B Fair Value of Financial Instruments.
Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations
FASB Accounting Standards Codification ("ASC") Topic 805, Business Combinations, requires an acquirer to recognize, separately from goodwill, the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree, and to measure these items generally at their acquisition date fair values. Goodwill is recorded as the residual amount by which the purchase price exceeds the fair value of the net assets acquired. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, we are required to report provisional amounts in the financial statements for the items for which the accounting is incomplete. Adjustments to provisional amounts initially recorded that are identified during the measurement period are recognized in the reporting period in which the adjustment amounts are determined. This includes any effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. During the measurement period, we are also required to recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends the sooner of one year from the acquisition date or when we receive the information we were seeking about facts and circumstances that existed as of the acquisition date or learn that more information is not obtainable. Contingent consideration liabilities or receivables recorded in connection with business acquisitions must also be adjusted for changes in fair value until settled.
Goodwill
Goodwill represents the excess of cost over fair value of identifiable net assets acquired and assumed in a business combination. Goodwill and other intangible assets with indefinite useful lives are reviewed for impairment at the reporting unit level on an annual basis or more frequently if circumstances indicate potential impairment, through a comparison of fair value to the carrying amount. In evaluating the recoverability of goodwill, we first determined that based on the level at which the operating results are shared with and regularly reviewed by the Company’s Chief Operating Decision Maker, the Company is a single reporting unit. Next, we perform a qualitative analysis at the reporting unit level to determine whether there are any events or circumstances that would indicate it is more likely than not that the fair value of our recorded goodwill exceeds its carrying value, prior to performing a full fair-value assessment.
We complete annual goodwill impairment analyses in the fourth quarter of each period presented using a September 30 measurement date. For the years ended December 31, 2022, December 31, 2021, the period from June 1, 2020 to December 31, 2020 and for the Predecessor periods from January 1, 2020 to May 31, 2020 we determined there were no events or circumstances which indicated that the carrying value of a reporting unit exceeded the fair value.
VOBA, DAC and DSI
Our intangible assets include the value of insurance and reinsurance contracts acquired (hereafter referred to as VOBA), DAC and DSI.
VOBA is an intangible asset that reflects the amount recorded as insurance contract liabilities less the estimated fair value of in-force contracts (“VIF”) in a life insurance company acquisition. It represents the portion of the purchase price that is allocated to the value of the rights to receive future cash flows from the business in force at the acquisition date. VOBA is a function of the VIF, current GAAP reserves, GAAP assets, and deferred tax liability. The VIF is determined by the present value of statutory distributable earnings less opening required capital, and is sensitive to assumptions including the discount rate, surrender rates, partial withdrawals, utilization rates, projected
investment spreads, mortality, and expenses. DAC consists principally of commissions that are related directly to the successful sale of new or renewal insurance contracts, which may be deferred to the extent recoverable. Indirect or unsuccessful acquisition costs, maintenance, product development and overhead expenses are charged to expense as incurred. DSI represents up front bonus credits and vesting and persistency bonuses to policyholder account values, which may be deferred to the extent recoverable.
The methodology for determining the amortization of VOBA, DAC and DSI varies by product type. For all insurance contracts accounted for under long-duration contract deposit accounting, amortization is based on assumptions consistent with those used in the development of the underlying contract liabilities, adjusted for emerging experience and expected trends. For all of the insurance intangibles (VOBA, DAC and DSI), the balances are generally amortized over the lives of the policies in relation to the expected emergence of estimated gross profits (“EGPs”) from investment income, surrender charges and other product fees, less policy benefits, maintenance expenses, mortality, and expense margins. Recognized gains (losses) on investments, changes in fair value of derivatives, and changes in fair value of the embedded derivative on our FIA and IUL products are included in actual gross profits in the period realized as described further below. Amortization is reported within Depreciation and amortization in the accompanying Consolidated Statements of Earnings.
Changes in assumptions, including our earned rate (i.e., long term assumptions of the Company’s expected earnings on related investments), budgeted option costs (i.e., the expected cost to purchase call options in future periods to fund the equity indexed linked feature) and surrender rates can have a significant impact on VOBA, DAC and DSI balances and amortization rates. Due to the relative size and sensitivity to minor changes in underlying assumptions of those intangible balances, we perform quarterly and annual analyses of the VOBA, DAC and DSI balances for recoverability to ensure that the unamortized portion does not exceed the expected recoverable amounts. At each evaluation date, actual historical gross profits are reflected with the impact on the intangibles reported as “unlocking” as a component of amortization expense, and estimated future gross profits and related assumptions are evaluated for continued reasonableness. Any adjustment in estimated future gross profits requires that the amortization rate be revised (“unlocking”) retroactively to the date of the contract issuance or acquisition date with respect to VOBA. The cumulative unlocking adjustment is recognized as a component of current period amortization and reflected within Depreciation and amortization in the accompanying Consolidated Statements of Earnings.
For investment-type products, the VOBA, DAC and DSI assets are adjusted for the impact of unrealized gains (losses) on AFS investments as if these gains (losses) had been realized, with corresponding credits or charges included in AOCI ("shadow adjustments").
Refer to Note Q Recent Accounting Pronouncements for further discussion of accounting pronouncements not yet adopted that may have a significant impact on future estimated amortization expense upon adoption.
Other Intangible Assets
We have other intangible assets, not including goodwill, VOBA, DAC or DSI, which consist primarily of customer relationships and contracts, the value of distribution network acquired ("VODA"), trademarks and tradenames, state licenses and computer software, which are generally recorded in connection with business combinations at their fair value. Intangible assets with estimable lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In general, customer relationships are amortized over their estimated useful lives, generally ten years, using an accelerated method, which takes into consideration expected customer attrition rates. VODA is an intangible asset that represents the value of an acquired distribution network and is amortized using the sum of years digits method. Contractual relationships are generally amortized over their contractual life. Trademarks and tradenames are generally amortized over ten years. Capitalized computer software includes the fair value of software acquired in business combinations, purchased software and capitalized software development costs. Purchased software is recorded at cost and amortized using the straight-line method over its estimated useful life. Software acquired in business combinations is recorded at its fair value and amortized using straight-line or accelerated methods over its estimated useful life. For internal-use computer software products, internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Internal and external costs incurred during the application development stage are capitalized and amortized
on a product by product basis commencing on the date the software is ready for its intended use. We do not capitalize any costs once the software is ready for its intended use.
We recorded $14 million of impairment expense to other intangible assets for the year ended December 31, 2022. We recorded no impairment expense to other intangible assets during the year ended December 31, 2021, the period from June 1 to December 31, 2020, and the Predecessor period from January 1 to May 31, 2020.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed primarily using the straight-line method based on the estimated useful lives of the related assets: twenty to thirty years for buildings and zero to twenty-five years for furniture, fixtures and equipment. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the applicable lease or the estimated useful lives of such assets. Property and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable.
Contractholder Funds
Contractholder funds include FIAs, fixed rate annuities, IULs, funding agreements and PRT and immediate annuities contracts without life contingencies. The liabilities for contractholder funds for fixed rate annuities, funding agreements and PRT and immediate annuities contracts without life contingencies consist of contract account balances that accrue to the benefit of the contractholders. The liabilities for FIA and IUL policies consist of the value of the host contract plus the fair value of the indexed crediting feature of the policy, which is accounted for as an embedded derivative. The embedded derivative is carried at fair value in Contractholder Funds in the accompanying Consolidated Balance Sheets with changes in fair value reported in Benefits and other changes in policy reserves in the accompanying Consolidated Statements of Earnings. See a description of the fair value methodology used in Note B Fair Value of Financial Instruments.
Liabilities for the Guaranteed Minimum Withdrawal Benefits ("GMWB") and Guaranteed Minimum Death Benefit ("GMDB") riders on FIA and fixed rate annuity products are calculated by multiplying the benefit ratio by the cumulative assessments recorded from contract inception through the balance sheet date less the cumulative guaranteed minimum withdrawal and death benefit payments plus interest. The benefit ratio is the ratio of the present value of future guaranteed minimum withdrawal and death benefit payments to the present value of the assessments used to provide the guaranteed minimum withdrawal and death benefit payments using the same assumptions as we use for our intangible assets. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes in a manner similar to the unlocking of VOBA, DAC and DSI. The accounting for these GMWB and GMDB benefit liabilities (also referred to as “SOP 03-1 liabilities”) impact EGPs used to calculate amortization of VOBA, DAC and DSI. The related reserve is adjusted for the impact of unrealized gains (losses) on AFS investments as if these gains (losses) had been realized, with corresponding credits or charges included in AOCI ("shadow adjustments").
Contractholder funds include funds related to funding agreements that have been issued pursuant to the FABN Program as well as to the Federal Home Loan Bank of Atlanta ("FHLB"). Single premiums are received at the initiation of the funding agreements. As of December 31, 2022 and December 31, 2021, we had approximately $2,200 million and $1,900 million, respectively, outstanding under the FABN Program, which provides for semi-annual interest payments with principal maturities. Reserves for the FHLB funding agreements totaled $1,982 million and $1,543 million as of December 31, 2022 and December 31, 2021, respectively. The FHLB agreements provide a guaranteed stream of payments or provide for a bullet payment at maturity with renewal provisions. In accordance with the FHLB agreements, the investments supporting the funding agreement liabilities are pledged as collateral to secure the FHLB funding agreement liabilities and are not available to settle our general obligations. The collateral investments had a fair value of $3,387 million and $2,469 million as of December 31, 2022 and December 31, 2021, respectively. Payments pursuant to FABN and FHLB funding agreements extend through 2029.
Future Policy Benefits
The liabilities for future policy benefits and claim reserves for traditional life policies and life-contingent immediate annuity policies (which includes life-contingent PRT annuities) are computed using assumptions for
investment yields, mortality and withdrawals, with a provision for adverse deviation, based on generally accepted actuarial methods and assumptions at the time of acquisition or contract issue. The investment yield assumption for the years ended December 31, 2022 and December 31, 2021 was 4.3% for traditional direct life reserves for all contracts, 4.1% for life contingent pay-out annuities, and ranges from 3.6% to 6.9% for PRT annuities with life contingencies. Policies are terminated through surrenders, lapses and maturities, where surrenders represent the voluntary terminations of policies by policyholders, lapses represent cancellations by us due to nonpayment of premiums and maturities are determined by policy contract terms. Surrender assumptions are based upon policyholder experience adjusted for expected future conditions.
For long-duration contracts the assumptions are locked in at contract inception and only modified if we deem the reserves to be inadequate. We periodically review actual and anticipated experience compared to the assumptions used to establish policy benefits. If the net GAAP liability (gross reserves less VOBA, DAC and DSI) is less than the gross premium liability, impairment is deemed to have occurred, and the VOBA, DAC and DSI asset balances are reduced until the net GAAP liability is equal to the gross premium liability. If the VOBA, DAC and DSI asset balances are completely written off and the net GAAP liability is still less than the gross premium liability, then an additional liability is recorded to arrive at the gross premium liability.
Income Taxes
We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities and expected benefits of utilizing net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that it is more likely than not that some portion of the tax benefit will not be realized. We adjust the valuation allowance if, based on our evaluation, there is a change in the amount of deferred income tax assets that are deemed more-likely-than-not to be realized. The impact on deferred taxes of changes in tax rates and laws, if any, is applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period enacted.
Reinsurance
Our insurance subsidiaries enter into reinsurance agreements with other companies in the normal course of business. For arrangements in which F&G follows reinsurance accounting and for most arrangements that are accounted for as separate investment contracts, we present the amounts consistently and on a gross basis in our Consolidated Balance Sheets with the ceded reserves balance presented as a Reinsurance recoverable. Where applicable, deferred gains associated with the reinsurance of insurance and investment contracts will be included within Accounts payable and accrued expenses with the related accretion reflected within Life insurance premiums and other fees on the Consolidated Balance Sheets and Statements of Earnings, respectively. Where applicable, deferred costs associated with the reinsurance of insurance and investment contracts will be included within the Prepaid expense and other assets with the related amortization reflected within Other operating expenses in the Consolidated Balance Sheets and Statements of Earnings, respectively. Premium and expense are recorded net of reinsurance ceded for both insurance and investment contracts.
For some arrangements for which deposit accounting is applied or the arrangement is accounted for as a separate investment contract, the assets and liabilities of certain reinsurance contracts are presented on a net basis in the accompanying Consolidated Balance Sheets. The related net investment income, investment gain/loss, and change in reserves are presented net on the accompanying Consolidated Statements of Earnings. F&G intends to apply the right of offset where there is a right of offset explicit in the reinsurance agreement. See Note J Reinsurance for more details over F&G's reinsurance agreements.
Revenue Recognition
The Company's life insurance premiums reflect premiums for traditional life policies and life-contingent immediate annuity policies (which includes life-contingent PRT annuities) which are recognized as revenue when
due from the policyholder. We have ceded the majority of our traditional life business to unaffiliated third-party reinsurers. While the base contract has been reinsured, we continue to retain the return of premium rider. Insurance and investment product fees and other consist primarily of the cost of insurance on IUL policies, unearned revenue on IUL policies, policy rider fees primarily on FIA policies and surrender charges assessed against policy withdrawals in excess of the policyholder's allowable penalty-free amounts. Surrender charges are earned when a policyholder withdraws funds from the contract early or cancels the contract. Other income related to riders is earned when elected by the policyholder.
Premium and annuity deposit collections for FIA, fixed rate annuities, immediate annuities and PRT without life contingencies, and amounts received for funding agreements are reported in the financial statements as deposit liabilities (i.e., Contractholder Funds) instead of as sales or revenues. Similarly, cash payments to customers are reported as decreases in the liability for contractholder funds and not as expenses. Sources of revenues for products accounted for as deposit liabilities include net investment income, surrender, cost of insurance and other charges deducted from Contractholder Funds, and net realized gains (losses) on investments. Components of expenses for products accounted for as deposit liabilities are interest-sensitive and index product benefits (primarily interest credited to account balances or the hedging cost of providing index credits to the policyholder), amortization of VOBA, DAC and DSI, other operating costs and expenses, and income taxes.
Premiums, annuity deposits (net of reinsurance) and funding agreements, which are not included as revenues in the accompanying Consolidated Statements of Earnings, collected by product type were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Period from June 1 to December 31, | | | Period from January 1 to May 31, | | |
| | 2022 | | 2021 | | 2020 | | | 2020 | | |
| | | | | | | | | Predecessor | | |
Product Type | | | | | | | | | | | |
Fixed indexed annuities | | $ | 4,483 | | | $ | 4,420 | | | $ | 1,966 | | | | $ | 1,469 | | | |
Fixed rate annuities | | 1,522 | | | 878 | | | 631 | | | | 146 | | | |
Funding agreements (FABN/FHLB) | | 1,891 | | | 2,658 | | | 100 | | | | 100 | | | |
| | | | | | | | | | | |
Life insurance and other (a) | | 446 | | | 329 | | | 152 | | | | 102 | | | |
Total | | $ | 8,342 | | | $ | 8,285 | | | $ | 2,849 | | | | $ | 1,817 | | | |
(a)Life insurance and other primarily includes indexed universal life insurance.
Interest and investment income consist primarily of interest payments received on fixed maturity security holdings and dividends received on equity and preferred security holdings along with the investment income of limited partnerships and is recognized when earned.
Benefits and Other Changes in Policy Reserves
Benefit expenses for FIAs, fixed rate annuities, IUL policies and funding agreements include interest credited and, for FIA and IUL policies, index credits, to contractholder account balances. Benefit claims in excess of contract account balances, net of reinsurance recoveries, are charged to expense in the period that they are earned by the policyholder based on their selected strategy or strategies. Interest crediting rates associated with funds invested in the general account of our insurance subsidiaries for the years ended December 31 2022 and December 31, 2021 range from 0.5% to 6.0% for fixed rate annuities and FIAs combined and 3.0% to 4.8% for IULs. For funding agreements, the rates range from 0.8% to 5.15% for the year ended December 31, 2022 and 0.2% to 5.0% for the year ended December 31, 2021. Other changes in policy reserves include the change in the fair value of the FIA embedded derivative and the change in the SOP 03-1 reserve for GMWB and GMDB benefits.
Other changes in policy reserves also include the change in reserves for life insurance products. For traditional life and immediate annuities (which includes PRT annuities with life contingencies), policy benefit claims are charged to expense in the period that the claims are incurred, net of reinsurance recoveries.
Stock-Based Compensation Plans
We account for stock-based compensation plans using the fair value method. Using the fair value method of accounting, compensation cost is measured based on the fair value of the award at the grant date using quoted market prices, and recognized over the service period.
Earnings Per Share
Basic earnings per share ("EPS"), as presented on the Consolidated Statement of Earnings, is computed by dividing net earnings from continuing operations and separately from discontinued operations by the weighted average number of common shares outstanding during the period. In periods when earnings are positive, diluted earnings per share is calculated by dividing net earnings from continuing operations and separately from discontinued operations by the weighted average number of common shares outstanding plus the impact of assumed conversions of potentially dilutive securities. For periods when we recognize a net loss, diluted earnings per share is equal to basic earnings per share as the impact of assumed conversions of potentially dilutive securities is considered to be antidilutive. Prior to the FNF acquisition, we had certain non-vested stock, stock options, warrants and performance share units, which have been treated as common share equivalents for purposes of calculating diluted earnings per share for periods in which positive earnings have been reported. For periods prior to the FNF acquisition, the effect of a potential conversion of outstanding preferred shares to common shares is not considered in the diluted EPS calculation as the preferred shareholders did not yet have the right to convert.
On June 24, 2022, the following action previously approved by the F&G board of directors became effective: (i) a stock split in a ratio of 105,000 for 1. Earnings per share has been retrospectively adjusted to reflect as if the split occurred as of June 1, 2020, in accordance with GAAP.
Refer to Note P - Earnings Per Share for more details over our calculation of EPS.
Comprehensive Earnings (Loss)
We report Comprehensive earnings (loss) in accordance with GAAP on the Consolidated Statements of Comprehensive Earnings. Total comprehensive earnings are defined as all changes in shareholders' equity during a period, other than those resulting from investments by and distributions to shareholders. While total comprehensive earnings is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive earnings or loss represents the cumulative balance of other comprehensive earnings, net of tax, as of the balance sheet date. Amounts reclassified to net earnings relate to the realized gains (losses) on our investments and other financial instruments, excluding investments in unconsolidated affiliates, and are included in Recognized gains and losses, net on the Consolidated Statements of Earnings.
Management Estimates
The preparation of these Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Periodically, and at least annually, typically in the third quarter, we review the assumptions associated with reserves for policy benefits, product guarantees, and amortization of intangibles. During the fourth quarter of 2022, based on increases in interest rates and pricing changes during 2022, we updated certain FIA assumptions used to calculate the fair value of the embedded derivative component within contractholder funds and certain assumptions used to calculate SOP 03-1 liabilities and intangible balances. These changes, taken together, resulted in an increase in contractholder funds and future policy benefits of $97 million and an increase to intangible assets of $47 million.
During the third quarter of 2021, we implemented a new actuarial valuation system. As a result, our third quarter 2021 assumption updates include model refinements and assumption updates resulting from the implementation. The system implementation and assumption review process that occurred in the third quarter of 2021, included refinements in the calculation of the fair value of the embedded derivative component of our FIAs within contractholder funds and updates to the surrender rates, GMWB utilization, IUL premium persistency,
maintenance expenses, and earned rate assumptions to reflect our current and expected future experience. These changes, taken together, resulted in a decrease in contractholder funds and future policy reserves of $425 million and a decrease to intangible assets of $136 million. These model refinements and assumptions are also used in the SOP 03-1 liability for GMWB and GMDB benefits and resulted in an increase in the liability of $28 million. There was no material change to underlying policyholder behavior. The majority of the changes represent one-time adjustments in the third quarter of 2021 related to the cumulative impact of the system implementation and are not expected to re-occur in the future.
Note B — Fair Value of Financial Instruments
Our measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset, or non-performance risk, which may include our own credit risk. We estimate an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market for that asset or liability in the absence of a principal market as opposed to the price that would be paid to acquire the asset or assume a liability (“entry price”). We categorize financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows:
Level 1 – Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date.
Level 2 – Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads, and yield curves.
Level 3 – Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date based on the best information available in the circumstances.
NAV - Certain equity investments are measured using NAV as a practical expedient in determining fair value. In addition, our unconsolidated affiliates (primarily limited partnerships) are primarily accounted for using the equity method of accounting with fair value determined using NAV as a practical expedient. Our carrying value reflects our pro rata ownership percentage as indicated by NAV in the limited partnership financial statements, which we may adjust if we determine NAV is not calculated consistent with investment company fair value principles. The underlying investments of the limited partnerships may have significant unobservable inputs, which may include, but are not limited to, comparable multiples and weighted average cost of capital rates applied in valuation models or a discounted cash flow model. Additionally, management meets quarterly with the general partner to determine whether any credit or other market events have occurred since prior quarter financial statements to ensure any material events are properly included in current quarter valuation and investment income.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. In addition to the unobservable inputs, Level 3 fair value investments may include observable components, which are components that are actively quoted or can be validated to market-based sources.
The carrying amounts and estimated fair values of our financial instruments for which the disclosure of fair values is required, including financial assets and liabilities measured and carried at fair value on a recurring basis, with the exception of investment contracts, portions of other long-term investments and debt, which are disclosed later within this footnote, was summarized according to the hierarchy previously described, as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | NAV | | Fair Value | | Carrying Amount |
Assets | | | | | | | | | | | |
Cash and cash equivalents | $ | 960 | | | $ | — | | | $ | — | | | $ | — | | | $ | 960 | | | $ | 960 | |
Fixed maturity securities, available-for-sale: | | | | | | | | | | | |
Asset-backed securities | — | | | 5,204 | | | 6,263 | | | — | | | 11,467 | | | 11,467 | |
Commercial mortgage-backed securities | — | | | 2,999 | | | 37 | | | — | | | 3,036 | | | 3,036 | |
Corporates | — | | | 11,472 | | | 1,427 | | | — | | | 12,899 | | | 12,899 | |
Hybrids | 93 | | | 612 | | | — | | | — | | | 705 | | | 705 | |
Municipals | — | | | 1,381 | | | 29 | | | — | | | 1,410 | | | 1,410 | |
Residential mortgage-backed securities | — | | | 1,219 | | | 302 | | | — | | | 1,521 | | | 1,521 | |
U.S. Government | 32 | | | — | | | — | | | — | | | 32 | | | 32 | |
Foreign Governments | — | | | 132 | | | 16 | | | — | | | 148 | | | 148 | |
Preferred securities | 248 | | | 474 | | | — | | | — | | | 722 | | | 722 | |
Equity securities | 54 | | | — | | | — | | | 47 | | | 101 | | | 101 | |
Derivative investments | — | | | 244 | | | — | | | — | | | 244 | | | 244 | |
Short term investments | 1,556 | | | — | | | — | | | — | | | 1,556 | | | 1,556 | |
Reinsurance related embedded derivative, included in other assets | — | | | 279 | | | — | | | — | | | 279 | | | 279 | |
Other long-term investments | — | | | — | | | 71 | | | — | | | 71 | | | 71 | |
| | | | | | | | | | | |
Total financial assets at fair value | $ | 2,943 | | | $ | 24,016 | | | $ | 8,145 | | | $ | 47 | | | $ | 35,151 | | | $ | 35,151 | |
Liabilities | | | | | | | | | | | |
| | | | | | | | | | | |
Derivatives: | | | | | | | | | | | |
FIA/ IUL embedded derivatives, included in contractholder funds | — | | | — | | | 3,115 | | | — | | | 3,115 | | | 3,115 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total financial liabilities at fair value | $ | — | | | $ | — | | | $ | 3,115 | | | $ | — | | | $ | 3,115 | | | $ | 3,115 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | NAV | | Fair Value | | Carrying Amount |
Assets | | | | | | | | | | | |
Cash and cash equivalents | $ | 1,533 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,533 | | | $ | 1,533 | |
Fixed maturity securities, available-for-sale: | | | | | | | | | | | |
Asset-backed securities | — | | | 4,736 | | | 3,959 | | | — | | | 8,695 | | | 8,695 | |
Commercial mortgage-backed securities | — | | | 2,929 | | | 35 | | | — | | | 2,964 | | | 2,964 | |
Corporates | — | | | 13,883 | | | 1,121 | | | — | | | 15,004 | | | 15,004 | |
Hybrids | 132 | | | 749 | | | — | | | — | | | 881 | | | 881 | |
Municipals | — | | | 1,398 | | | 43 | | | — | | | 1,441 | | | 1,441 | |
Residential mortgage-backed securities | — | | | 722 | | | — | | | — | | | 722 | | | 722 | |
U.S. Government | 50 | | | — | | | — | | | — | | | 50 | | | 50 | |
Foreign Governments | — | | | 187 | | | 18 | | | — | | | 205 | | | 205 | |
Preferred securities | 407 | | | 620 | | | 1 | | | — | | | 1,028 | | | 1,028 | |
Equity securities | 95 | | | — | | | — | | | 48 | | | 143 | | | 143 | |
| | | | | | | | | | | |
Derivative investments | — | | | 816 | | | — | | | | | 816 | | | 816 | |
Short-term investments | 50 | | | 2 | | | 321 | | | — | | | 373 | | | 373 | |
Other long-term investments | — | | | — | | | 78 | | | — | | | 78 | | | 78 | |
| | | | | | | | | | | |
Total financial assets at fair value | $ | 2,267 | | | $ | 26,042 | | | $ | 5,576 | | | $ | 48 | | | $ | 33,933 | | | $ | 33,933 | |
Liabilities | | | | | | | | | | | |
| | | | | | | | | | | |
Derivatives: | | | | | | | | | | | |
FIA/ IUL embedded derivatives, included in contractholder funds | — | | | — | | | 3,883 | | | — | | | 3,883 | | | 3,883 | |
Reinsurance related embedded derivatives, included in accounts payable and accrued liabilities | — | | | 73 | | | — | | | — | | | 73 | | | 73 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total financial liabilities at fair value | $ | — | | | $ | 73 | | | $ | 3,883 | | | $ | — | | | $ | 3,956 | | | $ | 3,956 | |
Valuation Methodologies
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Balance Sheets for these instruments approximate fair value.
Fixed Maturity Preferred and Equity Securities
We measure the fair value of our securities based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity, preferred or equity security, and we will then consistently apply the valuation methodology to measure the security’s fair value. Our fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach include third-party pricing services, independent broker quotations, or pricing matrices. We use observable and unobservable inputs in our valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. In addition, market indicators and industry and economic events are monitored and further market data will be acquired when certain thresholds are met.
For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. The significant input used in the fair value measurement of equity securities for which the market approach valuation technique is employed is yield for comparable securities. Increases or decreases in the yields would result in lower or higher, respectively, fair value measurements. For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. We believe the broker quotes are prices at which trades could be executed based on historical trades executed at broker-quoted or slightly higher prices.
We analyze the third-party valuation methodologies and related inputs to perform assessments to determine the appropriate level within the fair value hierarchy. However, we did not adjust prices received from third parties as of December 31, 2022 or December 31, 2021.
Certain equity investments are measured using NAV as a practical expedient in determining fair value.
Derivative Financial Instruments
The fair value of call options is based upon valuation pricing models, which represents what we would expect to receive or pay at the balance sheet date if we canceled the options, entered into offsetting positions, or exercised the options. Fair values for these instruments are determined internally, based on industry accepted valuation pricing models, which use market-observable inputs, including interest rates, yield curve volatilities, and other factors.
The fair value of futures contracts (specifically for FIA contracts) represents the cumulative unsettled variation margin (open trade equity, net of cash settlements), which represents what we would expect to receive or pay at the balance sheet date if we canceled the contracts or entered into offsetting positions. These contracts are classified as Level 1.
The fair value measurement of the FIA/IUL embedded derivatives included in contractholder funds is determined through a combination of market observable information and significant unobservable inputs using the option budget method. The market observable inputs are the market value of option and treasury rates. The significant unobservable inputs are the budgeted option cost (i.e., the expected cost to purchase call options in future periods to fund the equity indexed linked feature), surrender rates, mortality multiplier and non-performance spread. The mortality multiplier at December 31, 2022 and December 31, 2021 was applied to the 2012 Individual Annuity mortality tables. Increases or decreases in the market value of an option in isolation would result in a higher or lower, respectively, fair value measurement. Increases or decreases in treasury rates, mortality multiplier, surrender rates, or non-performance spread in isolation would result in a lower or higher fair value measurement, respectively. Generally, a change in any one unobservable input would not directly result in a change in any other unobservable input. Also refer to Management's Estimates in Note A Business and Summary of Significant Accounting Policies regarding updated assumptions during the fourth quarter of 2022 and the implementation of a new actuarial valuation system and assumption updates during the third quarter of 2021. The system implementation and assumption review process included refinements in the calculation of the fair value of the embedded derivative component of our fixed indexed annuities.
The fair value of the reinsurance-related embedded derivatives in the funds withheld reinsurance agreements with Kubera (effective October 31, 2021, this agreement was novated from Kubera to Somerset, a certified third party reinsurer) and Aspida Re are estimated based upon the fair value of the assets supporting the funds withheld from reinsurance liabilities. The fair value of the assets is based on a quoted market price of similar assets (Level 2), and therefore the fair value of the embedded derivative is based on market-observable inputs and classified as Level 2. See Note J Reinsurance for further discussion on F&G reinsurance agreements.
Short-term Investments
The carrying amounts reported in the Consolidated Balance Sheets for these instruments approximate fair value.
Other Long-term Investments
We hold a fund-linked note, which provides for an additional payment at maturity based on the value of an embedded derivative based on the actual return of a dedicated return fund. Fair value of the embedded derivative is based on an unobservable input, the net asset value of the fund at the balance sheet date. The embedded derivative is similar to a call option on the net asset value of the fund with a strike price of zero since we will not be required to make any additional payments at maturity of the fund-linked note in order to receive the net asset value of the fund on the maturity date. A Black-Scholes model determines the net asset value of the fund as the fair value of the call option regardless of the values used for the other inputs to the option pricing model. The net asset value of the fund is provided by the fund manager at the end of each calendar month and represents the value an investor would receive if it withdrew its investment on the balance sheet date. Therefore, the key unobservable input used in the
Black-Scholes model is the value of the fund. As the value of the fund increases or decreases, the fair value of the embedded derivative will increase or decrease. See further discussion on the available-for-sale embedded derivative in Note D Derivative Financial Instruments.
The fair value of the credit-linked note is based on a weighted average of a broker quote and a discounted cash flow analysis. The discounted cash flow approach is based on the expected portfolio cash flows and amortization schedule reflecting investment expectations, adjusted for assumptions on the portfolio's default and recovery rates, and the note's discount rate. The fair value of the note is provided by the fund manager at the end of each quarter.
Quantitative information regarding significant unobservable inputs used for recurring Level 3 fair value measurements of financial instruments carried at fair value as of December 31, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at | | Valuation Technique | | Unobservable Input(s) | | Range (Weighted average) |
| December 31, 2022 | | | |
| (in millions) | | | | December 31, 2022 |
Assets | | | | | | | |
Asset-backed securities | $ | 5,916 | | | Broker-quoted | | Offered quotes | | 52.85% - 117.17% (94.18%) |
| | | | | | | |
Asset-backed securities | 347 | | | Third-Party Valuation | | Offered quotes | | 41.43% - 210.50% (67.99%) |
Commercial mortgage-backed securities | 20 | | | Broker-quoted | | Offered quotes | | 109.02% - 109.02% (109.02%) |
Commercial mortgage-backed securities | 17 | | | Third-Party Valuation | | Offered quotes | | 74.66% - 88.48% (82.74%) |
Corporates | 602 | | | Broker-quoted | | Offered quotes | | 79.16% - 102.53% (94.16%) |
| | | | | | | |
Corporates | 825 | | | Third-Party Valuation | | Offered quotes | | —% - 104.96% (89.69%) |
| | | | | | | |
Municipals | 29 | | | Third-Party Valuation | | Offered quotes | | 93.95% - 93.95% (93.95%) |
Residential mortgage-backed securities | 302 | | | Broker-quoted | | Offered quotes | | 0.00% - 91.04% (86.38%) |
| | | | | | | |
Foreign governments | 16 | | | Third-Party Valuation | | Offered quotes | | 99.78% - 102.29% (100.56%) |
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Other long-term investments: | | | | | | | |
Available-for-sale embedded derivative | 23 | | | Black Scholes model | | Market value of fund | | 100.00% |
Secured borrowing receivable | 10 | | | Broker-quoted | | Offered quotes | | 100.00% - 100.00% (100.00%) |
Credit linked note | 15 | | | Broker-quoted | | Offered quotes | | 96.23% |
Investment in affiliate | 23 | | | Market Comparable Company Analysis | | EBITDA multiple | | 5x-5.5x |
| | | | | | | |
Total financial assets at fair value | $ | 8,145 | | | | | | | |
Liabilities | | | | | | | |
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Derivative investments: | | | | | | | |
FIA/IUL embedded derivatives, included in contractholder funds | 3,115 | | | Discounted cash flow | | Market value of option | | 0.00% - 23.90% (0.87%) |
| | | | | Swap rates | | 3.88% - 4.73% (4.31%) |
| | | | | Mortality multiplier | | 100.00% - 100.00% (100.00%) |
| | | | | Surrender rates | | 0.25% - 70.00% (6.57%) |
| | | | | Partial withdrawals | | 2.00% - 29.41% (2.73%) |
| | | | | Non-performance spread | | 0.48% - 1.44% (1.30%) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Option cost | | 0.07% - 4.97% (1.89%) |
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| | | | | | | |
Total financial liabilities at fair value | $ | 3,115 | | | | | | | |
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| Fair Value at | | Valuation Technique | | Unobservable Input(s) | | Range (Weighted average) |
| December 31, 2021 | | | |
| (in millions) | | | | December 31, 2021 |
Assets | | | | | | | |
Asset-backed securities | $ | 3,844 | | | Broker-quoted | | Offered quotes | | 52.56% - 260.70% (97.06)% |
| | | | | | | |
Asset-backed securities | 115 | | | Third-Party Valuation | | Offered quotes | | 93.02% - 108.45% (104.95)% |
| | | | | | | |
Commercial mortgage-backed securities | 24 | | | Broker-quoted | | Offered quotes | | 126.70% - 126.70% (126.70)% |
| | | | | | | |
Commercial mortgage-backed securities | 11 | | | Third Party Valuation | | Offered quotes | | 97.91% - 97.91% (97.91)% |
Corporates | 380 | | | Broker-quoted | | Offered quotes | | —% - 109.69% (100.91)% |
Corporates | 741 | | | Third-Party Valuation | | Offered quotes | | 85.71% - 119.57% (107.72)% |
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Municipals | 43 | | | Third-Party Valuation | | Offered quotes | | 135.09% - 135.09% (135.09)% |
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Foreign governments | 18 | | | Third-Party Valuation | | Offered quotes | | 107.23% - 116.44%% (110.11)% |
Short-term | 321 | | | Broker-quoted | | Offered quotes | | 100.00% - 100.00% (100.00)% |
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Preferred securities | 1 | | | Income-Approach | | Yield | | 2.43% |
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Other long-term investments: | | | | | | | |
Available-for-sale embedded derivative | 34 | | | Black Scholes model | | Market value of fund | | 100.00% |
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Credit linked note | 23 | | | Broker-quoted | | Offered quotes | | 100.00% |
Investment in affiliate | 21 | | | Market Comparable Company Analysis | | EBITDA multiple | | 8x-8x |
Total financial assets at fair value | $ | 5,576 | | | | | | | |
Liabilities | | | | | | | |
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Derivatives: | | | | | | | |
FIA/ IUL embedded derivatives, included in contractholder funds | 3,883 | | | Discounted cash flow | | Market value of option | | —% - 38.72% (3.16)% |
| | | | | Swap rates | | 0.05% - 1.94% (1.00)% |
| | | | | Mortality multiplier | | 100.00% - 100.00% (100.00)% |
| | | | | Surrender rates | | 0.25% - 70.00% (6.26)% |
| | | | | Partial withdrawals | | 2.00% - 23.26% (2.72)% |
| | | | | Non-performance spread | | 0.43% - 1.01% (0.68)% |
| | | | | Option cost | | 0.07% - 4.97% (1.83)% |
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| | | | | | | |
Total financial liabilities at fair value | $ | 3,883 | | | | | | | |
The following tables summarize changes to the Company’s financial instruments carried at fair value and classified within Level 3 of the fair value hierarchy for the years ended December 31, 2022 and 2021, respectively.
This summary excludes any impact of amortization of VOBA, DAC and DSI. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.
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| Year ended December 31, 2022 | | |
| (in millions) | | |
| Balance at Beginning of Period | | | Total Gains (Losses) | | Purchases | | Sales | | Settlements | | Net transfer In (Out) of Level 3 (a) | | Balance at End of Period | | Change in Unrealized Included in OCI |
| | Included in Earnings | | Included in AOCI | | | | | | |
Assets | | | | | | | | | | | | | | | | | | |
Fixed maturity securities available-for-sale: | | | | | | | | | | | | | | | | | | |
Asset-backed securities | $ | 3,959 | | | | $ | (6) | | | $ | (393) | | | $ | 3,269 | | | $ | (39) | | | $ | (541) | | | $ | 14 | | | $ | 6,263 | | | $ | (426) | |
Commercial mortgage-backed securities | 35 | | | | — | | | (5) | | | — | | | — | | | — | | | 7 | | | 37 | | | (4) | |
Corporates | 1,121 | | | | 1 | | | (187) | | | 710 | | | (20) | | | (215) | | | 17 | | | 1,427 | | | (188) | |
Hybrids | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Municipals | 43 | | | | — | | | (14) | | | — | | | — | | | — | | | — | | | 29 | | | (13) | |
Residential mortgage-backed securities | — | | | | — | | | — | | | 316 | | | — | | | — | | | (14) | | | 302 | | | — | |
Foreign Governments | 18 | | | | — | | | (2) | | | — | | | — | | | — | | | — | | | 16 | | | (1) | |
Short-term | 321 | | | | — | | | (1) | | | 20 | | | — | | | — | | | (340) | | | — | | | (1) | |
| | | | | | | | | | | | | | | | | | |
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Preferred securities | 1 | | | | — | | | (1) | | | — | | | — | | | — | | | — | | | — | | | (1) | |
Equity securities | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Other long-term investments: | | | | | | | | | | | | | | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Available-for-sale embedded derivative | 34 | | | | (11) | | | — | | | — | | | — | | | — | | | — | | | 23 | | | — | |
Investment in affiliate | 21 | | | | — | | | 2 | | | — | | | — | | | — | | | — | | | 23 | | | 2 | |
| | | | | | | | | | | | | | | | | | |
Credit linked note | 23 | | | | (1) | | | (1) | | | — | | | (2) | | | (4) | | | — | | | 15 | | | — | |
Secured borrowing receivable | — | | | | — | | | — | | | — | | | — | | | — | | | 10 | | | 10 | | | — | |
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Total assets at Level 3 fair value | $ | 5,576 | | | | $ | (17) | | | $ | (602) | | | $ | 4,315 | | | $ | (61) | | | $ | (760) | | | $ | (306) | | | $ | 8,145 | | | $ | (632) | |
Liabilities | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
FIA/IUL embedded derivatives, included in contractholder funds | 3,883 | | | | (1,382) | | | — | | | 768 | | | — | | | (154) | | | — | | | 3,115 | | | — | |
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Total liabilities at Level 3 fair value | $ | 3,883 | | | | $ | (1,382) | | | $ | — | | | $ | 768 | | | $ | — | | | $ | (154) | | | $ | — | | | $ | 3,115 | | | $ | — | |
(a)The net transfers out of Level 3 during the year ended December 31, 2022 were to Level 2, except for the net transfers out related to our other long-term investment, which was to Level 1.
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| Year ended December 31, 2021 |
| (in millions) |
| Balance at Beginning of Period | | Total Gains (Losses) | | Purchases | | Sales | | Settlements | | Net transfer In (Out) of Level 3 (a) | | Balance at End of Period | | Change in Unrealized Included in OCI |
| | Included in Earnings | | Included in AOCI | | | | | | |
Assets | | | | | | | | | | | | | | | | | |
Fixed maturity securities available-for-sale: | | | | | | | | | | | | | | | | | |
Asset-backed securities | $ | 1,350 | | | $ | (1) | | | $ | (8) | | | $ | 3,417 | | | $ | (97) | | | $ | (595) | | | $ | (107) | | | $ | 3,959 | | | $ | 4 | |
Commercial mortgage-backed securities | 26 | | | — | | | (3) | | | 12 | | | — | | | — | | | — | | | 35 | | | 1 | |
Corporates | 1,274 | | | 8 | | | (40) | | | 154 | | | (9) | | | (247) | | | (19) | | | 1,121 | | | 23 | |
Hybrids | 4 | | | — | | | — | | | — | | | — | | | (4) | | | — | | | — | | | — | |
Municipals | 43 | | | — | | | — | | | — | | | — | | | — | | | — | | | 43 | | | 7 | |
Residential mortgage-backed securities | 483 | | | — | | | (1) | | | 14 | | | — | | | (102) | | | (394) | | | — | | | 22 | |
Foreign Governments | 17 | | | — | | | 1 | | | — | | | — | | | — | | | — | | | 18 | | | 2 | |
Short-term | — | | | — | | | 2 | | | 820 | | | — | | | (501) | | | — | | | 321 | | | — | |
Preferred securities | 1 | | | (1) | | | 1 | | | — | | | — | | | — | | | — | | | 1 | | | — | |
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Other long-term investments: | | | | | | | | | | | | | | | | | |
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Available-for-sale embedded derivative | 27 | | | 7 | | | — | | | — | | | — | | | — | | | — | | | 34 | | | — | |
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Credit linked note | 23 | | | — | | | — | | | — | | | — | | | — | | | — | | | 23 | | | — | |
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Investment in affiliate | — | | | — | | | — | | | 21 | | | — | | | — | | | — | | | 21 | | | — | |
Total assets at Level 3 fair value | $ | 3,248 | | | $ | 13 | | | $ | (48) | | | $ | 4,438 | | | $ | (106) | | | $ | (1,449) | | | $ | (520) | | | $ | 5,576 | | | $ | 59 | |
Liabilities | | | | | | | | | | | | | | | | | |
Future policy benefits | 5 | | | — | | | — | | | — | | | (4) | | | (1) | | | — | | | — | | | — | |
FIA/IUL embedded derivatives, included in contractholder funds | 3,404 | | | 121 | | | — | | | 513 | | | — | | | (155) | | | — | | | 3,883 | | | — | |
| | | | | | | | | | | | | | | | | |
Total liabilities at Level 3 fair value | $ | 3,409 | | | $ | 121 | | | $ | — | | | $ | 513 | | | $ | (4) | | | $ | (156) | | | $ | — | | | $ | 3,883 | | | $ | — | |
(a) The net transfers out of Level 3 during the year ended December 31, 2021 were to Level 2. Valuation Methodologies and Associated Inputs for Financial Instruments Not Carried at Fair Value
The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments not carried at fair value. Considerable judgment is required to develop these assumptions used to measure fair value. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments.
Mortgage Loans
The fair value of mortgage loans is established using a discounted cash flow method based on internal credit rating, maturity and future income. This yield-based approach is sourced from our third-party vendor. The internal ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt service coverage, loan-to-value, quality of tenancy, borrower, and payment record. The inputs used to measure the fair value of our mortgage loans are classified as Level 3 within the fair value hierarchy.
Investments in Unconsolidated affiliates
The fair value of investments in unconsolidated affiliates is determined using NAV as a practical expedient. As discussed in Note A Business and Summary of Significant Accounting Policies, recognition of income and adjustments to the carrying amount are delayed due to the availability of the related financial statements, which are obtained from the general partner generally on a one to three-month delay.
Policy Loans (included within Other long-term investments)
Fair values for policy loans are estimated from a discounted cash flow analysis, using interest rates currently being offered for loans with similar credit risk. Loans with similar characteristics are aggregated for purposes of the calculations.
Company Owned Life Insurance
Company owned life insurance (“COLI”) is a life insurance program used to finance certain employee benefit expenses. The fair value of COLI is based on net realizable value, which is generally cash surrender value. COLI is classified as Level 3 within the fair value hierarchy.
Other Invested Assets (included within Other long-term investments)
The fair value of bank loans is estimated using a discounted cash flow method with the discount rate based on weighted average cost of capital ("WACC"). This yield-based approach is sourced from a third-party vendor and the WACC establishes a market participant discount rate by determining the hypothetical capital structure for the asset should it be underwritten as of each period end. Other invested assets are classified as Level 3 within the fair value hierarchy.
Investment Contracts
Investment contracts include deferred annuities (FIAs and fixed rate annuities), indexed universal life policies (“IULs”), funding agreements and PRT and immediate annuity contracts without life contingencies. The FIA/ IUL embedded derivatives, included in contractholder funds, are excluded as they are carried at fair value. The fair value of the FIA, fixed rate annuity and IUL contracts is based on their cash surrender value (i.e. the cost the Company would incur to extinguish the liability) as these contracts are generally issued without an annuitization date. The fair value of funding agreements and PRT and immediate annuity contracts without life contingencies is derived by calculating a new fair value interest rate using the updated yield curve and treasury spreads as of the respective reporting date. The Company is not required to, and has not, estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosures of fair value.
Other
Federal Home Loan Bank of Atlanta (“FHLB”) common stock, Accounts receivable and Notes receivable are carried at cost, which approximates fair value. FHLB common stock is classified as Level 2 within the fair value hierarchy. Accounts receivable and Notes receivable are classified as Level 3 within the fair value hierarchy.
Debt
The fair value of the $550 million aggregate principal amount of 5.50% senior notes due 2025 is based on quoted market prices of debt with similar credit risk and tenor. The inputs used to measure the fair value of this debt results in a Level 2 classification within the fair value hierarchy. The fair value of the $400 million promissory note with FNF is estimated using a discounted cash flow analysis wherein contractual cash flows are discounted using then current interest rates being offered for debt with similar credit risk and tenor. This debt is classified as Level 3 within the fair value hierarchy.
The carrying value of the revolving credit facility at December 31, 2022 approximates fair value as the rates are comparable to those at which we could currently borrow under similar terms. As such, the fair value of the revolving credit facility was classified as a Level 2 measurement.
The following tables provide the carrying value and estimated fair value of our financial instruments that are carried on the Consolidated Balance Sheets at amounts other than fair value, summarized according to the fair value hierarchy previously described.
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| December 31, 2022 |
| (in millions) |
| Level 1 | | Level 2 | | Level 3 | | NAV | | Total Estimated Fair Value | | Carrying Amount |
Assets | | | | | | | | | | | |
FHLB common stock | $ | — | | | $ | 99 | | | $ | — | | | $ | — | | | $ | 99 | | | $ | 99 | |
Commercial mortgage loans | — | | | — | | | 2,083 | | | — | | | 2,083 | | | 2,406 | |
Residential mortgage loans | — | | | — | | | 1,892 | | | — | | | 1,892 | | | 2,148 | |
Investments in unconsolidated affiliates | — | | | — | | | — | | | 2,427 | | | 2,427 | | | 2,427 | |
Policy loans | — | | | — | | | 52 | | | — | | | 52 | | | 52 | |
Other invested assets | — | | | — | | | 15 | | | — | | | 15 | | | 15 | |
Company-owned life insurance | — | | | — | | | 328 | | | — | | | 328 | | | 328 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total | $ | — | | | $ | 99 | | | $ | 4,370 | | | $ | 2,427 | | | $ | 6,896 | | | $ | 7,475 | |
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Liabilities | | | | | | | | | | | |
Investment contracts, included in contractholder funds | — | | | — | | | 34,464 | | | — | | | 34,464 | | | 38,412 | |
Debt | — | | | 1,092 | | | — | | | — | | | 1,092 | | | 1,114 | |
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Total | $ | — | | | $ | 1,092 | | | $ | 34,464 | | | $ | — | | | $ | 35,556 | | | $ | 39,526 | |
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| December 31, 2021 |
| (in millions) |
| Level 1 | | Level 2 | | Level 3 | | NAV | | Total Estimated Fair Value | | Carrying Amount |
Assets | | | | | | | | | | | |
FHLB common stock | $ | — | | | $ | 72 | | | $ | — | | | $ | — | | | $ | 72 | | | $ | 72 | |
Commercial mortgage loans | — | | | — | | | 2,265 | | | — | | | 2,265 | | | 2,168 | |
Residential mortgage loans | — | | | — | | | 1,549 | | | — | | | 1,549 | | | 1,581 | |
Investments in unconsolidated affiliates | — | | | — | | | — | | | 2,350 | | | 2,350 | | | 2,350 | |
Policy loans | — | | | — | | | 39 | | | — | | | 39 | | | 39 | |
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Company-owned life insurance | — | | | — | | | 299 | | | — | | | 299 | | | 299 | |
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Total | $ | — | | | $ | 72 | | | $ | 4,152 | | | $ | 2,350 | | | $ | 6,574 | | | $ | 6,509 | |
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Liabilities | | | | | | | | | | | |
Investment contracts, included in contractholder funds | — | | | — | | | 27,448 | | | — | | | 27,448 | | | 31,529 | |
Debt | — | | | 615 | | | 412 | | | — | | | 1,027 | | | 977 | |
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Total | $ | — | | | $ | 615 | | | $ | 27,860 | | | $ | — | | | $ | 28,475 | | | $ | 32,506 | |
For investments for which NAV is used, we do not have any significant restrictions in our ability to liquidate our positions in these investments, other than obtaining general partner approval, nor do we believe it is probable a price less than NAV would be received in the event of a liquidation.
We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting
period in which the changes occur. The transfers into and out of Level 3 were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value.
Note C — Investments
Our fixed maturity securities investments have been designated as available-for-sale, and are carried at fair value, net of allowance for expected credit losses, with unrealized gains and losses included in AOCI, net of associated adjustments for VOBA, DAC, DSI, UREV, SOP 03-1 reserves, and deferred income taxes. Our preferred and equity securities investments are carried at fair value with unrealized gains and losses included in net earnings. The Company’s consolidated investments are summarized as follows (in millions):
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| December 31, 2022 |
| Amortized Cost | | Allowance for Expected Credit Losses | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Carrying Value |
Available-for-sale securities | | | | | | | | | | | |
Asset-backed securities | $ | 12,209 | | | $ | (8) | | | $ | 36 | | | $ | (770) | | | $ | 11,467 | | | $ | 11,467 | |
Commercial mortgage-backed securities | 3,309 | | | (1) | | | 12 | | | (284) | | | 3,036 | | | 3,036 | |
Corporates | 15,879 | | | (15) | | | 30 | | | (2,995) | | | 12,899 | | | 12,899 | |
Hybrids | 781 | | | — | | | 8 | | | (84) | | | 705 | | | 705 | |
Municipals | 1,695 | | | — | | | 4 | | | (289) | | | 1,410 | | | 1,410 | |
Residential mortgage-backed securities | 1,631 | | | (7) | | | 6 | | | (109) | | | 1,521 | | | 1,521 | |
U.S. Government | 34 | | | — | | | — | | | (2) | | | 32 | | | 32 | |
Foreign Governments | 185 | | | — | | | — | | | (37) | | | 148 | | | 148 | |
Total available-for-sale securities | $ | 35,723 | | | $ | (31) | | | $ | 96 | | | $ | (4,570) | | | $ | 31,218 | | | $ | 31,218 | |
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| December 31, 2021 |
| Amortized Cost | | Allowance for Expected Credit Losses | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Carrying Value |
Available-for-sale securities | | | | | | | | | | | |
Asset-backed securities | $ | 8,516 | | | $ | (3) | | | $ | 220 | | | $ | (38) | | | $ | 8,695 | | | $ | 8,695 | |
Commercial mortgage-backed securities | 2,669 | | | (2) | | | 308 | | | (11) | | | 2,964 | | | 2,964 | |
Corporates | 14,372 | | | — | | | 784 | | | (152) | | | 15,004 | | | 15,004 | |
Hybrids | 812 | | | — | | | 69 | | | — | | | 881 | | | 881 | |
Municipals | 1,386 | | | — | | | 66 | | | (11) | | | 1,441 | | | 1,441 | |
Residential mortgage-backed securities | 722 | | | (3) | | | 7 | | | (4) | | | 722 | | | 722 | |
U.S. Government | 50 | | | — | | | — | | | — | | | 50 | | | 50 | |
Foreign Governments | 197 | | | — | | | 8 | | | — | | | 205 | | | 205 | |
Total available-for-sale securities | $ | 28,724 | | | $ | (8) | | | $ | 1,462 | | | $ | (216) | | | $ | 29,962 | | | $ | 29,962 | |
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Securities held on deposit with various state regulatory authorities had a fair value of $17,751 million and $22,219 million at December 31, 2022 and December 31, 2021, respectively.
As of December 31, 2022 and December 31, 2021, the Company held $27 million and no material investments that were non-income producing for a period greater than twelve months, respectively.
As of December 31, 2022 and December 31, 2021, the Company's accrued interest receivable balance was $358 million and $246 million, respectively. Accrued interest receivable is classified within Prepaid expenses and other assets within the Consolidated Balance Sheets.
In accordance with our FHLB agreements, the investments supporting the funding agreement liabilities are pledged as collateral to secure the FHLB funding agreement liabilities and are not available to us for general purposes. The collateral investments had a fair value of $3,387 million and $2,469 million as of December 31, 2022 and December 31, 2021, respectively.
The amortized cost and fair value of fixed maturity securities by contractual maturities, as applicable, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
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| December 31, 2022 | | December 31, 2021 |
| (in millions) | | (in millions) |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Corporates, Non-structured Hybrids, Municipal and U.S. Government Securities: | | | | | | | |
Due in one year or less | $ | 124 | | | $ | 123 | | | $ | 105 | | | $ | 106 | |
Due after one year through five years | 2,193 | | | 2,059 | | | 1,724 | | | 1,754 | |
Due after five years through ten years | 1,840 | | | 1,633 | | | 2,141 | | | 2,201 | |
Due after ten years | 14,417 | | | 11,379 | | | 12,842 | | | 13,515 | |
Subtotal | 18,574 | | | 15,194 | | | 16,812 | | | 17,576 | |
Other securities, which provide for periodic payments: | | | | | | | |
Asset-backed securities | 12,209 | | | 11,467 | | | 8,516 | | | 8,695 | |
Commercial mortgage-backed securities | 3,309 | | | 3,036 | | | 2,669 | | | 2,964 | |
Structured hybrids | — | | | — | | | 5 | | | 5 | |
Residential mortgage-backed securities | 1,631 | | | 1,521 | | | 722 | | | 722 | |
Subtotal | 17,149 | | | 16,024 | | | 11,912 | | | 12,386 | |
Total fixed maturity available-for-sale securities | $ | 35,723 | | | $ | 31,218 | | | $ | 28,724 | | | $ | 29,962 | |
Allowance for Current Expected Credit Loss
We regularly review AFS securities for declines in fair value that we determine to be credit related. For our fixed maturity securities, we generally consider the following in determining whether our unrealized losses are credit related, and if so, the magnitude of the credit loss:
•The extent to which the fair value is less than the amortized cost basis;
•The reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening);
•The financial condition of and near-term prospects of the issuer (including issuer's current credit rating and the probability of full recovery of principal based upon the issuer's financial strength);
•Current delinquencies and nonperforming assets of underlying collateral;
•Expected future default rates;
•Collateral value by vintage, geographic region, industry concentration or property type;
•Subordination levels or other credit enhancements as of the balance sheet date as compared to origination; and
•Contractual and regulatory cash obligations and the issuer's plans to meet such obligations.
We recognize an allowance for current expected credit losses on fixed maturity securities in an unrealized loss position when it is determined, using the factors discussed above, a component of the unrealized loss is related to credit. We measure the credit loss using a discounted cash flow model that utilizes the single best estimate cash flow and the recognized credit loss is limited to the total unrealized loss on the security (i.e. the fair value floor). Cash flows are discounted using the implicit yield of bonds at their time of purchase and the current book yield for asset and mortgage backed securities as well as variable rate securities. We recognize the expected credit losses in Recognized gains and losses, net in the Consolidated Statements of Earnings, with an offset for the amount of non-credit impairments recognized in AOCI. We do not measure a credit loss allowance on accrued investment income because we write-off accrued interest through Interest and investment income when collectability concerns arise.
We consider the following in determining whether write-offs of a security’s amortized cost is necessary:
•We believe amounts related to securities have become uncollectible;
•We intend to sell a security; or
•It is more likely than not that we will be required to sell a security prior to recovery.
If we intend to sell a fixed maturity security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, we will write down the security to current fair value, with a corresponding charge, net of any amount previously recognized as an allowance for expected credit loss, to Recognized gains and losses, net in the accompanying Consolidated Statements of Earnings. If we do not intend to sell a fixed maturity security or it is more likely than not that we will not be required to sell a fixed maturity security before recovery of its amortized cost basis but believe amounts related to a security are uncollectible (generally based on proximity to expected credit loss), an impairment is deemed to have occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge, net of any amount previously recognized as an allowance for expected credit loss, to Recognized gains and losses, net in the accompanying Consolidated Statements of Earnings. The remainder of unrealized loss is held in AOCI.
The activity in the allowance for expected credit losses of available-for-sale securities aggregated by investment category was as follows (in millions):
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| Year ended December 31, 2022 |
| | | Additions | | | Reductions | | | | | | | | |
| Balance at Beginning of Period | | For credit losses on securities for which losses were not previously recorded | | For initial credit losses on purchased securities accounted for as PCD financial assets (a) | | (Additions) reductions in allowance recorded on previously impaired securities | | | For securities sold during the period | | For securities intended/required to be sold prior to recovery of amortized cost basis | | Write offs charged against the allowance | | Recoveries of amounts previously written off | | | | | | Balance at End of Period |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | |
Asset-backed securities | $ | (3) | | | $ | (7) | | | $ | — | | | $ | (1) | | | | $ | 2 | | | $ | — | | | $ | 1 | | | — | | | | | | | $ | (8) | |
Commercial mortgage-backed securities | (2) | | | — | | | — | | | — | | | | 1 | | | — | | | — | | | — | | | | | | | (1) | |
Corporates | — | | | (15) | | | — | | | — | | | | — | | | — | | | — | | | — | | | | | | | (15) | |
| | | | | | | | | | | | | | | | | | | | | | |
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Residential mortgage-backed securities | (3) | | | (2) | | | — | | | (2) | | | | — | | | — | | | — | | | — | | | | | | | (7) | |
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| | | | | | | | | | | | | | | | | | | | | | |
Total available-for-sale securities | $ | (8) | | | $ | (24) | | | $ | — | | | $ | (3) | | | | $ | 3 | | | $ | — | | | $ | 1 | | | $ | — | | | | | | | $ | (31) | |
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| Year ended December 31, 2021 |
| | | Additions | | | Reductions | | | | | | | | |
| Balance at Beginning of Period | | For credit losses on securities for which losses were not previously recorded | | For initial credit losses on purchased securities accounted for as PCD financial assets (a) | | (Additions) reductions in allowance recorded on previously impaired securities | | | For securities sold during the period | | For securities intended/required to be sold prior to recovery of amortized cost basis | | Write offs charged against the allowance | | Recoveries of amounts previously written off | | | | | | Balance at End of Period |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | |
Asset-backed securities | $ | — | | | $ | — | | | $ | (1) | | | $ | (2) | | | | $ | — | | | $ | — | | | $ | — | | | — | | | | | | | $ | (3) | |
Commercial mortgage-backed securities | — | | | (2) | | | — | | | — | | | | — | | | — | | | — | | | — | | | | | | | (2) | |
Corporates | (7) | | | — | | | — | | | 6 | | | | — | | | — | | | — | | | 1 | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage-backed securities | (3) | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | | | | | (3) | |
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| | | | | | | | | | | | | | | | | | | | | | |
Total available-for-sale securities | $ | (10) | | | $ | (2) | | | $ | (1) | | | $ | 4 | | | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | | | | | $ | (8) | |
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| Period from June 1 to December 31, 2020 |
| | | Additions | | | Reductions | | | | | | |
| Balance at Beginning of Period | | For credit losses on securities for which losses were not previously recorded | | For initial credit losses on purchased securities accounted for as PCD financial assets (a) | | (Additions) reductions in allowance recorded on previously impaired securities | | | For securities sold during the period | | For securities intended/required to be sold prior to recovery of amortized cost basis | | Write offs charged against the allowance | | Recoveries of amounts previously written off | | | | Balance at End of Period |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | |
Asset-backed securities | $ | — | | | $ | 7 | | | $ | (9) | | | $ | 2 | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Corporates | — | | | 1 | | | (17) | | | — | | | | 3 | | | 4 | | | 2 | | | — | | | | | (7) | |
Hybrids | — | | | — | | | (3) | | | — | | | | 3 | | | — | | | — | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Residential mortgage-backed securities | — | | | 2 | | | (7) | | | 1 | | | | 1 | | | — | | | — | | | — | | | | | (3) | |
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Total available-for-sale securities | $ | — | | | $ | 10 | | | $ | (36) | | | $ | 3 | | | | $ | 7 | | | $ | 4 | | | $ | 2 | | | $ | — | | | | | $ | (10) | |
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| Period from January 1 to May 31, 2020 |
| | | Additions | | | Reductions | | | | | | |
| Balance at Beginning of Period | | For credit losses on securities for which losses were not previously recorded | | For initial credit losses on purchased securities accounted for as PCD financial assets (a) | | (Additions) reductions in allowance recorded on previously impaired securities | | | For securities sold during the period | | For securities intended/required to be sold prior to recovery of amortized cost basis | | Write offs charged against the allowance | | Recoveries of amounts previously written off | | | | Balance at End of Period |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | |
Asset-backed securities | $ | — | | | $ | (17) | | | $ | — | | | $ | 12 | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | $ | (5) | |
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Corporates | — | | | (28) | | | — | | | — | | | | 8 | | | 12 | | | 1 | | | — | | | | | (7) | |
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Residential mortgage-backed securities | — | | | (6) | | | — | | | 3 | | | | — | | | — | | | — | | | — | | | | | (3) | |
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Total available-for-sale securities | $ | — | | | $ | (51) | | | $ | — | | | $ | 15 | | | | $ | 8 | | | $ | 12 | | | $ | 1 | | | $ | — | | | | | $ | (15) | |
(a) Purchased credit deteriorated financial assets (“PCD”)
PCD’s are AFS securities purchased at a discount, where part of that discount is attributable to credit. Credit loss allowances are calculated for these securities as of the date of their acquisition, with the initial allowance serving to increase amortized cost. The following table summarizes year to date PCD AFS security purchases (in millions).
| | | | | | | | | | |
Purchased credit-deteriorated available-for-sale debt securities | December 31, 2022 | December 31, 2021 | | |
Purchase price | $ | — | | $ | 4 | | | |
Allowance for credit losses at acquisition | — | | 1 | | | |
| | | | |
AFS purchased credit-deteriorated par value | $ | — | | $ | 5 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
The fair value and gross unrealized losses of AFS securities, excluding securities in an unrealized loss position with an allowance for expected credit loss, aggregated by investment category and duration of fair value below amortized cost were as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Less Than 12 Months | | 12 Months or Longer | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Available-for-sale securities | | | | | | | | | | | |
Asset-backed securities | $ | 7,001 | | | $ | (410) | | | $ | 3,727 | | | $ | (360) | | | $ | 10,728 | | | $ | (770) | |
Commercial mortgage-backed securities | 2,065 | | | (168) | | | 475 | | | (116) | | | 2,540 | | | (284) | |
Corporates | 8,780 | | | (1,679) | | | 3,231 | | | (1,312) | | | 12,011 | | | (2,991) | |
Hybrids | 619 | | | (83) | | | 3 | | | (1) | | | 622 | | | (84) | |
Municipals | 948 | | | (176) | | | 352 | | | (113) | | | 1,300 | | | (289) | |
Residential mortgage-backed securities | 990 | | | (51) | | | 184 | | | (22) | | | 1,174 | | | (73) | |
U.S. Government | 11 | | | (1) | | | 21 | | | (1) | | | 32 | | | (2) | |
Foreign Government | 119 | | | (32) | | | 14 | | | (5) | | | 133 | | | (37) | |
Total available-for-sale securities | $ | 20,533 | | | $ | (2,600) | | | $ | 8,007 | | | $ | (1,930) | | | $ | 28,540 | | | $ | (4,530) | |
Total number of available-for-sale securities in an unrealized loss position less than twelve months | | | | | | | | | | | 2,774 | |
Total number of available-for-sale securities in an unrealized loss position twelve months or longer | | | | | | | | | | | 1,212 |
Total number of AFS securities in an unrealized loss position | | | | | | | | | | | 3,986 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Less Than 12 Months | | 12 Months or Longer | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Available-for-sale securities | | | | | | | | | | | |
Asset-backed securities | $ | 4,410 | | | $ | (31) | | | $ | 146 | | | $ | (7) | | | $ | 4,556 | | | $ | (38) | |
Commercial mortgage-backed securities | 600 | | | (11) | | | 1 | | | — | | | 601 | | | (11) | |
Corporates | 5,017 | | | (126) | | | 394 | | | (26) | | | 5,411 | | | (152) | |
Hybrids | 3 | | | — | | | — | | | — | | | 3 | | | — | |
Municipals | 407 | | | (5) | | | 85 | | | (6) | | | 492 | | | (11) | |
Residential mortgage-backed securities | 325 | | | (3) | | | 11 | | | (1) | | | 336 | | | (4) | |
U.S. Government | 32 | | | — | | | 4 | | | — | | | 36 | | | — | |
Foreign Government | 27 | | | — | | | — | | | — | | | 27 | | | — | |
Total available-for-sale securities | $ | 10,821 | | | $ | (176) | | | $ | 641 | | | $ | (40) | | | $ | 11,462 | | | $ | (216) | |
Total number of available-for-sale securities in an unrealized loss position less than twelve months | | | | | | | | | | | 1,955 |
Total number of available-for-sale securities in an unrealized loss position twelve months or longer | | | | | | | | | | | 67 |
Total number of AFS securities in an unrealized loss position | | | | | | | | | | | 2,022 | |
We determined the increase in unrealized losses as of December 31, 2022 was caused by higher treasury rates as well as wider spreads. This is in part due to the Federal Reserve's action to increase rates in efforts to combat inflation. For securities in an unrealized loss position as of December 31, 2022, our allowance for expected credit loss was $31 million. We believe that the unrealized loss position for which we have not recorded an allowance for expected credit loss as of December 31, 2022 was primarily attributable to interest rate increases, near-term illiquidity, and other macroeconomic uncertainties as opposed to issuer specific credit concerns.
Mortgage Loans
Our mortgage loans are collateralized by commercial and residential properties.
Commercial Mortgage Loans
Commercial mortgage loans (“CMLs”) represented approximately 6% of our total investments as of December 31, 2022 and December 31, 2021. The mortgages loans in our investment portfolio, are generally comprised of high quality commercial first lien and mezzanine real estate loans. Mortgage loans are primarily on income producing properties including industrial properties, retail buildings, multifamily properties and office buildings. We diversify our CML portfolio by geographic region and property type to attempt to reduce concentration risk. We continuously evaluate CMLs based on relevant current information to ensure properties are performing at a consistent and acceptable level to secure the related debt. The distribution of CMLs, gross of valuation allowances, by property type and geographic region is reflected in the following tables (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Amortized Cost | | % of Total | | Amortized Cost | | % of Total |
Property Type: | | | | | | | |
Hotel | $ | 18 | | | 1 | % | | $ | 19 | | | 1 | % |
Industrial | 520 | | | 22 | % | | 497 | | | 23 | % |
Mixed Use | 12 | | | 1 | % | | 13 | | | 1 | % |
Multifamily | 1,013 | | | 42 | % | | 894 | | | 41 | % |
Office | 330 | | | 14 | % | | 343 | | | 16 | % |
Retail | 105 | | | 4 | % | | 121 | | | 6 | % |
Student Housing | 83 | | | 3 | % | | 83 | | | 4 | % |
Other | 335 | | | 13 | % | | 204 | | | 8 | % |
Total commercial mortgage loans, gross of valuation allowance | $ | 2,416 | | | 100 | % | | $ | 2,174 | | | 100 | % |
Allowance for expected credit loss | (10) | | | | | (6) | | | |
Total commercial mortgage loans, net of valuation allowance | $ | 2,406 | | | | | $ | 2,168 | | | |
| | | | | | | |
U.S. Region: | | | | | | | |
East North Central | $ | 151 | | | 6 | % | | $ | 137 | | | 6 | % |
East South Central | 76 | | | 3 | % | | 79 | | | 4 | % |
Middle Atlantic | 326 | | | 13 | % | | 293 | | | 13 | % |
Mountain | 355 | | | 15 | % | | 236 | | | 11 | % |
New England | 158 | | | 7 | % | | 149 | | | 7 | % |
Pacific | 708 | | | 28 | % | | 649 | | | 30 | % |
South Atlantic | 521 | | | 22 | % | | 459 | | | 21 | % |
West North Central | 4 | | | 1 | % | | 12 | | | 1 | % |
West South Central | 117 | | | 5 | % | | 160 | | | 7 | % |
Total commercial mortgage loans, gross of valuation allowance | $ | 2,416 | | | 100 | % | | $ | 2,174 | | | 100 | % |
Allowance for expected credit loss | (10) | | | | | (6) | | | |
Total commercial mortgage loans, net of valuation allowance | $ | 2,406 | | | | | $ | 2,168 | | | |
Loan-to-value (“LTV”) and debt service coverage (“DSC”) ratios are measures commonly used to assess the risk and quality of mortgage loans. The LTV ratio is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. The DSC ratio, based upon the most recently received financial statements, is expressed as a percentage of the amount of a property’s net income to its debt service payments. A DSC ratio of less than 1.00 indicates that a property’s operations do not generate sufficient income to cover debt payments. We normalize our DSC ratios to a 25-year amortization period for purposes of our general loan allowance evaluation.
The following tables presents the recorded investment in CMLs by LTV and DSC ratio categories and estimated fair value by the indicated loan-to-value ratios, gross of valuation allowances (dollars in millions):
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| Debt-Service Coverage Ratios | | | | Total Amount | | % of Total | | Estimated Fair Value | | % of Total |
| >1.25 | | 1.00 - 1.25 | | <1.00 | | | | | | |
December 31, 2022 | | | | | | | | | | | | | | | |
LTV Ratios: | | | | | | | | | | | | | | | |
Less than 50.00% | $ | 511 | | | $ | 4 | | | $ | 11 | | | | | $ | 526 | | | 22 | % | | $ | 490 | | | 24 | % |
50.00% to 59.99% | 706 | | | — | | | — | | | | | 706 | | | 29 | % | | 615 | | | 30 | % |
60.00% to 74.99% | 1,154 | | | 3 | | | — | | | | | 1,157 | | | 48 | % | | 955 | | | 45 | % |
75.00% to 84.99% | — | | | — | | | 18 | | | | | 18 | | | 1 | % | | 14 | | | 1 | % |
Commercial mortgage loans (a) | $ | 2,371 | | | $ | 7 | | | $ | 29 | | | | | $ | 2,407 | | | 100 | % | | $ | 2,074 | | | 100 | % |
| | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | | | |
LTV Ratios: | | | | | | | | | | | | | | | |
Less than 50.00% | $ | 626 | | | $ | 33 | | | $ | 9 | | | | | $ | 668 | | | 31 | % | | $ | 745 | | | 33 | % |
50.00% to 59.99% | 470 | | | — | | | — | | | | | 470 | | | 22 | % | | 481 | | | 21 | % |
60.00% to 74.99% | 1,036 | | | — | | | — | | | | | 1,036 | | | 47 | % | | 1,039 | | | 46 | % |
| | | | | | | | | | | | | | | |
Commercial mortgage loans | $ | 2,132 | | | $ | 33 | | | $ | 9 | | | | | $ | 2,174 | | | 100 | % | | $ | 2,265 | | | 100 | % |
(a) Excludes loans under development with an amortized cost and estimated fair value of $9 million.We recognize a mortgage loan as delinquent when payments on the loan are greater than 30 days past due. At December 31, 2022 we had one CML that was delinquent in principal or interest payments as shown in the risk rating exposure table below. At December 31, 2021 we had no CMLs that were delinquent in principal or interest payments.
Residential Mortgage Loans
Residential mortgage loans (“RMLs”) represented approximately 5% and 4% of our total investments as of December 31, 2022 and December 31, 2021, respectively. Our residential mortgage loans are closed end, amortizing loans and 100% of the properties are located in the United States. We diversify our RML portfolio by state to attempt to reduce concentration risk. The distribution of RMLs by state with highest-to-lowest concentration are reflected in the following tables, gross of valuation allowances (dollars in millions):
| | | | | | | | | | | |
| December 31, 2022 |
U.S. State: | Amortized Cost | | % of Total |
Florida | $ | 324 | | | 15 | % |
Texas | 215 | | | 10 | % |
New Jersey | 172 | | | 8 | % |
Pennsylvania | 153 | | | 7 | % |
California | 139 | | | 6 | % |
New York | 138 | | | 6 | % |
Georgia | 125 | | | 6 | % |
All other states (a) | 914 | | | 42 | % |
Total residential mortgage loans | $ | 2,180 | | | 100 | % |
(a) The individual concentration of each state is equal to or less than 5% as of December 31, 2022.
| | | | | | | | | | | |
| December 31, 2021 |
U.S. State: | Amortized Cost | | % of Total |
Florida | $ | 234 | | | 15 | % |
Texas | 170 | | | 10 | % |
New Jersey | 153 | | | 10 | % |
All other states (a) | 1,049 | | | 65 | % |
| | | |
| | | |
| | | |
| | | |
Total residential mortgage loans | $ | 1,606 | | | 100 | % |
(a) The individual concentration of each state is less than 9% as of December 31, 2021.
Residential mortgage loans have a primary credit quality indicator of either a performing or nonperforming loan. We define non-performing residential mortgage loans as those that are 90 or more days past due or in nonaccrual status, which is assessed monthly. The credit quality of RMLs was as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Performance indicators: | Amortized Cost | | % of Total | | Amortized Cost | | % of Total |
Performing | $ | 2,118 | | | 97 | % | | $ | 1,533 | | | 95 | % |
Non-performing | 62 | | | 3 | % | | 73 | | | 5 | % |
Total residential mortgage loans, gross of valuation allowance | $ | 2,180 | | | 100 | % | | $ | 1,606 | | | 100 | % |
Allowance for expected loan loss | (32) | | | — | % | | (25) | | | — | % |
Total residential mortgage loans, net of valuation allowance | $ | 2,148 | | | 100 | % | | $ | 1,581 | | | 100 | % |
Loans segregated by risk rating exposure were as follows, gross of valuation allowances (in millions):
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| December 31, 2022 | | |
| | | |
| Amortized Cost by Origination Year | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total | | |
Residential mortgages | | | | | | | | | | | | | | | |
Current (less than 30 days past due) | $ | 766 | | | $ | 884 | | | $ | 214 | | | $ | 185 | | | $ | 23 | | | $ | 33 | | | $ | 2,105 | | | |
30-89 days past due | 2 | | | 7 | | | — | | | 4 | | | — | | | — | | | 13 | | | |
Over 90 days past due | 3 | | | 9 | | | 15 | | | 34 | | | 1 | | | — | | | 62 | | | |
Total residential mortgages | $ | 771 | | | $ | 900 | | | $ | 229 | | | $ | 223 | | | $ | 24 | | | $ | 33 | | | $ | 2,180 | | | |
Commercial mortgages | | | | | | | | | | | | | | | |
Current (less than 30 days past due) | $ | 350 | | | $ | 1,300 | | | $ | 488 | | | $ | — | | | $ | — | | | $ | 269 | | | $ | 2,407 | | | |
30-89 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | | | |
Over 90 days past due | — | | | — | | | — | | | — | | | — | | | 9 | | | 9 | | | |
Total commercial mortgages | $ | 350 | | | $ | 1,300 | | | $ | 488 | | | $ | — | | | $ | — | | | $ | 278 | | | $ | 2,416 | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| |
| Amortized Cost by Origination Year |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
Residential mortgages | | | | | | | | | | | | | |
Current (less than 30 days past due) | $ | 795 | | | $ | 293 | | | $ | 323 | | | $ | 50 | | | $ | 36 | | | $ | 21 | | | $ | 1,518 | |
30-89 days past due | 5 | | | 4 | | | 6 | | | 1 | | | — | | | — | | | 16 | |
Over 90 days past due | 1 | | | 23 | | | 46 | | | 2 | | | — | | | — | | | 72 | |
Total residential mortgages | $ | 801 | | | $ | 320 | | | $ | 375 | | | $ | 53 | | | $ | 36 | | | $ | 21 | | | $ | 1,606 | |
Commercial mortgages | | | | | | | | | | | | | |
Current (less than 30 days past due) | $ | 1,301 | | | $ | 543 | | | $ | — | | | $ | 6 | | | $ | — | | | $ | 324 | | | $ | 2,174 | |
30-89 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Over 90 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial mortgages | $ | 1,301 | | | $ | 543 | | | $ | — | | | $ | 6 | | | $ | — | | | $ | 324 | | | $ | 2,174 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| |
| Amortized Cost by Origination Year |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
Commercial mortgages | | | | | | | | | | | | | |
LTV | | | | | | | | | | | | | |
Less than 50.00% | $ | 70 | | | $ | 120 | | | $ | 207 | | | $ | — | | | $ | — | | | $ | 129 | | | $ | 526 | |
50.00% to 59.99% | 149 | | | 268 | | | 158 | | | — | | | — | | | 131 | | | 706 | |
60.00% to 74.99% | 113 | | | 912 | | | 123 | | | — | | | — | | | 9 | | | 1,157 | |
75.00% to 84.99% | 9 | | | — | | | — | | | — | | | — | | | 9 | | | 18 | |
Total commercial mortgages (a) | $ | 341 | | | $ | 1,300 | | | $ | 488 | | | $ | — | | | $ | — | | | $ | 278 | | | $ | 2,407 | |
Commercial mortgages | | | | | | | | | | | | | |
DSCR | | | | | | | | | | | | | |
Greater than 1.25x | $ | 329 | | | $ | 1,300 | | | $ | 488 | | | $ | — | | | $ | — | | | $ | 254 | | | $ | 2,371 | |
1.00x - 1.25x | 3 | | | — | | | — | | | — | | | — | | | 4 | | | 7 | |
Less than 1.00x | 9 | | | — | | | — | | | — | | | — | | | 20 | | | 29 | |
Total commercial mortgages (a) | $ | 341 | | | $ | 1,300 | | | $ | 488 | | | $ | — | | | $ | — | | | $ | 278 | | | $ | 2,407 | |
(a) Excludes loans under development with an amortized cost and estimated fair value of $9 million. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| |
| Amortized Cost by Origination Year |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
Commercial mortgages | | | | | | | | | | | | | |
LTV | | | | | | | | | | | | | |
Less than 50.00% | $ | 120 | | | $ | 229 | | | $ | — | | | $ | 6 | | | $ | — | | | $ | 313 | | | $ | 668 | |
50.00% to 59.99% | 267 | | | 192 | | | — | | | — | | | — | | | 11 | | | 470 | |
60.00% to 74.99% | 914 | | | 122 | | | — | | | — | | | — | | | — | | | 1,036 | |
Total commercial mortgages | $ | 1,301 | | | $ | 543 | | | $ | — | | | $ | 6 | | | $ | — | | | $ | 324 | | | $ | 2,174 | |
Commercial mortgages | | | | | | | | | | | | | |
DSCR | | | | | | | | | | | | | |
Greater than 1.25x | $ | 1,301 | | | $ | 543 | | | $ | — | | | $ | 4 | | | $ | — | | | $ | 284 | | | $ | 2,132 | |
1.00x - 1.25x | — | | | — | | | — | | | 2 | | | — | | | 31 | | | 33 | |
Less than 1.00x | — | | | — | | | — | | | — | | | — | | | 9 | | | 9 | |
Total commercial mortgages | $ | 1,301 | | | $ | 543 | | | $ | — | | | $ | 6 | | | $ | — | | | $ | 324 | | | $ | 2,174 | |
Non-accrual loans by amortized cost were as follows (in millions):
| | | | | | | | | | | | | | |
Amortized cost of loans on non-accrual | December 31, 2022 | | December 31, 2021 | | | |
Residential mortgage | $ | 62 | | | $ | 72 | | | | |
Commercial mortgage | 9 | | | — | | | | |
Total non-accrual mortgages | $ | 71 | | | $ | 72 | | | | |
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| | | | | | |
Immaterial interest income was recognized on non-accrual financing receivables for the twelve months ended December 31, 2022 and December 31, 2021.
It is our policy to cease to accrue interest on loans that are 90 days or more delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes 90 days or more delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. As of December 31, 2022 and December 31, 2021, we had $71 million and $72 million, respectively, of mortgage loans that were over 90 days past due, of which $38 million and $39 million was in the process of foreclosure as of December 31, 2022 and December 31, 2021, respectively.
Allowance for Expected Credit Loss
We estimate expected credit losses for our commercial and residential mortgage loan portfolios using a probability of default/loss given default model. Significant inputs to this model include, where applicable, the loans' current performance, underlying collateral type, location, contractual life, LTV, DSC and Debt to Income or FICO. The model projects losses using a two year reasonable and supportable forecast and then reverts over a three year period to market-wide historical loss experience. Changes in our allowance for expected credit losses on mortgage loans are recognized in Recognized gains and losses, net in the accompanying Consolidated Statements of Earnings.
The allowances for our mortgage loan portfolio is summarized as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year ended December 31, 2022 | | | Year ended December 31, 2021 |
| | | | | | | | |
| | | | | | | | | | | | | Residential Mortgages | | Commercial Mortgages | | Total | | | Residential Mortgages | | Commercial Mortgages | | Total |
Beginning Balance | | | | | | | | | | | | | $ | 25 | | | $ | 6 | | | $ | 31 | | | | $ | 37 | | | $ | 2 | | | $ | 39 | |
Provision for loan losses | | | | | | | | | | | | | 7 | | | 4 | | | 11 | | | | (12) | | | 4 | | | (8) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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Ending Balance | | | | | | | | | | | | | $ | 32 | | | $ | 10 | | | $ | 42 | | | | $ | 25 | | | $ | 6 | | | $ | 31 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Period from June 1 to December 31, 2020 | | | Period from January 1 to May 31, 2020 |
| | | | | | | | | | | | |
| | | | | | | | | | | | | Residential Mortgages | | Commercial Mortgages | | Total | | | Residential Mortgages | | Commercial Mortgages | | Total |
| | | | | | | | | | | | | | | | | | | | Predecessor |
Beginning Balance | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | — | | | | $ | 7 | | | $ | 1 | | | $ | 8 | |
Provision for loan losses | | | | | | | | | | | | | 30 | | | 2 | | | 32 | | | | 7 | | | — | | | 7 | |
For initial credit losses on purchased loans accounted for as PCD financial assets | | | | | | | | | | | | | 7 | | | — | | | 7 | | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | | | | | | | | | | | | $ | 37 | | | $ | 2 | | | $ | 39 | | | | $ | 14 | | | $ | 1 | | | $ | 15 | |
An allowance for expected credit loss is not measured on accrued interest income for commercial mortgage loans as we have a process to write-off interest on loans that enter into non-accrual status (90 days or more past due). Allowances for expected credit losses are measured on accrued interest income for residential mortgage loans and were immaterial as of December 31, 2022 and December 31, 2021.
Interest and Investment Income
The major sources of Interest and investment income reported on the accompanying Consolidated Statements of Earnings were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Period from June 1 to December 31, | | | Period from January 1 to May 31, |
| | | | | 2022 | | 2021 | | 2020 | | | 2020 |
| | | | | | | | | | | | Predecessor |
Fixed maturity securities, available-for-sale | | | | | $ | 1,431 | | | $ | 1,213 | | | $ | 643 | | | | $ | 426 | |
Equity securities | | | | | 17 | | | 11 | | | 7 | | | | 4 | |
Preferred securities | | | | | 49 | | | 47 | | | 35 | | | | 16 | |
| | | | | | | | | | | | |
Mortgage loans | | | | | 186 | | | 131 | | | 50 | | | | 36 | |
Invested cash and short-term investments | | | | | 33 | | | 7 | | | — | | | | 4 | |
| | | | | | | | | | | | |
Limited partnerships | | | | | 110 | | | 589 | | | 75 | | | | (37) | |
Other investments | | | | | 20 | | | 17 | | | 8 | | | | 5 | |
Gross investment income | | | | | 1,846 | | | 2,015 | | | 818 | | | | 454 | |
Investment expense | | | | | (191) | | | (163) | | | (75) | | | | (51) | |
| | | | | | | | | | | | |
Interest and investment income | | | | | $ | 1,655 | | | $ | 1,852 | | | $ | 743 | | | | $ | 403 | |
Interest and investment income is shown net of amounts attributable to certain funds withheld reinsurance agreements which is passed along to the reinsurer in accordance with the terms of these agreements. Interest and investment income attributable to these agreements, and thus excluded from the totals in the table above, was $109 million, $53 million, $21 million and $15 million, for the year ended December 31, 2022, the year ended December 31, 2021, the period from June 1 to December 31, 2020 and the Predecessor period from January 1 to May 31, 2020, respectively.
Recognized Gains and Losses, net
Details underlying Recognized gains and losses, net reported on the accompanying Consolidated Statements of Earnings were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Period from June 1 to December 31, | | | Period from January 1 to May 31, |
| | | | | 2022 | | 2021 | | 2020 | | | 2020 |
| | | | | | | | | | | | Predecessor |
Net realized (losses) gains on fixed maturity available-for-sale securities | | | | | $ | (241) | | | $ | 102 | | | $ | 95 | | | | $ | (49) | |
Net realized/unrealized (losses) gains on equity securities (a) | | | | | (40) | | | (37) | | | 29 | | | | (30) | |
Net realized/unrealized (losses) gains on preferred securities (b) | | | | | (167) | | | (14) | | | 55 | | | | (40) | |
Realized (losses) gains on other invested assets | | | | | (13) | | | 6 | | | — | | | | (2) | |
Change in allowance for expected credit losses | | | | | (34) | | | 4 | | | (19) | | | | (23) | |
Derivatives and embedded derivatives: | | | | | | | | | | | | |
Realized (losses) gains on certain derivative instruments | | | | | (164) | | | 455 | | | 76 | | | | 11 | |
Unrealized (losses) gains on certain derivative instruments | | | | | (693) | | | 160 | | | 161 | | | | (223) | |
Change in fair value of reinsurance related embedded derivatives (c) | | | | | 352 | | | 34 | | | (53) | | | | 19 | |
Change in fair value of other derivatives and embedded derivatives | | | | | (10) | | | 5 | | | 8 | | | | (1) | |
Realized (losses) gains on derivatives and embedded derivatives | | | | | (515) | | | 654 | | | 192 | | | | (194) | |
Recognized gains and losses, net | | | | | $ | (1,010) | | | $ | 715 | | | $ | 352 | | | | $ | (338) | |
(a)Includes net valuation (losses) gains of $(40) million, $(37) million, $30 million and $(30) million for the years ended December 31, 2022 and 2021, the period from June 1 to December 31, 2020 and the Predecessor period from January 1 to May 31, 2020, respectively.
(b)Includes net valuation (losses) gains of $(159) million, $(14) million, $56 million and $(34) million for the years ended December 31, 2022 and 2021, the period from June 1 to December 31, 2020 and the Predecessor period from January 1 to May 31, 2020, respectively.
(c)Change in fair value of reinsurance related embedded derivatives is due to activity related to the reinsurance treaties with Kubera (novated from Kubera to Somerset effective October 31, 2021) and Aspida Re.
Recognized gains and losses is shown net of amounts attributable to certain funds withheld reinsurance agreements which is passed along to the reinsurer in accordance with the terms of these agreements. Recognized gains and losses attributable to these agreements, and thus excluded from the totals in the table above, was $381 million, $15 million, $(58) million and $21 million for the year ended December 31, 2022, the year ended December 31, 2021, the period from June 1 to December 31, 2020 and the Predecessor period from January 1 to May 31, 2020, respectively.
The proceeds from the sale of fixed-maturity securities and the gross gains and losses associated with those transactions were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Period from June 1 to December 31, | | | Period from January 1 to May 31, |
| | | | | 2022 | | 2021 | | 2020 | | | 2020 |
| | | | | | | | | | | | Predecessor |
Proceeds | | | | | $ | 3,097 | | | $ | 4,555 | | | $ | 1,398 | | | | $ | 513 | |
Gross gains | | | | | 13 | | | 142 | | | 101 | | | | 29 | |
Gross losses | | | | | (239) | | | (42) | | | (5) | | | | (20) | |
Unconsolidated Variable Interest Entities
We own investments in VIEs that are not consolidated within our financial statements. A VIE is an entity that does not have sufficient equity to finance its own activities without additional financial support, where investors lack certain characteristics of a controlling financial interest, or where the entity is structured with non-substantive voting rights. VIEs are consolidated by their ‘primary beneficiary’, a designation given to an entity that receives both the benefits from the VIE as well as the substantive power to make its key economic decisions. While we participate in the benefits from VIEs in which we invest, but do not consolidate, the substantive power to make the key economic decisions for each respective VIE resides with entities not under our common control. It is for this reason that we are not considered the primary beneficiary for the VIE investments that are not consolidated.
We invest in various limited partnerships and limited liability companies primarily as a passive investor. These investments are primarily in credit funds with a bias towards current income, real assets, or private equity. Limited partnership and limited liability company interests are accounted for under the equity method and are included in Investments in unconsolidated affiliates on our Consolidated Balance Sheets. In addition, we invest in structured investments, which may be VIEs, but for which we are not the primary beneficiary. These structured investments typically invest in fixed income investments and are managed by third parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities included in fixed maturity securities available for sale on our Consolidated Balance Sheets.
Our maximum exposure to loss with respect to these VIEs is limited to the investment carrying amounts reported in our Consolidated Balance Sheets for limited partnerships and the amortized costs of our fixed maturity securities, in addition to any required unfunded commitments (also refer to Note F Commitments and Contingencies).
The following table summarizes the carrying value and the maximum loss exposure of our unconsolidated VIEs (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Carrying Value | | Maximum Loss Exposure | | Carrying Value | | Maximum Loss Exposure |
Investment in unconsolidated affiliates | $ | 2,427 | | | $ | 4,030 | | | $ | 2,350 | | | $ | 3,496 | |
Fixed maturity securities | 15,680 | | | 17,404 | | | 12,382 | | | 12,802 | |
Total unconsolidated VIE investments | $ | 18,107 | | | $ | 21,434 | | | $ | 14,732 | | | $ | 16,298 | |
Concentrations
Our underlying investment concentrations that exceed 10% of shareholders equity are as follows (in millions). Certain of the investments disclosed as of December 31, 2022 were held as of December 31, 2021 but are not presented in the December 31, 2021 column as they did not exceed 10 % of shareholders equity as of December 31, 2021.
| | | | | | | | |
| December 31, 2022 | December 31, 2021 |
Blackstone Wave Asset Holdco (a) | $ | 741 | | $ | 870 | |
ELBA (b) | 470 | | — | |
COLI | 308 | | — | |
Verus Securitization Trust (c) | 302 | | — | |
Jade 1 (d) | 271 | | — | |
Jade 2 (d) | 271 | | — | |
Jade 3 (d) | 271 | | — | |
Jade 4 (d) | 271 | | — | |
Maybay Finance, LLC (e) | 224 | | — | |
(a)Represents a special purpose vehicle that holds investments in numerous limited partnership investments whose underlying investments are further diversified by holding interest in multiple individual investments and industries.
(b)Represents special purpose vehicles that hold an underlying minority ownership interest in a single operating liquified natural gas export facility.
(c)Represents special purpose vehicles that hold investments backed by the interest paid on loans for residencies.
(d)Represents special purpose vehicles that hold numerous underlying corporate loans across various industries.
(e)Represents special purpose vehicles that hold investments in multiple aircraft leases.
Note D — Derivative Financial Instruments
The carrying amounts of derivative instruments, including derivative instruments embedded in FIA and IUL contracts, and reinsurance is as follows (in millions):
| | | | | | | | | | | | | |
| December 31, 2022 | | | | December 31, 2021 |
Assets: | | | | | |
Derivative investments: | | | | | |
Call options | $ | 244 | | | | | $ | 816 | |
| | | | | |
| | | | | |
Other long-term investments: | | | | | |
Other embedded derivatives | 23 | | | | | 33 | |
Prepaid expenses and other assets: | | | | | |
Reinsurance related embedded derivatives | 279 | | | | | — | |
| $ | 546 | | | | | $ | 849 | |
| | | | | | | | | | | | | |
Liabilities: | | | | | |
Contractholder funds: | | | | | |
FIA/ IUL embedded derivatives | $ | 3,115 | | | $ | 3,883 | | | |
| | | | | |
| | | | | |
Accounts payable and accrued liabilities: | | | | | |
| | | | | |
| | | | | |
Reinsurance related embedded derivatives | — | | | 73 | | | |
| | | | | |
| $ | 3,115 | | | $ | 3,956 | | | |
The change in fair value of derivative instruments included within Recognized gains and losses, net, in the accompanying Consolidated Statements of Earnings is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Period from June 1 to December 31, | | | Period from January 1 to May 31, |
| | 2022 | | 2021 | | 2020 | | | 2020 |
Net investment gains (losses): | | | | | | | | | Predecessor |
Call options | | $ | (862) | | | $ | 597 | | | $ | 229 | | | | $ | (221) | |
Futures contracts | | (7) | | | 8 | | | 15 | | | | 8 | |
Foreign currency forwards | | 12 | | | 10 | | | (7) | | | | 1 | |
Other derivatives and embedded derivatives | | (10) | | | 5 | | | 8 | | | | (1) | |
Reinsurance related embedded derivatives | | 352 | | | 34 | | | (53) | | | | 19 | |
Total net investment gains (losses) | | $ | (515) | | | $ | 654 | | | $ | 192 | | | | $ | (194) | |
| | | | | | | | | |
Benefits and other changes in policy reserves: | | | | | | | | | |
FIA/ IUL embedded derivatives (decrease) increase | | $ | (768) | | | $ | 479 | | | $ | 552 | | | | $ | 239 | |
Additional Disclosures
FIA/IUL Embedded Derivative and Call Options and Futures
We have FIA and IUL contracts that permit the holder to elect an interest rate return or an equity index linked component, where interest credited to the contracts is linked to the performance of various equity indices, primarily the S&P 500 Index. This feature represents an embedded derivative under GAAP. The FIA/IUL embedded derivatives are valued at fair value and included in the liability for contractholder funds in the accompanying Consolidated Balance Sheets with changes in fair value included as a component of Benefits and other changes in
policy reserves in the Consolidated Statements of Earnings. See a description of the fair value methodology used in Note B Fair Value of Financial Instruments.
We purchase derivatives consisting of a combination of call options and futures contracts (specifically for FIA contracts) on the applicable market indices to fund the index credits due to FIA/IUL contractholders. The call options are one, two, three, and five year options purchased to match the funding requirements of the underlying policies. On the respective anniversary dates of the indexed policies, the index used to compute the interest 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 FIA/IUL contracts, which permit us to change caps, spreads or participation rates, subject to guaranteed minimums, on each contract’s anniversary date. The change in the fair value of the call options and futures contracts is generally designed to offset the portion of the change in the fair value of the FIA/IUL embedded derivatives related to index performance through the current credit period. The call options and futures contracts are marked to fair value with the change in fair value included as a component of Recognized gains and losses, net, in the accompanying Consolidated Statements of Earnings. The change in fair value of the call options and futures contracts includes the gains and losses recognized at the expiration of the instrument term or upon early termination and the changes in fair value of open positions.
Other market exposures are hedged periodically depending on market conditions and our risk tolerance. Our FIA/IUL hedging strategy economically hedges the equity returns and exposes us to the risk that unhedged market exposures result in divergence between changes in the fair value of the liabilities and the hedging assets. We use a variety of techniques, including direct estimation of market sensitivities, to monitor this risk daily. We intend to continue to adjust the hedging strategy as market conditions and our risk tolerance changes.
Credit Risk
We are exposed to credit loss in the event of non-performance by our counterparties on the call options and reflect assumptions regarding this non-performance risk in the fair value of the call options. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts less collateral held. We maintain a policy of requiring all derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement.
Information regarding our exposure to credit loss on the call options we hold is presented in the following table (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 |
Counterparty | | Credit Rating (Fitch/Moody's/S&P) (1) | | Notional Amount | | Fair Value | | Collateral | | Net Credit Risk |
Merrill Lynch | | AA/*/A+ | | $ | 3,563 | | | $ | 23 | | | $ | — | | | $ | 23 | |
| | | | | | | | | | |
Morgan Stanley | | */Aa3/A+ | | 1,699 | | | 14 | | | 19 | | | — | |
Barclay's Bank | | A+/A1/A | | 6,049 | | | 65 | | | 59 | | | 6 | |
Canadian Imperial Bank of Commerce | | AA/Aa2/A+ | | 5,169 | | | 68 | | | 64 | | | 4 | |
Wells Fargo | | A+/A1/BBB+ | | 1,361 | | | 17 | | | 17 | | | — | |
Goldman Sachs | | A/A2/BBB+ | | 1,133 | | | 9 | | | 10 | | | — | |
Credit Suisse | | BBB+/A3/A- | | 1,039 | | | 5 | | | 5 | | | — | |
Truist | | A+/A2/A | | 2,489 | | | 35 | | | 36 | | | — | |
Citibank | | A+/Aa3/A+ | | 795 | | | 8 | | | 9 | | | — | |
Total | | | | $ | 23,297 | | | $ | 244 | | | $ | 219 | | | $ | 33 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 |
Counterparty | | Credit Rating (Fitch/Moody's/S&P)(1) | | Notional Amount | | Fair Value | | Collateral | | Net Credit Risk |
Merrill Lynch | | AA/*/A+ | | $ | 3,307 | | | $ | 128 | | | $ | 86 | | | $ | 42 | |
| | | | | | | | | | |
Morgan Stanley | | */Aa3/A+ | | 2,184 | | | 86 | | | 92 | | | — | |
Barclay's Bank | | A+/A1/A | | 5,197 | | | 231 | | | 233 | | | — | |
Canadian Imperial Bank of Commerce | | AA/Aa2/A+ | | 2,936 | | | 147 | | | 151 | | | — | |
Wells Fargo | | A+/A1/BBB+ | | 2,445 | | | 89 | | | 90 | | | — | |
Goldman Sachs | | A/A2/BBB+ | | 307 | | | 10 | | | 10 | | | — | |
Credit Suisse | | A/A1/A+ | | 1,485 | | | 74 | | | 75 | | | — | |
Truist | | A+/A2/A | | 1,543 | | | 51 | | | 53 | | | — | |
Total | | | | $ | 19,404 | | | $ | 816 | | | $ | 790 | | | $ | 42 | |
__________________
(1)An * represents credit ratings that were not available.
Collateral Agreements
We are required to maintain minimum ratings as a matter of routine practice as part of our over-the-counter derivative agreements on ISDA forms. Under some ISDA agreements, we have agreed to maintain certain financial strength ratings. A downgrade below these levels provides the counterparty under the agreement the right to terminate the open option contracts between the parties, at which time any amounts payable by us or the counterparty would be dependent on the market value of the underlying option contracts. Our current rating does not allow any counterparty the right to terminate ISDA agreements. In certain transactions, both us and the counterparty have entered into a collateral support agreement requiring either party to post collateral when the net exposures exceed pre-determined thresholds. For all counterparties, except Merrill Lynch, this threshold is set to zero. As of December 31, 2022 and December 31, 2021 counterparties posted $219 million and $790 million, respectively, of collateral of which $178 million and $576 million, respectively, is included in cash and cash equivalents with an associated payable for this collateral included in accounts payable and accrued liabilities on the Consolidated Balance Sheets. Accordingly, the maximum amount of 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 was $33 million at December 31, 2022 and $42 million at December 31, 2021.
We are required to pay counterparties the effective federal funds rate each day for cash collateral posted to F&G for daily mark to market margin changes. We reinvest derivative cash collateral to reduce the interest cost. Cash collateral is invested in overnight investment sweep products, which are included in cash and cash equivalents in the accompanying Consolidated Balance Sheets.
We held 409 and 329 futures contracts at December 31, 2022 and December 31, 2021, respectively. The fair value of the futures contracts represents the cumulative unsettled variation margin (open trade equity, net of cash settlements). We provide cash collateral to the counterparties for the initial and variation margin on the futures contracts, which is included in cash and cash equivalents in the accompanying Consolidated Balance Sheets. The amount of cash collateral held by the counterparties for such contracts was $3 million and $3 million at December 31, 2022 and December 31, 2021, respectively.
Reinsurance Related Embedded Derivatives
The Company entered into a reinsurance agreement with Kubera effective December 31, 2018, to cede certain multi-year guaranteed annuity (“MYGA”) and deferred annuity business on a coinsurance funds withheld basis, net of applicable existing reinsurance. Effective October 31, 2021, this agreement was novated from Kubera to Somerset, a certified third-party reinsurer. Additionally, F&G entered into a reinsurance agreement with Aspida Re effective January 1, 2021, and amended in August 2021 and September 2022, to cede a quota share of certain deferred annuity business on a funds withheld basis. Fair value movements in the funds withheld balances associated with these arrangements creates an obligation for F&G to pay Somerset and Aspida Re at a later date, which results
in embedded derivatives. These embedded derivatives are considered total return swaps with contractual returns that are attributable to the assets and liabilities associated with the reinsurance arrangements. The fair value of the total return swap is based on the change in fair value of the underlying assets held in the funds withheld portfolio. Investment results for the assets that support the coinsurance with funds withheld reinsurance arrangements, including gains and losses from sales, were passed directly to the reinsurers pursuant to contractual terms of the reinsurance arrangements. The reinsurance related embedded derivatives are reported in prepaid expenses and other assets if in a net gain position, or accounts payable and accrued liabilities, if in a net loss position, on the Consolidated Balance Sheets and the related gains or losses are reported in Recognized gains and losses, net on the Consolidated Statements of Earnings.
Note E — Notes Payable
Notes payable consists of the following:
| | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | |
| (In millions) |
Revolving Credit Facility - Short-term | $ | 547 | | | $ | — | | | |
5.50% F&G Notes | 567 | | | 577 | | | |
FNF Promissory Note | — | | | 400 | | | |
| | | | | |
| $ | 1,114 | | | $ | 977 | | | |
On November 22, 2022, we entered into a Credit Agreement (the “Credit Agreement”) with certain lenders (the “Lenders”) and Bank of America, N.A. as administrative agent (in such capacity, the “Administrative Agent”), swing line lender and an issuing bank, pursuant to which the Lenders have made available an unsecured revolving credit facility in an aggregate principal amount of $550 million to be used for working capital and general corporate purposes.
The Credit Agreement matures the earlier to occur of November 22, 2025 or 91 days prior to May 1, 2025, the stated maturity date of the 5.50% F&G Notes, unless the principal amount of the 5.50% F&G Notes is $150,000,000 or less at such time, the 5.50% F&G Notes have been redeemed or defeased in full, and any refinancing Indebtedness incurred in connection therewith matures at least 91 days after the date that is 3 years from the Effective Date or certain other conditions are met. As the revolving loans under the Credit Agreement mature in less than one year, the amounts outstanding under the Credit Agreement are considered short-term.
Revolving loans under the Credit Agreement generally bear interest at a variable rate based on either (i) the base rate (which is the highest of (a) one-half of one percent in excess of the federal funds rate, (b) the Administrative Agent’s “prime rate”, or (c) the sum of one percent plus Term The Secured Overnight Financing Rate (“SOFR”) plus a margin of between 30.0 and 80.0 basis points depending on the non-credit-enhanced, senior unsecured long-term debt ratings of F&G or (ii) Term SOFR plus a margin of between 130.0 and 180.0 basis points depending on the non-credit-enhanced, senior unsecured long-term debt ratings of F&G. At the current Standard & Poor’s, Moody’s and Fitch non-credit-enhanced, senior unsecured long-term debt ratings of BBB-/Ba1//BBB-, respectively, the applicable margin for revolving loans subject to Term SOFR is 165 basis points. In addition, we will pay a facility fee of between 20.0 and 45.0 basis points on the entire facility, also depending on the non-credit-enhanced, senior unsecured long-term debt ratings, which is payable quarterly in arrears.
As of December 31, 2022, the revolving credit facility was fully drawn with $550 million outstanding, offset by approximately $3 million of unamortized debt issuance costs. For the year ended December 31, 2022, interest expense on the revolving credit facility was approximately $1 million.
On September 15, 2021, we entered into a promissory note with FNF for $400 million aggregate principal amount, quarterly interest at three-month LIBOR + 2.50% (2.63% at December 31, 2021), due 2028 (the "FNF Promissory Note"). On June 24, 2022, the following action previously approved by the F&G board of directors became effective: (i) an exchange agreement with FNF pursuant to which F&G transferred shares of its common stock to FNF in exchange for the $400 million FNF Promissory Note, after which the note was retired. There was no
gain or loss recorded with respect to the exchange agreement. For the years ended December 31, 2022 and 2021, interest expense on the FNF Promissory Note was approximately $6 million and $3 million, respectively.
On December 29, 2020, we entered into a revolving note agreement with FNF for up to $200 million capacity (the "FNF Credit Facility") to be used for working capital and other general corporate purposes. No amounts were outstanding under this revolving note agreement as of December 31, 2022 or December 31, 2021.
On April 20, 2018, Fidelity & Guaranty Life Holdings, Inc. (“FGLH”), our indirect wholly owned subsidiary, completed a debt offering of $550 million aggregate principal amount of 5.50% senior notes due May 1, 2025 (the "5.50% F&G Notes"), at 99.5% of face value for proceeds of $547 million. As a result of the FNF acquisition, a premium of $39 million was established for these notes and is being amortized over the remaining life of the debt through 2025. In conjunction with the acquisition, FNF became a guarantor of FGLH’s obligations under the 5.50% F&G Notes and agreed to fully and unconditionally guarantee the F&G 5.50% Notes, on a joint and several basis. Interest expense, net of premium amortization on the 5.50% F&G Notes were $29 million, $29 million, $18 million and $13 million for the years ended December 31, 2022 and December 31, 2021, the period from June 1 to December 31, 2020 and the Predecessor period from January 1 to May 31, 2020, respectively.
The Credit Agreement and the indenture governing the 5.50% F&G Notes impose certain operating and financial restrictions, including financial covenants, on F&G. As of December 31, 2022, we were in compliance with all covenants.
Also refer to Note A - Business and Summary of Significant Accounting Policies - Recent Events for additional information about our Notes Payable.
| | | | | |
Gross principal maturities of notes payable at December 31, 2022 are as follows (in millions): | |
2023 | $ | 550 | |
2024 | — | |
2025 | 550 | |
2026 | — | |
2027 | — | |
Thereafter | — | |
| $ | 1,100 | |
Note F — Commitments and Contingencies
Legal and Regulatory Contingencies
In the ordinary course of business, we are involved in various pending and threatened litigation matters related to our operations, some of which include claims for punitive or exemplary damages. Like other companies, our ordinary course litigation includes a number of class action and purported class action lawsuits, which make allegations related to aspects of our operations. We believe that no actions, other than the matters discussed below, if any, depart from customary litigation incidental to our business.
We review lawsuits and other legal and regulatory matters (collectively “legal proceedings”) on an ongoing basis when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, management bases its decision on its assessment of the ultimate outcome assuming all appeals have been exhausted. For legal proceedings in which it has been determined that a loss is both probable and reasonably estimable, a liability based on known facts and that represents our best estimate has been recorded. Our accrual for legal and regulatory matters was insignificant as of December 31, 2022 and December 31, 2021. We do not consider (i) the amounts we have currently recorded for all legal proceedings in which it has been determined that a loss is both probable and reasonably estimable and (ii) reasonably possible losses for all pending legal proceedings to be material to our financial statements either individually or in the aggregate. Actual losses may materially differ from the amounts recorded and the ultimate outcome of our pending legal proceedings is generally not yet determinable. While some of these matters could be material to our operating results or cash flows for any particular period if an unfavorable outcome results, at present we do not believe that the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on our financial condition.
In August 2020, a lawsuit styled, In the Matter of FGL Holdings, was filed in the Grand Court of the Cayman Islands related to FNF's acquisition of F&G where dissenting shareholders, Kingfishers LP, Kingstown 1740 Fund LP, Kingstown Partners II LP, Kingstown Partners Master Ltd., and Ktown LP, asserted statutory appraisal rights relative to their ownership of 12,000,000 shares of F&G stock. They sought a judicial determination of the fair value of their shares of F&G stock as of the date of valuation under the law of the Cayman Islands, together with interest. On September 5, 2022 the Grand Court of the Cayman Islands decided in favor of F&G. Kingstown Capital Management LP failed to appeal, and its appeal period expired on October 20, 2022. The result in this case has no material adverse effect on our financial condition.
From time to time we receive inquiries and requests for information from state insurance departments, attorneys general and other regulatory agencies about various matters relating to our business. Sometimes these take the form of civil investigative demands or subpoenas. We cooperate with all such inquiries and we have responded to or are currently responding to inquiries from multiple governmental agencies. From time to time, we are assessed fines for violations of regulations or other matters or enter into settlements with such authorities, which may require us to pay fines or claims or take other actions. We do not anticipate such fines and settlements, either individually or in the aggregate, will have a material adverse effect on our financial condition.
Commitments
We have unfunded investment commitments as of December 31, 2022 and December 31, 2021 based upon the timing of when investments are executed compared to when the actual investments are funded, as some investments require that funding occur over a period of months or years. A summary of unfunded commitments by invested asset class as of December 31, 2022 and December 31, 2021 is included below (in millions):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Asset Type | | | |
Unconsolidated VIEs: | | | |
Limited partnerships | $ | 1,603 | | | $ | 1,146 | |
Whole loans | 419 | | | 589 | |
Fixed maturity securities, ABS | 201 | | | 306 | |
Other fixed maturity securities, AFS | 48 | | | 119 | |
Commercial mortgage loans | 36 | | | 44 | |
| | | |
Other assets | 120 | | | 156 | |
Residential mortgage loans | 2 | | | — | |
Committed amounts included in liabilities | 1 | | | — | |
Total | $ | 2,430 | | | $ | 2,360 | |
See Note A Business and Summary of Significant Accounting Policies, for discussion of funding agreements that have been issued pursuant to the FABN Program as well as to the FHLB that are included in Contractholder funds.
The Company leases office space under operating leases. The largest leases are cancellable in 2027 and expire in 2030. Rent expense and minimum rental commitments under all leases are immaterial.
As discussed in Note J Reinsurance, to enhance Kubera's ability to pay its obligations under the amended reinsurance agreement, effective October 31, 2021, F&G entered into a Variable Note Purchase Agreement (the “NPA”), whereby F&G agreed to fund a note to Kubera to be used to ultimately settle with F&G, with principal increases up to a maximum amount of $300 million, to the extent a potential funding shortfall (treaty assets are less than the total funding requirement) is projected relative to the business ceded to Kubera from F&G as part of the amended reinsurance agreement. The potential funding shortfall will be determined quarterly and, among other items, is impacted by the market value of the assets in the funds withheld account related to the reinsurance agreement and Kubera's capital as calculated on a Bermuda regulatory basis. The NPA matures on November 30, 2071. Based on the current level of the treaty assets and projections that these policies will be profitable over the lifetime of the agreement, we do not expect significant fundings to occur under the NPA. As of December 31, 2022 and December 31, 2021, the amount funded under the NPA was insignificant.
Note G — Supplemental Cash Flow Information
The following supplemental cash flow information is provided with respect to certain cash payment and non-cash investing and financing activities (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Period from June 1 to December 31, | | | Period from January 1 to May 31, |
| 2022 | | 2021 | | 2020 | | | 2020 |
| | | | | | | | Predecessor |
Cash paid for: | | | | | | | | |
Interest paid | $ | 34 | | | $ | 30 | | $ | 30 | | $ | 15 | | | | $ | 15 | |
Income taxes (refunded) paid | (72) | | | 44 | | | 2 | | | | — | |
Deferred sales inducements | 87 | | | 90 | | | 46 | | | | 43 | |
Non-cash investing and financing activities: | | | | | | | | |
Investments received from pension risk transfer premiums | — | | | 316 | | | — | | | | — | |
Change in proceeds of sales of investments available for sale receivable in period | 115 | | | (160) | | | (3) | | | | 5 | |
Change in purchases of investments available for sale payable in period | (10) | | | 2 | | | 7 | | | | (6) | |
Note H —Intangibles
A summary of the changes in the carrying amounts of our VOBA, DAC and DSI intangible assets is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| VOBA | | DAC | | DSI | | Total |
Balance at January 1, 2022 | $ | 1,185 | | | $ | 761 | | | $ | 88 | | | $ | 2,034 | |
| | | | | | | |
Deferrals | — | | | 727 | | | 87 | | | 814 | |
Amortization | (203) | | | (107) | | | (43) | | | (353) | |
Interest | 25 | | | 30 | | | 2 | | | 57 | |
Unlocking | (5) | | | (4) | | | 5 | | | (4) | |
Adjustment for net unrealized investment losses (gains) | 662 | | | 182 | | | 68 | | | 912 | |
| | | | | | | |
Balance at December 31, 2022 | $ | 1,664 | | | $ | 1,589 | | | $ | 207 | | | $ | 3,460 | |
| | | | | | | |
| VOBA | | DAC | | DSI | | Total |
Balance at January 1, 2021 | $ | 1,466 | | | $ | 222 | | | $ | 36 | | | $ | 1,724 | |
Purchase price allocation adjustments | 61 | | | — | | | — | | | 61 | |
Deferrals | — | | | 585 | | | 90 | | | 675 | |
Amortization | (436) | | | (46) | | | (35) | | | (517) | |
Interest | 30 | | | 13 | | | 1 | | | 44 | |
Unlocking | 13 | | | 1 | | | (2) | | | 12 | |
Adjustment for net unrealized investment losses (gains) | 51 | | | (14) | | | (2) | | | 35 | |
Balance at December 31, 2021 | $ | 1,185 | | | $ | 761 | | | $ | 88 | | | $ | 2,034 | |
| | | | | | | |
| VOBA | | DAC | | DSI | | Total |
Balance at June 1, 2020 (a) | $ | 1,847 | | | $ | — | | | $ | — | | | $ | 1,847 | |
Deferrals | — | | | 251 | | | 46 | | | 297 | |
Amortization | (120) | | | (6) | | | (5) | | | (131) | |
Interest | 20 | | | 2 | | | — | | | 22 | |
Unlocking | 2 | | | — | | | — | | | 2 | |
Adjustment for net unrealized investment losses (gains) | (283) | | | (25) | | | (5) | | | (313) | |
Balance at December 31, 2020 | $ | 1,466 | | | $ | 222 | | | $ | 36 | | | $ | 1,724 | |
| | | | | | | |
Predecessor | VOBA | | DAC | | DSI | | Total |
Balance at January 1, 2020 | $ | 599 | | | $ | 641 | | | $ | 236 | | | $ | 1,476 | |
Deferrals | — | | | 184 | | | 43 | | | 227 | |
Amortization | 14 | | | 22 | | | 10 | | | 46 | |
Interest | 7 | | | 8 | | | 2 | | | 17 | |
Unlocking | (9) | | | (2) | | | — | | | (11) | |
Adjustment for net unrealized investment losses (gains) | 141 | | | 65 | | | 30 | | | 236 | |
Balance at May 31, 2020 | $ | 752 | | | $ | 918 | | | $ | 321 | | | $ | 1,991 | |
(a) As of the June 1, 2020 acquisition of F&G, due to purchase accounting adjustments, our prior intangible assets were valued at $0 and VOBA was re-established at fair value.
Amortization of VOBA, DAC, and DSI is based on the current and future expected gross margins or profits recognized, including investment gains and losses. The interest accrual rates utilized to calculate the accretion of interest on VOBA ranged from 0% to 4.71% for the years ended December 31, 2022 and December 31, 2021. The adjustment for unrealized net investment losses (gains) represents the amount of VOBA, DAC, and DSI that would have been amortized if such unrealized gains and losses had been recognized. This is referred to as the “shadow adjustments” as the additional amortization is reflected in AOCI on the Consolidated Balance Sheet rather than as depreciation and amortization on the Consolidated Statements of Earnings. As of December 31, 2022 and December 31, 2021, the VOBA balances included cumulative adjustments for net unrealized investment gains
(losses) of $(430) million and $232 million, respectively, the DAC balances included cumulative adjustments for net unrealized investment gains (losses) of $(143) million and $39 million, respectively, and the DSI balance included net unrealized investment gains (losses) of $(61) million and $7 million, respectively.
For the in-force liabilities as of December 31, 2022, the estimated amortization expense for VOBA in future fiscal periods under existing accounting rules is as follows (in millions) (Refer to Note Q Recent Accounting Pronouncements for further discussion of accounting pronouncements not yet adopted that may have a significant impact on future estimated amortization expense upon adoption):
| | | | | |
| Estimated Amortization Expense |
Fiscal Year | |
2023 | $ | (53) | |
2024 | 172 | |
2025 | 151 | |
2026 | 133 | |
2027 | 129 | |
| |
Thereafter | 702 | |
Definite and Indefinite Lived Other Intangible Assets
Other intangible assets as of December 31, 2022 consist of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Cost | | Accumulated amortization | | Net carrying amount | | Weighted average useful life (years) |
| | | | | | | |
Value of distribution asset (VODA) | $ | 140 | | | $ | (40) | | | $ | 100 | | | 15 |
Computer software | 82 | | | (21) | | | 61 | | | 2 to 10 |
Definite lived trademarks, tradenames, and other | 30 | | | (8) | | | 22 | | | 10 |
Indefinite lived tradenames and other | 8 | | | N/A | | 8 | | | Indefinite |
Total | | | | | $ | 191 | | | |
Other intangible assets as of December 31, 2021 consist of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Cost | | Accumulated amortization | | Net carrying amount | | Weighted average useful life (years) |
Value of distribution asset (VODA) | $ | 140 | | | $ | (25) | | | $ | 115 | | | 15 |
Computer software | 67 | | | (15) | | | 52 | | | 2 to 10 |
Definite lived trademarks, tradenames and other | 30 | | | (5) | | | 25 | | | 10 |
Indefinite lived tradenames and other | 8 | | | N/A | | 8 | | | Indefinite |
Total | | | | | $ | 200 | | | |
Amortization expense for amortizable intangible assets, which consist primarily of VODA, computer software, and definite lived trademarks, tradenames and other was $25 million, $28 million, $17 million and $1 million for the years ended December 31, 2022 and December 31, 2021, the period June 1 to December 31, 2020 and the Predecessor period January 1 to May 31, 2020, respectively. Estimated amortization expense for the next five years for assets owned at December 31, 2022, is $29 million in 2023, $26 million in 2024, $24 million in 2025, $23 million in 2026 and $22 million in 2027.
Note I — Goodwill
Goodwill of $1,756 million as of December 31, 2022, and December 31, 2021 relates to goodwill recorded in connection with the FNF acquisition at June 1, 2020. There have been no changes in goodwill since the FNF
acquisition. Refer to Note A Business and Summary of Significant Accounting Policies regarding our accounting policy for Goodwill and discussion of impairment testing.
Note J — Reinsurance
F&G reinsures portions of its policy risks with other insurance companies. The use of indemnity reinsurance does not discharge an insurer from liability on the insurance ceded. The insurer is required to pay in full the amount of its insurance liability regardless of whether it is entitled to or able to receive payment from the reinsurer. The portion of risks exceeding F&G's retention limit is reinsured. F&G primarily seeks reinsurance coverage in order to limit its exposure to mortality losses and enhance capital management. F&G follows reinsurance accounting when there is adequate risk transfer or deposit accounting if there is inadequate risk transfer. If the underlying policy being reinsured is an investment contract, the effects of the agreement are accounted for as a separate investment contract. Refer to Note A Business and Summary of Significant Accounting Policies for more information over our accounting policy for reinsurance agreements.
The effect of reinsurance on net premiums earned and net benefits incurred (benefits paid and reserve changes) for the years ended December 31, 2022 and December 31, 2021, the period from June 1, 2020 to December 31, 2020 and the Predecessor period January 1, 2020 to May 31, 2020, respectively, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Period from June 1 to December 31, | | | Period from January 1 to May 31, |
| 2022 | | 2021 | | 2020 | | | 2020 |
| | | | | | | | | | | | | | Predecessor |
| Net Premiums Earned | | Net Benefits Incurred | | Net Premiums Earned | | Net Benefits Incurred | | Net Premiums Earned | | Net Benefits Incurred | | | Net Premiums Earned | | Net Benefits Incurred |
Direct | $ | 1,522 | | | $ | 3,671 | | | $ | 1,314 | | | $ | 3,282 | | | $ | 108 | | | $ | 976 | | | | $ | 86 | | | $ | 402 | |
Assumed | — | | | — | | | — | | | — | | | — | | | 1 | | | | — | | | (1) | |
Ceded | (128) | | | (2,546) | | | (137) | | | (1,144) | | | (85) | | | (111) | | | | (67) | | | (103) | |
Net | $ | 1,394 | | | $ | 1,125 | | | $ | 1,177 | | | $ | 2,138 | | | $ | 23 | | | $ | 866 | | | | $ | 19 | | | $ | 298 | |
Amounts payable or recoverable for reinsurance on paid and unpaid claims are not subject to periodic or maximum limits. The Company did not write off any significant reinsurance balances during the years ended December 31, 2022 and December 31, 2021, the period from June 1, 2020 to December 31, 2020 or the Predecessor period from January 1, 2020 to May, 31, 2020. The Company did not commute any ceded reinsurance treaties during the years ended December 31, 2022 and December 31, 2021, the period from June 1, 2020 to December 31, 2020 or the Predecessor period from January 1, 2020 to May 31, 2020.
F&G estimates expected credit losses on reinsurance recoverables using a probability of default/loss given default model. Significant inputs to the model include the reinsurer's credit risk, expected timing of recovery, industry-wide historical default experience, senior unsecured bond recovery rates, and credit enhancement features. For the period ended May 31, 2020, the expected credit loss reserve was $22 million. As of the June 1, 2020 acquisition of F&G, due to purchase accounting adjustments, our expected credit loss reserve was valued at $0. For the seven months ended December 31, 2020, the expected credit loss reserve increased from $0 to $21 million. As of December 31, 2022 and December 31, 2021, the expected credit loss reserve was $10 million and $20 million, respectively.
No policies issued by F&G have been reinsured with any foreign company, which is controlled, either directly or indirectly, by a party not primarily engaged in the business of insurance.
F&G has not entered into any reinsurance agreements in which the reinsurer may unilaterally cancel any reinsurance for reasons other than non-payment of premiums or other similar credit issues.
New Reinsurance Transaction. Effective December 31, 2022, F&G entered into an indemnity reinsurance agreement with New Reinsurance Company Ltd. (“New Re”), a third-party reinsurer, to cede a quota share of certain FIA policies and related waiver of surrender charges, issued after January 1, 2022, on a coinsurance and yearly
renewable term basis. The coinsurance quota share is only applicable to the base contract benefits under the FIA policies. The yearly renewable term is applicable to the waiver of surrender charges. As the FIA policies ceded do not include any GMWB or GMDB benefits, there is no significant insurance risk present and therefore the effects of this agreement are accounted for as a separate investment contract.
Aspida Reinsurance Transaction. F&G executed a Funds Withheld Coinsurance Agreement with Aspida Re, a Bermuda reinsurer. In accordance with the terms of this agreement, F&G cedes to the reinsurer, on a fifty percent (50%) funds withheld coinsurance basis, certain multiyear guaranteed annuity business written effective January 1, 2021. The agreement was originally executed January 15, 2021 and amended in August 2021 and September 2022. For reinsured policies issued prior to September 1, 2022, the policies are ceded on a fifty percent (50%) quota share basis. For reinsured policies issued on or after September 1, 2022, the policies are ceded on a seventy-five percent (75%) quota share basis, capped at $350 million cession per month. As the policies ceded to Aspida are investment contracts, there is no significant insurance risk present and therefore the effects of this agreement are accounted for as a separate investment contract.
Somerset Reinsurance Transaction. F&G entered into a reinsurance agreement with Kubera, a third-party reinsurer, effective December 31, 2018, to cede certain MYGA and deferred annuity GAAP and statutory reserves on a coinsurance funds withheld basis, net of applicable existing reinsurance. In accordance with the terms of this agreement, F&G cedes a quota share percentage of MYGA and deferred annuity policies for certain issue years to Kubera. Effective October 31, 2021, this agreement was novated from Kubera to Somerset, a certified third-party reinsurer. This agreement cedes GAAP and statutory reserves of approximately $1 billion. As the policies ceded to Somerset are investment contracts, there is no significant insurance risk present and therefore the effects of this agreement are accounted for as a separate investment contract.
Kubera Reinsurance Transaction. F&G has a reinsurance agreement with Kubera to cede certain FIA statutory reserves on a coinsurance funds withheld basis, net of applicable existing reinsurance. In accordance with the terms of this agreement, F&G cedes a quota share percentage of FIA policies for certain issue years to Kubera. Effective October 31, 2021, this agreement was amended to increase the ceded reserves from approximately $4 billion to approximately $10 billion. The agreement was subsequently amended and restated on October 1, 2022 whereby F&G recaptured approximately $52 million in statutory reserves solely related to waiver of surrender charges. As the policies ceded to Kubera are investment contracts, there is no significant insurance risk present and therefore the reinsurance agreement is accounted for as a separate investment contract. F&G incurred risk charge fees of $12 million, $5 million, $4 million, and ($1) million during the years ended December 31, 2022 and December 31, 2021, the period from June 1, 2020 to December 31, 2020, and the Predecessor period from January 1, 2020 to May 31, 2020, respectively, in relation to this reinsurance agreement.
To enhance Kubera's ability to pay its obligations under the amended reinsurance agreement, F&G entered into a Variable Note Purchase Agreement (the “NPA”), whereby F&G agreed to fund a note to Kubera to be used to ultimately settle with F&G, with principal increases up to a maximum amount of $300 million, to the extent a potential funding shortfall (treaty assets are less than the total funding requirement) is projected relative to the business ceded to Kubera from F&G as part of the amended reinsurance agreement. The potential funding shortfall will be determined quarterly and, among other items, is impacted by the market value of the assets in the funds withheld account related to the reinsurance agreement and Kubera's capital as calculated on a Bermuda regulatory basis. The NPA matures on November 30, 2071. Based on the current level of the treaty assets and projections that these policies will be profitable over the lifetime of the agreement, we do not expect significant fundings to occur under the NPA. As of December 31, 2022 and December 31, 2021, the amount funded under the NPA was insignificant.
Canada Life Reinsurance Transaction. Effective May 1, 2020, F&G entered into an indemnity reinsurance agreement with Canada Life Assurance Company United States Branch, a third-party reinsurer, to reinsure FIA policies with GMWB. In accordance with the terms of this agreement, F&G cedes a quota share percentage of the net retention of guarantee payments in excess of account value for GMWB. This treaty was amended effective January 1, 2021 and January 1, 2022, and covers FIA policies with GMWB issued from January 1, 2020 to December 31, 2023. Effective October 1, 2022, the treaty was then amended and restated to cover additional FIA business policies. The effects of this agreement are not accounted for as reinsurance as it does not satisfy the risk
transfer requirements for GAAP; therefore, deposit accounting is applied. F&G incurred risk charge fees of $4 million, $2 million and $1 million during the years ended December 31, 2022 and December 31, 2021 and the period from June 1, 2020 to December 31, 2020, respectively, in relation to this reinsurance agreement.
Hannover Reinsurance Transaction. F&G has an indemnity reinsurance agreement with Hannover Re, a third-party reinsurer, to cede a quota share percentage of the net retention of guarantee payments in excess of account value for GMWB and GMDB guarantees associated with an in-force block of its FIA and fixed deferred annuity contracts. The effects of this agreement are not accounted for as reinsurance as it does not satisfy the risk transfer requirements for GAAP; therefore, deposit accounting is applied. F&G incurred risk charge fees of $20 million, $21 million, $12 million, and $8 million during the years ended December 31, 2022 and December 31, 2021, the period from June 1, 2020 to December 31, 2020, and the Predecessor period from January 1, 2020 to May 31, 2020, respectively, in relation to this reinsurance agreement.
Wilton Reinsurance Transaction. Pursuant to the agreed upon terms, Wilton Reassurance Company (“Wilton Re”) purchased through a 100% quota share reinsurance agreement certain FGL Insurance life insurance policies that are subject to redundant reserves, reported on a statutory basis, under Regulation XXX and Guideline AXXX, as well as another block of FGL Insurance’s in-force traditional, universal life and IUL insurance policies. The effects of this agreement are accounted for as reinsurance as the ceded policies qualify as insurance products and because the agreement satisfies the risk transfer requirements for GAAP.
Concentration of Reinsurance Risk
The Company has a significant concentration of reinsurance risk with third party reinsurers, Aspida Re, Wilton Re, and Somerset that could have a material impact on our financial position in the event that any of these reinsurers fails to perform its obligations under the various reinsurance treaties. Aspida Re has an A- issuer credit rating from AM Best as of December 31, 2022, and the risk of non-performance is further mitigated through the funds withheld arrangement. Wilton Re has an A+ issuer credit rating from AM Best and an A issuer credit rating from Fitch as of December 31, 2022. Somerset has an A- issuer credit rating from AM Best and a BBB+ issuer credit rating from S&P as of December 31, 2022, and the risk of non-performance is further mitigated through the funds withheld arrangement. On December 31, 2022, the net amounts recoverable from Aspida Re, Wilton Re, and Somerset were $3,121 million, $1,231 million, and $570 million, respectively. We monitor both the financial condition of individual reinsurers and risk concentration arising from similar activities and economic characteristics of reinsurers to attempt to reduce the risk of default by such reinsurers. We believe that all amounts due from Aspida Re, Wilton Re, and Somerset for periodic treaty settlements are collectible as of December 31, 2022.
Intercompany Reinsurance Agreements
Effective December 31, 2022, Fidelity & Guaranty Life Insurance Company (“FGL Insurance”) entered into a Coinsurance Agreement with F&G Life Re, an affiliated Bermuda reinsurer to issue a quota share of PRT group annuity contracts. Some of the contracts reinsured are held by FGL Insurance’s general account and others are held by a FGL Insurance separate account (which does not meet the GAAP definition of a separate account). The cession from FGL Insurance to the Reinsurer is on a 80% quota share basis. Reinsurance of the separate account contracts are maintained on a modified coinsurance basis and reinsurance of the general account contracts are maintained on a funds withheld basis. On the funds withheld portion of the transaction, FGL Insurance ceded approximately $380 million, in certain PRT Statutory Reserves and Interest Maintenance Reserve. FGL Insurance also established a modified coinsurance reserve of approximately $1.7 billion associated with the PRT Separate Account Insurance Liabilities.
F&G has a reinsurance treaty with Raven Reinsurance Company ("Raven Re"), its wholly owned captive reinsurance company, to cede the Commissioners Annuity Reserve Valuation Method ("CARVM") liability for annuity benefits where surrender charges are waived related to certain FIA, DA and MYGA policies. Effective October 1, 2022, the treaty was amended and restated to cover additional FIA, DA and MYGA policy issue years. In connection with the CARVM reinsurance agreement, (“FGL Insurance”) and Raven Re entered into an agreement with Nomura Bank International plc (“NBI”) to establish a reserve financing facility in the form of a letter of credit issued by NBI. The reimbursement agreement associated with the facility was amended and restated
on September 30, 2022. As a result, the financing facility now has $200 million available to draw on as of December 31, 2022. The amended facility may terminate earlier than the current termination date of October 1, 2027, in accordance with the terms of the reimbursement agreement. Under the terms of the reimbursement agreement, in the event the letter of credit is drawn upon, Raven Re is required to repay the amounts utilized, and FGLH is obligated to repay the amounts utilized if Raven Re fails to make the required reimbursement. FGLH also is required to make capital contributions to Raven Re in the event that Raven Re’s statutory capital and surplus falls below certain defined levels. As of December 31, 2022 and December 31, 2021, Raven Re’s statutory capital and surplus was $11 million and $62 million, respectively, in excess of the minimum level required under the reimbursement agreement. As this letter of credit is provided by an unaffiliated financial institution, Raven Re is permitted to carry the letter of credit as an admitted asset on the Raven Re statutory balance sheet.
Effective December 31, 2020, FGL Insurance executed a Coinsurance Agreement with F&G Life Re Ltd. (“F&G Life Re” or "Reinsurer"), an affiliated Bermuda reinsurer, to reinsure a quota share of FIA policies to the Reinsurer. Concurrently, the Reinsurer and F&G Cayman Re Ltd. (“F&G Cayman Re”), an affiliated reinsurer of both FGL Insurance and the Reinsurer, entered into a Retrocession Agreement. The cession from FGL Insurance to the Reinsurer is on a 100% quota share basis, net of applicable existing reinsurance and the retrocession to F&G Cayman Re from the Reinsurer is on a 45% quota share basis. Additionally, both treaties are maintained on a funds withheld basis. FGL Insurance ceded and the Reinsurer retroceded approximately $5.0 billion and $2.2 billion, respectively, in certain FIA Statutory Reserves and Interest Maintenance Reserve.
Since these agreements are intercompany, the financial impacts are eliminated in the preparation of the Consolidated Financial Statements included within this Annual Report.
Note K — Related Party Transactions
The Company has determined that related parties would fall into the following categories; (i) affiliates of the entity, (ii) entities for which investments in their equity securities would be required to be accounted for by the equity method by the investing entity, (iii) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management, (iv) principal owners (>10% equity stake) of the entity and members of their immediate families, (v) management (including FNF’s BOD, CEO, and other persons responsible for achieving the objectives of the entity and who have the authority to establish policies and make decisions) of the entity and other members of their immediate families, (vi) other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests (vii) other parties that can significantly influence management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate business, (viii) attorney in fact of a reciprocal reporting entity or any affiliate of the attorney in fact, and (ix) a U.S. manager of a U.S. branch or any affiliate of the U.S. manager of a U.S. branch.
Prior to the FNF acquisition, the Company determined that for the period January 1 to May 31, 2020, the Blackstone Group LP ("Blackstone") and its affiliates, further discussed below, as well as the Company's directors and officers (along with their immediate family members) were related parties of the Company due to ownership in F&G. Blackstone was a related party based on its equity stake in the Company. Upon the closing of the FNF acquisition, the Company re-evaluated related parties. Blackstone and its affiliates are no longer related parties due to no longer holding ownership in F&G. It was determined that FNF as well as FNF's directors and officers (along with their immediate family members) would be related parties subsequent to June 1, 2020.
FNF
Separation Agreement
F&G has entered into the Separation Agreement with FNF to provide for, among other things, the principal corporate transactions required to effect the separation and distribution, certain conditions to the separation and distribution and provisions governing our relationship with FNF with respect to and resulting from the separation
and distribution. Refer to “Risk Factors - Risks Related to the Separation and Distribution and our Status as a subsidiary of FNF” in this Annual Report for additional information on the separation.
Notes Payable
For a description of our financing arrangements with FNF see Note E Notes Payable to the Consolidated Financial Statements included in this Annual Report.
Governance
Because FNF will initially own approximately 85% of the shares of outstanding F&G common stock we are a controlled company within the meaning of the corporate governance standards of the NYSE. A controlled company does not need its board of directors to have a majority of independent directors or to form an independent compensation committee or nominating and corporate governance committee. Refer to “Risk Factors - Risks Related to the Separation and Distribution and our Status as a subsidiary of FNF” in this Annual Report for additional information on management and governance.
Tax Sharing Agreement
Refer to Note N Income Taxes for a discussion of the tax matters agreement between FNF and the Company.
Stock Split, Increase to Authorized shares and Exchange Agreement with FNF
On June 24, 2022, the following actions previously approved by the F&G board of directors became effective: (i) a stock split in a ratio of 105,000 for 1. FNF, as the sole shareholder, received, in the form of a dividend, 104,999 additional shares of common stock for each share of common stock held. Earnings per share has been retrospectively adjusted to reflect as if the split occurred as of June 1, 2020 in accordance with GAAP; (ii) an increase in the number of authorized shares of common stock from one thousand (1,000) to five hundred million (500,000,000); (iii) an exchange agreement with FNF pursuant to which F&G transferred shares of its common stock to FNF in exchange for the $400 million FNF Promissory Note, after which the note was retired. There was no gain or loss recorded with respect to the exchange agreement. For the years ended December 31, 2022 and 2021, interest expense on the FNF Promissory Note was approximately $6 million and $3 million, respectively.
Corporate Services Agreement
FNF has entered into a Corporate Services Agreement with F&G, which we refer to as the Corporate Services Agreement. Pursuant to such agreement, FNF will provide F&G with certain corporate services, including internal audit services, litigation and dispute management services, compliance services, corporate and transactional support services, SEC & reporting services, insurance and risk management services, human resources support services and real estate services. The Corporate Services Agreement terminates after the date upon which all corporate services or transition assistance have been terminated or upon the mutual agreement of the parties. F&G may terminate corporate services by providing 90 days written notice to FNF.
Reverse Corporate Services Agreement
F&G has entered into a Reverse Corporate Services Agreement with FNF. Pursuant to such agreement, F&G will provide FNF with certain services, including employee services. The Reverse Corporate Services Agreement terminates after the date upon which all corporate services or transition assistance has been terminated or upon the mutual agreement of the parties. FNF may terminate corporate services by providing 90 days written notice to F&G.
Shared Services
For the years ended December 31, 2022 and 2021, and for the period June 1, 2020 to December 31, 2020, FNF provided certain operational support services for F&G including tax, insurance, legal, risk management, information technology, employee benefits and accounting.
Expenses incurred by F&G for all services were approximately $4 million for the year ended December 31, 2022 and were insignificant for the year ended December 31, 2021 and for the period June 1, 2020 to December 31,
2020.
Blackstone ISG-I Advisors LLC ("BIS")
FGL Insurance and certain subsidiaries of the Company, entered into investment management agreements ("IMAs") with "BIS", a wholly owned subsidiary of The Blackstone Group LP on December 1, 2017. On December 31, 2019, to be effective as of October 31, 2019, FGL Insurance and certain subsidiaries of the Company entered into amended and restated IMAs (the “Restated IMAs”) with BIS, pursuant to which BIS was appointed as investment manager of the Company’s general accounts (the “F&G Accounts”). Pursuant to the terms of the Restated IMAs, BIS may delegate any or all of its discretionary investment, advisory and other rights, powers, functions and obligations under the Restated IMAs to one or more sub-managers, including its affiliates. BIS delegated certain investment services to its affiliates, Blackstone Real Estate Special Situations Advisors L.L.C. (“BRESSA”) and GSO Capital Advisors II LLC (“GSO Capital Advisors”), pursuant to sub-management agreements executed between BIS and each of BRESSA and GSO Capital Advisors. The Restated IMAs were further amended and restated on June 1, 2020.
BIS appointed MVB Management, an entity owned by affiliates of FNF’s Chairman, as Sub-Adviser of the FGL Account pursuant to a sub-advisory agreement (the “Sub-Advisory Agreement”). Under the Sub-Advisory Agreement, MVB Management will provide portfolio review, and consulting services, including such recommendations as the Investment Manager shall reasonably request. Payment or reimbursement of the sub-advisory fee to MVB Management is solely the obligation of BIS and is not an obligation of FGL Insurance or F&G. Subject to certain conditions, the Sub-Advisory Agreement cannot be terminated by BIS unless FGL Insurance terminates the FGL Insurance IMA.
The Company purchased $103 million of residential loans from Finance of America Holdings LLC, a Blackstone affiliate, during the period January 1 to May 31, 2020. In addition, the Company purchased $67 million commercial mortgage loans from Blackstone Real Estate Debt Strategies, a Blackstone affiliate, during the period January 1 to May 31, 2020.
The Company earned $(12) million of interest and investment income for the period January 1 to May 31, 2020 on affiliated investments.
Freedom Equity Group (“FEG”)
In October 2021, we purchased a 30% minority ownership stake in FEG. FEG is a nearly 4,000 agent strong Network Marketing Group that focuses on cultural markets including Mexican-American, Hmong, Laotian, Filipino, Burmese, Congolese-American, Samoan, African-American, Thai and Vietnamese. For the year ended December 31, 2022, we paid approximately $74 million in commissions to FEG, with the expense included in other operating expenses on the accompanying Consolidated Statement of Earnings.
Refer to Note S Subsequent Events, for discussion of a recent investment we made in Syncis.
Note L — Insurance Subsidiary Financial Information and Regulatory Matters
Our U.S. insurance subsidiaries, FGL Insurance, Fidelity & Guaranty Life Insurance Company of New York (“FGL NY Insurance”), and Raven Re, file financial statements with state insurance regulatory authorities and the National Association of Insurance Commissioners (“NAIC”) that are prepared in accordance with Statutory Accounting Principles (“SAP”) prescribed or permitted by such authorities, which may vary materially from GAAP. Prescribed SAP includes the Accounting Practices and Procedures Manual of the NAIC as well as state laws, regulations and administrative rules. Permitted SAP encompasses all accounting practices not so prescribed. The principal differences between SAP financial statements and financial statements prepared in accordance with GAAP are that SAP financial statements do not reflect VOBA, DAC, and DSI, some bond portfolios may be carried at amortized cost, assets and liabilities are presented net of reinsurance, contractholder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted. Accordingly, SAP operating results and SAP capital and surplus may differ substantially from amounts reported in the GAAP basis financial statements for comparable items.
F&G Cayman Re and F&G Life Re (Bermuda) file financial statements with their respective regulators that are based on U.S. GAAP.
U.S. Companies
Our principal insurance subsidiaries' statutory (SAP and GAAP) financial statements are based on a December 31 year end. Statutory net income and statutory capital and surplus of our wholly owned U.S. regulated insurance subsidiaries were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Subsidiary (state of domicile) (a) |
| FGL Insurance (IA) | | FGL NY Insurance (NY) | | Raven Re (VT) |
Statutory Net income (loss): | | | | | |
Year ended December 31, 2022 | $ | (243) | | | $ | (15) | | | $ | (111) | |
Year ended December 31, 2021 | $ | 351 | | | $ | 4 | | | $ | 3 | |
Statutory Capital and Surplus: | | | | | |
December 31, 2022 | $ | 1,877 | | | $ | 82 | | | $ | 121 | |
December 31, 2021 | $ | 1,473 | | | $ | 99 | | | $ | 115 | |
(a)FGL NY Insurance and Raven Re are subsidiaries of FGL Insurance, and the columns should not be added together.
Regulation - U.S. Companies
FGL Insurance, FGL NY Insurance and Raven Re's respective statutory capital and surplus satisfies the applicable minimum regulatory requirements.
In order to enhance the regulation of insurers’ solvency, the NAIC adopted a model law to implement RBC requirements for life, health and property and casualty insurance companies. All states have adopted the NAIC’s model law or a substantially similar law. RBC is used to evaluate the adequacy of capital and surplus maintained by an insurance company in relation to risks associated with: (i) asset risk, (ii) insurance risk, (iii) interest rate risk, and (iv) business risk. As of the most recent annual statutory financial statements filed with insurance regulators, the RBC ratios for FGL Insurance and FGL NY Insurance each exceeded the minimum RBC requirements.
The insurance laws of Iowa and New York regulate the amount of dividends that may be paid in any year by FGL Insurance and FGL NY Insurance, respectively.
Pursuant to Iowa insurance law, ordinary dividends are payments, together with all other such payments within the preceding twelve months, that do not exceed the greater of (i) 10% of FGL Insurance’s statutory surplus as regards policyholders as of December 31 of the preceding year; or (ii) the net gain from operations of FGL Insurance (excluding realized capital gains) for the 12-month period ending December 31 of the preceding year.
Dividends in excess of FGL Insurance’s ordinary dividend capacity are referred to as extraordinary and require prior approval of the Iowa Insurance Commissioner. FGL Insurance may only pay dividends out of statutory earned surplus. FGL Insurance paid extraordinary dividends to FGAL of $0 million, $38 million, and $151 million, in the 12-month periods ending December 31, 2022, 2021, and 2020, respectively.
Each year, FGL NY Insurance may pay a certain limited amount of ordinary dividends or other distributions without being required to obtain the prior consent of or the New York State Department of Financial Services (“NYDFS”). However, to pay any dividends or distributions (including the payment of any dividends or distributions for which prior consent is not required), FGL NY Insurance must provide advance written notice to the NYDFS.
FGL NY Insurance has historically not paid dividends.
FGL Insurance applies Iowa-prescribed accounting practices that permit Iowa-domiciled insurers to report equity call options used to economically hedge FIA index credits at amortized cost for statutory accounting purposes
and to calculate FIA statutory reserves such that index credit returns will be included in the reserve only after crediting to the annuity contract. Effective October 1, 2022, the Company incorporated IUL products under these Iowa-prescribed accounting practices. This resulted in a $152 million and $106 million decrease to statutory capital and surplus at December 31, 2022 and December 31, 2021, respectively.
FGL Insurance’s statutory carrying value of Raven Re reflects the effect of permitted practices Raven Re received to treat the available amount of a letter of credit as an admitted asset, which increased Raven Re’s statutory capital and surplus by $200 million and $85 million at December 31, 2022 and December 31, 2021, respectively.
Raven Re is also permitted to follow Iowa prescribed statutory accounting practice for its reserves on reinsurance assumed from FGL Insurance which increased Raven Re’s statutory capital and surplus by $28 million at December 31, 2022 and by $0 million at December 31, 2021. Without such permitted statutory accounting practices, Raven Re’s statutory capital and surplus (deficit) would be $(107) million as of December 31, 2022 and would be $30 million as of December 31, 2021, and its risk-based capital would not fall below the minimum regulatory requirements. The letter of credit facility is collateralized by NAIC 1 rated debt securities. If the permitted practice was revoked, the letter of credit could be replaced by the collateral assets with Nomura’s consent as discussed in Note J Reinsurance. FGL Insurance’s statutory carrying value of Raven Re was $121 million and $115 million at December 31, 2022 and December 31, 2021, respectively.
As of December 31, 2022, FGL NY Insurance did not follow any prescribed or permitted statutory accounting practices that differ from the NAIC's statutory accounting practices.
Non-U.S. Companies
Net income and capital and surplus of our wholly owned Bermuda and Cayman regulated insurance subsidiaries under U.S. GAAP were as follows (in millions):
| | | | | | | | | | | |
| Subsidiary (country of domicile) |
| F&G Cayman Re (Cayman) | | F&G Life Re (Bermuda) |
Statutory Net income (loss): | | | |
Year ended December 31, 2022 | $ | 299 | | | $ | 339 | |
Year ended December 31, 2021 | $ | 99 | | | $ | 94 | |
Statutory Capital and Surplus: | | | |
December 31, 2022 | $ | 126 | | | $ | 138 | |
December 31, 2021 | $ | 164 | | | $ | 206 | |
Regulation - Bermuda
F&G Life Re is a Bermuda exempted company incorporated under the Companies Act 1981, as amended (the “Companies Act”) and registered as a Class E insurer under the Insurance Act 1978, as amended, and its related regulations (the “Insurance Act”). F&G Life Re is regulated by the Bermuda Monetary Authority (“BMA”).
Bermuda has been awarded full equivalence for commercial insurers under Europe’s Solvency II regime applicable to insurance companies, which regime came into effect on January 1, 2016.
The BMA utilizes a risk-based approach when it comes to licensing and supervising insurance and reinsurance companies. As part of the BMA’s risk-based system, an assessment of the inherent risks within each particular class of insurer or reinsurer is used to determine the limitations and specific requirements that may be imposed. Thereafter the BMA keeps its analysis of relative risk within individual institutions under review on an ongoing basis, including through the scrutiny of audited financial statements, and, as appropriate, meeting with senior management during onsite visits.
The Insurance Act imposes on Bermuda insurance companies solvency and liquidity standards, as well as auditing and reporting requirements. Certain significant aspects of the Bermuda insurance regulatory framework are set forth below.
Minimum Solvency Margin. The Insurance Act provides that the value of the assets of an insurer must exceed the value of its liabilities by an amount greater than its prescribed minimum solvency margin.
The minimum solvency margin that must be maintained by a Class E insurer is the greater of: (i) $8,000,000; (ii) 2% of first $500,000,000 of assets plus 1.5% of assets above $500,000,000; and (iii) 25% of that insurer’s enhanced capital requirement (“ECR”). An insurer may file an application under the Insurance Act to waive the aforementioned requirements.
ECR and Bermuda Solvency Capital Requirements (“BSCR”). Class E insurers are required to maintain available capital and surplus at a level equal to or in excess of the applicable ECR, which is established by reference to either the applicable BSCR model or an approved internal capital model. Furthermore, to enable the BMA to better assess the quality of the insurer’s capital resources, a Class E insurer is required to disclose the makeup of its capital in accordance with its 3-tiered capital system. An insurer may file an application under the Insurance Act to have the aforementioned ECR requirements waived.
Restrictions on Dividends and Distributions. In addition to the requirements under the Companies Act (as discussed below), the Insurance Act limits the maximum amount of annual dividends and distributions that may be paid or distributed by F&G Life Re without prior regulatory approval.
F&G Life Re is prohibited from declaring or paying a dividend if it fails to meet its minimum solvency margin, or ECR, or if the declaration or payment of such dividend would cause such breach. If F&G Life Re were to fail to meet its minimum solvency margin on the last day of any financial year, it would be prohibited from declaring or paying any dividends during the next financial year without the approval of the BMA.
In addition, as a Class E insurer, F&G Life Re must not declare or pay a dividend to any person other than a policyholder unless the value of the assets of such insurer, as certified by the insurer’s approved actuary, exceeds its liabilities (as so certified) by the greater of its margin of solvency or ECR. In the event a dividend complies with the above, F&G Life Re must ensure the amount of any such dividend does not exceed that excess.
Furthermore, as a Class E insurer, F&G Life Re must not declare or pay a dividend in any financial year which would exceed 25% of its total capital and statutory surplus, as set out in its previous year’s financial statements, unless at least seven days before payment of such dividend F&G Life Re files with the BMA an affidavit signed by at least two directors of F&G Life Re and its principal representative under the Insurance Act stating that, in the opinion of those signing, declaration of such dividend has not caused the insurer to fail to meet its relevant margins.
The Companies Act also limits F&G Life Re’s ability to pay dividends and make distributions to its shareholders. F&G Life Re is not permitted to declare or pay a dividend, or make a distribution out of its contributed surplus, if it is, or would after the payment be, unable to pay its liabilities as they become due or if the realizable value of its assets would be less than its liabilities.
Reduction of Capital. F&G Life Re may not reduce its total statutory capital by 15% or more, as set out in its previous year’s financial statements, unless it has received the prior approval of the BMA. Total statutory capital consists of the insurer’s paid in share capital, its contributed surplus (sometimes called additional paid in capital) and any other fixed capital designated by the BMA as statutory capital.
Regulation - Cayman
F&G Cayman Re is licensed as a class D insurer in the Cayman Islands by the Cayman Islands Monetary Authority (“CIMA”). As a regulated insurance company, F&G Cayman Re is subject to the supervision of CIMA and CIMA may at any time direct F&G Cayman Re, in relation to a policy, a line of business or the entire business, to cease or refrain from committing an act or pursing a course of conduct and to perform such acts as in the opinion of CIMA are necessary to remedy or ameliorate the situation.
The laws and regulations of the Cayman Islands require that, among other things, F&G Cayman Re maintain minimum levels of statutory capital, surplus and liquidity, meet solvency standards, submit to periodic examinations of its financial condition and restrict payments of dividends and reductions of capital. Statutes, regulations and policies that F&G Cayman Re is subject to may also restrict the ability of F&G Cayman Re to write insurance and reinsurance policies, make certain investments and distribute funds. Any failure to meet the applicable requirements or minimum statutory capital requirements could subject it to further examination or corrective action by CIMA, including restrictions on dividend payments, limitations on our writing of additional business or engaging in finance activities, supervision or liquidation.
The prescribed and permitted statutory accounting practices have no impact on our audited Consolidated Financial Statements, which are prepared in accordance with GAAP.
Note M — Accounts Payable and Accrued liabilities
Accounts payable and other accrued liabilities consist of the following:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In millions) |
Salaries and incentives | $ | 72 | | | $ | 60 | |
Accrued benefits | 58 | | | 74 | |
Deferred revenue | 203 | | | 35 | |
| | | |
Trade accounts payable | 114 | | | 72 | |
| | | |
| | | |
Accrued premium taxes | 5 | | | 3 | |
Liability for policy and contract claims | 109 | | | 109 | |
Retained asset account | 117 | | | 148 | |
Remittances and items not allocated | 225 | | | 39 | |
Option collateral liabilities | 178 | | | 576 | |
Funds withheld embedded derivative | — | | | 73 | |
Other accrued liabilities | 193 | | | 108 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| $ | 1,273 | | | $ | 1,297 | |
Note N — Income Taxes
Income tax expense (benefit) on continuing operations consists of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Period from June 1 to December 31, | | | Period from January 1 to May 31, |
| 2022 | | 2021 | | 2020 | | | 2020 |
| | | | | | | | Predecessor |
Current | $ | (31) | | | $ | 27 | | | $ | 18 | | | | $ | (1) | |
Deferred | 148 | | | 193 | | | (93) | | | | (13) | |
| $ | 117 | | | $ | 220 | | | $ | (75) | | | | $ | (14) | |
Total income tax expense (benefit) was allocated as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Period from June 1 to December 31, | | | Period from January 1 to May 31, |
| 2022 | | 2021 | | 2020 | | | 2020 |
| | | | | | | | Predecessor |
Taxes on net earnings (loss) from continuing operations | $ | 117 | | | $ | 220 | | | $ | (75) | | | | $ | (14) | |
Tax expense on net earnings (loss) from discontinued operations | — | | | — | | | — | | | | — | |
Other comprehensive (loss) earnings: | | | | | | | | |
Unrealized (loss) gain on investments and other financial instruments | (935) | | | (123) | | | 315 | | | | (185) | |
Unrealized gain on foreign currency translation and cash flow hedging | (1) | | | (1) | | | 2 | | | | — | |
Total income tax (benefit) expense allocated to other comprehensive earnings | (936) | | | (124) | | | 317 | | | | (185) | |
Total income taxes | $ | (819) | | | $ | 96 | | | $ | 242 | | | | $ | (199) | |
A reconciliation of the federal statutory rate to our effective tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Period from June 1 to December 31, | | | Period from January 1 to May 31, |
| 2022 | | 2021 | | 2020 | | | 2020 |
| | | | | | | | Predecessor |
Federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % | | | 21.0 | % |
State income taxes, net of federal benefit | 0.1 | | | 0.4 | | | 1.8 | | | | (0.4) | |
Benefit for Capital Loss Carryback | (4.0) | | | — | | | — | | | | |
| | | | | | | | |
| | | | | | | | |
Stock compensation | — | | | (0.1) | | | 0.1 | | | | — | |
Tax credits | (1.4) | | | (0.4) | | | (3.2) | | | | 0.1 | |
Dividends received deduction | (0.6) | | | (0.3) | | | (2.5) | | | | 0.4 | |
Benefit on outside of United States income taxed at 0% | — | | | — | | | — | | | | (1.8) | |
| | | | | | | | |
Withholding tax on 0% taxed jurisdiction | — | | | — | | | (2.5) | | | | (0.3) | |
Valuation allowance for deferred tax assets | 4.5 | | | (1.3) | | | (63.5) | | | | (12.1) | |
Change in tax status benefit | — | | | — | | | (41.0) | | | | — | |
Adjustment of DTAs on sale of subsidiary | — | | | 1.4 | | | — | | | | — | |
| | | | | | | | |
Non-deductible expenses and other, net | — | | | (0.2) | | | 1.5 | | | | (0.4) | |
Effective tax rate | 19.6 | % | | 20.5 | % | | (88.3) | % | | | 6.5 | % |
| | | | | | | | |
| | | | | | | | |
For the year ended December 31, 2022, the Company’s effective tax rate was 19.6%. The effective tax rate was positively impacted by favorable permanent adjustments, including low income housing tax credits (“LIHTC”), the dividends received deduction (“DRD”), and company owned life insurance (“ICOLI”). The effective tax rate was also impacted by the benefit of the capital loss carryback. This benefit is offset by the valuation allowance expense recorded on unrealized losses and capital loss carryforwards.
For the year ended December 31, 2021, the Company’s effective tax rate was 20.5%. The effective tax rate was positively impacted by favorable permanent adjustments, including LIHTC, DRD, and ICOLI.
For the period from June 1, 2020 to December 31, 2020, the Company’s effective tax rate was (88.3)%. The effective tax rate was positively impacted by the valuation allowance release on the current period activity in FSRC included in continuing operations and the valuation allowance release on the US non-life companies’ deferred tax assets. The effective tax rate was also positively impacted by the change in tax status benefit recorded at December 31, 2020, reversal of withholding taxes, and favorable permanent adjustments, including LIHTC and the DRD.
For the Predecessor period from January 1, 2020 to May 31, 2020, the Company’s effective tax rate was 6.5%. The effective tax rate was impacted by the valuation allowance recorded on the ordinary deferred tax assets in FSRC
included in continuing operations. The effective tax rate was also impacted by the impact of low taxed international losses and withholding taxes.
The significant components of deferred tax assets and liabilities consist of the following:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In millions) |
Deferred Tax Assets: | | | |
Employee benefit accruals | $ | 21 | | | $ | 22 | |
| | | |
Net operating loss carryforwards | 28 | | | 16 | |
| | | |
Accrued liabilities | 1 | | | — | |
| | | |
| | | |
Tax credits | 30 | | | 32 | |
| | | |
Investment securities | 853 | | | — | |
Capital loss carryover | 8 | | | 41 | |
| | | |
Derivatives | 67 | | | — | |
Life insurance and claim related adjustments | 669 | | | 854 | |
Funds held under reinsurance agreements | 37 | | | 52 | |
Other | 19 | | | 12 | |
Total gross deferred tax asset | 1,733 | | | 1,029 | |
Less: valuation allowance | 30 | | | — | |
Total deferred tax asset | $ | 1,703 | | | $ | 1,029 | |
Deferred Tax Liabilities: | | | |
| | | |
Amortization of goodwill and intangible assets | (29) | | | (33) | |
| | | |
Other | (2) | | | (1) | |
Investment securities | — | | | (355) | |
Depreciation | (14) | | | (11) | |
Partnerships | (93) | | | (126) | |
Value of business acquired | (350) | | | (249) | |
| | | |
Derivatives | — | | | (68) | |
Deferred acquisition costs | (243) | | | (102) | |
Transition reserve on new reserve method | (25) | | | (34) | |
Funds held under reinsurance agreements | (183) | | | (74) | |
| | | |
| | | |
| | | |
Total deferred tax liability | $ | (939) | | | $ | (1,053) | |
Net deferred tax asset (liability) | $ | 764 | | | $ | (24) | |
Our net deferred tax asset (liability) was $764 million as of December 31, 2022 and a net deferred tax asset (liability) of $(24) million as of December 31, 2021. The significant changes in the deferred taxes are as follows: the deferred tax for investment securities changed by $1,208 million primarily due to unrealized losses recorded on investment securities. The deferred tax liability relating to partnerships decreased by $33 million primarily due to provision to return true-ups that increased the overall tax basis of the partnership investments. The U.S. life insurance business’ deferred tax liability relating to VOBA increased by $101 million due to unrealized losses on the VOBA assets. The deferred tax liability related to deferred acquisition costs increased by $141 million, which is consistent with the growth in sales in our U.S. life group. The deferred tax liability relating to derivatives decreased by $135 million due to unrealized losses on call options. The life insurance reserves and claim related adjustments deferred tax asset decreased by $185 million primarily due to the tax reserves for the year increasing by more than the GAAP reserves. The reinsurance receivable deferred tax asset decreased by $15 million and the reinsurance receivable deferred tax liability increased by $109 million, both due to unrealized gains in the funds withheld portfolios.
As of December 31, 2022, we have net operating losses ("NOLs") on a pretax basis of $133 million, which are available to carryforward and offset future federal taxable income subject to the 80% taxable income limitation. The life losses are U.S. federal net operating losses and consist of $133 million of Internal Revenue Code Section 382 limited net operating losses. These losses do not expire.
As of December 31, 2022 and 2021, we had $30 million and $32 million of tax credits, respectively, which expire between 2038 and 2042. The tax credits consist of $11 million of Internal Revenue Code Section 382 limited losses and $19 million of tax credits with no limitation.
As of December 31, 2022, the valuation allowance of $30 million consisted of a full valuation allowance of $4 million on the unrealized capital loss deferred tax assets for F&G Life Re, F&G Cayman Re, and the US Non-life Companies, a full valuation allowance of $4 million on the remaining capital loss carryforwards for the US Non-life Companies, and a partial valuation allowance of $22 million on the US Life Companies’ unrealized capital loss deferred tax assets.
The U.S. Life insurance group is subject to a Tax Sharing Agreement within the members of the life insurance tax return group. The agreement provides for an allocation based on separate return calculations and allows for reimbursement of company tax benefits absorbed by other members of the group. The U.S. non-life group is subject to a Tax Sharing Agreement with its parent, Fidelity National Financial, Inc (“FNF”), with which it files a consolidated federal income tax return. The Company’s non-life group Tax Sharing Agreement allows for reimbursement of company tax benefits absorbed by FNF. If, during the year ended December 31, 2022, the Company had computed taxes using the separate return method, the pro-forma provision for income taxes would remain unchanged.
The U.S. Federal income tax returns of the Company for years prior to 2018 are no longer subject to examination by the taxing authorities. The Company does not have any unrecognized tax benefits (“UTBs”) at December 31, 2022, but did have a UTB of $58 million at December 31, 2021. The Company had a UTB related to a capital loss carryback claim that did not meet the threshold to recognize the benefit. In the current year the benefit was recognized as the carryback claim was effectively settled and the UTB was removed. In the event the Company has UTBs, interest and penalties related to uncertain tax positions would be recorded as part of income tax expense in the financial statements. The Company regularly assesses the likelihood of additional tax assessments by jurisdiction and, if necessary, adjusts its tax reserves based on new information or developments.
The Inflation Reduction Act of 2022 (the “IRA”) was signed into law on August 16, 2022. Among other changes, the IRA introduced a 15% corporate alternative minimum tax (“CAMT”) on adjusted financial statement income and a 1% excise tax on treasury stock repurchases. The effective date of these provisions will be January 1, 2023. Though the Company will likely be subject to the minimum tax, the Company does not expect to be in a perpetual CAMT position. The life companies will join the consolidated tax return group with FNF and file a life/non-life consolidated return once the five-year waiting period has completed in 2026, which should strengthen that position as FNF is not anticipating owing CAMT on its future returns. As a result, the Company has assessed that there is no material impact on the 2022 financial statements.
On March 27, 2020 H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act, (“the CARES Act”), was signed into legislation which includes tax provisions relevant to businesses that during 2020 will impact taxes related to 2018 and 2019. Some of the significant changes are reducing the interest expense disallowance for 2019 and 2020, allowing the five-year carryback of net operating losses for 2018-2020, suspension of the 80% limitation of taxable income for net operating loss carryforwards for 2018-2020, and the acceleration of depreciation expense from 2018 and forward on qualified improvement property. The Company is required to recognize the effect in the period the law was enacted and recorded total tax benefits of $7 million for the Predecessor period from January 1, 2020 to May 31, 2020 for the U.S. life group. $1 million of the related tax benefit was for the NOL carryback from 2018 to 2017, of which, a small amount was for the tax rate differential. The remaining tax benefit of $6 million was on the use of 100% of NOLs versus the 80% limitation under the Tax Cuts and Jobs Act (or “TCJA”). The NOL carryback and the temporary lifting of the 80% of taxable income limitation on the use of NOLs are timing in nature with an offsetting reduction in deferred taxes. The tax rate differential is a permanent tax benefit.
Note O - Employee Benefit Plans
FNF Stock Purchase Plan
During the years ended December 31, 2022 and December 31, 2021, and for the period from June 1, 2020 to December 31, 2020, our eligible employees could voluntarily participate in FNF's employee stock purchase plan
(“ESPP”) sponsored by FNF. Pursuant to the ESPP, employees may contribute an amount between 3% and 15% of their base salary and certain commissions. Company matching contributions are funded one year after employee contributions are made pursuant to the ESPP. We provided FNF an insignificant amount with respect to our matching contributions to the ESPP in the years ended December 31, 2022 and December 31, 2021, and for the period from June 1, 2020 to December 31, 2020.
F&G Stock Purchase Plan
On January 1, 2023, the Company adopted an Employee Stock Purchase Plan (“F&G ESPP”), enabling employees to purchase the Company stock in an amount between 3% and 15% of their base salary and certain commissions. Based on employee contributions the company will match between 30% and 50% one year after initial employee contributions are made pursuant to the F&G ESPP. The first year F&G will have match amounts is 2024.
401(k) Profit Sharing Plan
During the years ended December 31, 2022 and December 31, 2021, for the period from June 1, 2020 to December 31, 2020, and for the Predecessor period from January 1, 2020 to May 31, 2020, we have offered our employees the opportunity to participate in our 401(k) profit sharing plan (the “401(k) Plan”), a qualified voluntary contributory savings plan that is available to substantially all of our employees. Eligible employees may contribute up to 75% of their pre-tax annual compensation, up to the amount allowed pursuant to the Internal Revenue Code. We make an employer match on the 401(k) Plan of $1.00 on each $1.00 contributed up to the first 5% of eligible earnings contributed to the 401(k) Plan by employees. The employer match was $5 million, $3 million, $1 million and $2 million for the years ended December 31, 2022 and December 31, 2021, for the period from June 1, 2020 to December 31, 2020 and for the Predecessor period from January 1, 2020 to May 31, 2020, respectively, and was credited based on the participant's individual investment elections in the 401(k) Plan.
2022 F&G Omnibus Incentive Plan
On December 1, 2022, we established the F&G Annuities & Life, Inc. 2022 Omnibus Incentive Plan (the “2022 F&G Omnibus Plan”), authorizing the issuance of up to 6 million shares of common stock, subject to the terms of the 2022 F&G Omnibus Plan. The 2022 F&G Omnibus Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance shares, performance units, other cash and stock-based awards and dividend equivalents. As of December 31, 2022, there were 1,409,904 shares of restricted stock outstanding under the 2022 F&G Omnibus Plan. Awards granted are approved by the Compensation Committee of the Board of Directors. Awards vest over a 3-year period and have a performance restriction that must be met for shares awarded to vest. If the performance restriction is not satisfied during the measurement period all of the shares that do not satisfy the performance criteria will be forfeited to the Company for no consideration.
F&G restricted stock transactions under the 2022 F&G Omnibus Plan in 2022 are as follows:
| | | | | | | | | | | |
| Shares | | Weighted Average Grant Date Fair Value |
Balance, January 1, 2022 | — | | | $ | — | |
Granted | 1,411,369 | | | 21.80 | |
Canceled | (1,465) | | | 21.80 | |
Vested | — | | | — | |
Balance, December 31, 2022 | 1,409,904 | | | $ | 21.80 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
We account for stock-based compensation plans in accordance with GAAP on share-based payments, which requires that compensation cost relating to share-based payments be recognized in the consolidated financial statements based on the fair value of each award. Using the fair value method of accounting, compensation cost is measured based on the fair value of the award at the grant date and recognized over the service period.
Fair value of restricted stock awards and units is based on the grant date value of the underlying stock derived from quoted market prices. The total fair value of restricted stock awards granted in the year ended December 31, 2022 was $31 million. There were no restricted stock awards which vested in the year ended December 31, 2022. Net earnings attributable to F&G Shareholders reflects stock-based compensation expense amounts of $1 million for the year ended December 31, 2022, which are included in personnel costs in the reported financial results for the period.
For the period ended December 31, 2022, the total unrecognized compensation costs related to non-vested restricted stock grants pursuant to the 2022 F&G Omnibus Plan are $30 million, which is expected to be recognized in pre-tax income over a weighted average period of 1.9 years.
FGL Incentive Plan and 2020 F&G Omnibus Incentive Plan
On August 8, 2017, the Company adopted a stock-based incentive plan (the “FGL Incentive Plan”) that permitted the granting of awards in the form of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, unrestricted stock, performance-based awards, dividend equivalents, cash awards and any combination of the foregoing.
On June 1, 2020, in connection with the acquisition of F&G, FNF assumed the shares that remained available for future awards under the FGL Holdings 2017 Omnibus Incentive Plan, as amended and restated (the “ 2020 F&G Omnibus Plan”) and cancelled and converted such shares into 2,096,429 shares of FNF common stock that may be issued pursuant to future awards granted under the 2020 F&G Omnibus Plan and 2,411,585 shares of FNF common stock that may be issued pursuant to outstanding stock options under the 2020 F&G Omnibus Plan. Each unvested stock option assumed under the 2020 F&G Omnibus Plan was converted into an FNF stock option and vests solely on the passage of time without any ongoing performance-vesting conditions. The options vest over a 3 year period, based on the option's initial grant date, and have a contractual life of 7 years. As of December 31, 2022, there were 501,548 shares of restricted stock and 1,172,607 stock options outstanding under the 2020 F&G Omnibus Plan.
Stock option transactions under the 2020 F&G Omnibus Plan for the years ended December 31, 2022 and 2021 and for the period June 1, 2020 to December 31, 2020, and the FGL Incentive Plan for the Predecessor period January 1, 2020 to May 31, 2020, are as follows:
| | | | | | | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price | | Exercisable |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Predecessor balance, January 1, 2020 | 15,213,959 | | | $ | 9.30 | | | 1,008,780 | |
Granted | — | | | $ | — | | | |
Exercised | (1,672,330) | | | $ | 9.51 | | | |
Canceled | (96,604) | | | $ | 10.00 | | | |
Predecessor balance, May 31, 2020 | 13,445,025 | | | $ | 9.30 | | | 640,000 | |
FGL options canceled and converted into options to purchase FNF common shares in connection with the F&G acquisition | 2,411,585 | | | 36.04 | | | |
Exercised | (109,159) | | | 27.64 | | | |
Canceled | (299,736) | | | 38.41 | | | |
Balance, December 31, 2020 | 2,002,690 | | | $ | 36.14 | | | 1,021,671 | |
| | | | | |
Exercised | (474,754) | | | 36.68 | | | |
Canceled | — | | | — | | | |
Balance, December 31, 2021 | 1,527,936 | | | $ | 35.97 | | | 1,072,584 | |
Granted | — | | | $ | — | | | |
Exercised | (352,614) | | | $ | 38.79 | | | |
Canceled | (2,715) | | | $ | 28.00 | | | |
Balance, December 31, 2022 | 1,172,607 | | | 35.15 | | 1,172,607 | |
The following table summarizes information related to stock options outstanding and exercisable as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options Outstanding | | Options Exercisable |
Range of Exercise Prices | Number of Options | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Intrinsic Value | | Number of Options | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Intrinsic Value |
| | | (In years) | | | | (In millions) | | | | (In years) | | | | (In millions) |
| | | | | | | | | | | | | | | |
$0.00 - $27.53 | 359,510 | | | 2.98 | | 27.53 | | | 4 | | | 359,510 | | | 2.98 | | 27.53 | | | 4 | |
$27.54 - $28.00 | 43,019 | | | 3.32 | | 28.00 | | | — | | | 43,019 | | | 3.32 | | 28.00 | | | — | |
$28.01 - $39.10 | 770,078 | | | 2.62 | | 39.10 | | | — | | | 770,078 | | | 2.62 | | 39.10 | | — | |
| | | | | | | | | | | | | | | |
| 1,172,607 | | | | | | | 4 | | | 1,172,607 | | | | | | | 4 | |
Restricted stock transactions under the 2020 F&G Omnibus Plan for the years ended December 31, 2022 and 2021 and for the period June 1, 2020 to December 31, 2020, and the FGL Incentive Plan for the predecessor period January 1, 2020 to May 31, 2020, are as follows:
| | | | | | | | | | | |
| Shares | | Weighted Average Grant Date Fair Value |
Predecessor balance, January 1, 2020 | — | | | — | |
Granted | 95,416 | | | $ | 10.48 | |
Canceled | — | | | — | |
Predecessor balance, May 31, 2020 | 95,416 | | | $ | 10.48 | |
FGL shares vested in connection with the F&G acquisition | (95,416) | | | 10.48 | |
Granted | 474,025 | | | 34.13 | |
Canceled | (24,155) | | | 34.47 | |
Balance, December 31, 2020 | 449,870 | | | $ | 34.11 | |
Granted | 311,081 | | | 48.28 | |
Canceled | (12,437) | | | 33.40 | |
Vested | (29,873) | | | 34.59 | |
Balance, December 31, 2021 | 718,641 | | | $ | 40.24 | |
Granted | — | | | — | |
Canceled | (78,551) | | | 37.79 | |
Vested | (138,542) | | | 34.11 | |
Balance, December 31, 2022 | 501,548 | | | $ | 42.31 | |
We account for stock-based compensation plans in accordance with GAAP on share-based payments, which requires that compensation cost relating to share-based payments be recognized in the consolidated financial statements based on the fair value of each award. Using the fair value method of accounting, compensation cost is measured based on the fair value of the award at the grant date and recognized over the service period.
The total fair value of restricted stock awards granted in the years ended December 31, 2022 and December 31, 2021, and for the period from June 1, 2020 to December 31, 2020 was $0 million, $15 million and $16 million, respectively and was insignificant for prior periods. The total fair value of restricted stock awards, which vested in the year ended December 31, 2022 was $5 million and was insignificant for prior periods. Option awards are measured at fair value on the grant date using the Black Scholes Option Pricing Model. The intrinsic value of options exercised in the years ended December 31, 2022 and December 31, 2021, for the period from June 1, 2020 to December 31, 2020, and for the Predecessor period from January 1, 2020 to May 31, 2020 was insignificant for all periods. Net earnings attributable to F&G Shareholders reflects stock-based compensation expense amounts of $12 million, $9 million, $4 million and $3 million for the years ended December 31, 2022 and December 31, 2021,
for the period June 1, 2020 to December 31, 2020, and for the Predecessor period from January 1, 2020 to May 31, 2020, respectively, which are included in personnel costs in the reported financial results of each period.
At December 31, 2022, the total unrecognized compensation costs related to non-vested stock option grants and restricted stock grants pursuant to the FGL Incentive Plan and the 2020 F&G Omnibus Plan are $6 million, which is expected to be recognized in pre-tax income over a weighted average period of 1.34 years.
Note P - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (share amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Period from June 1 to December 31, | | | Period from January 1 to May 31, |
| 2022 | | 2021 | | 2020 | | | 2020 |
| | | | | | | | Predecessor |
| | | | | | | | |
Net earnings (loss) from continuing operations | $ | 481 | | | $ | 857 | | | $ | 161 | | | | $ | (200) | |
Net earnings (loss) from discontinued operations | — | | | 8 | | | (25) | | | | (114) | |
Net earnings (loss) | $ | 481 | | | $ | 865 | | | $ | 136 | | | | $ | (314) | |
Less: Preferred stock dividend | — | | | — | | | — | | | | 8 | |
Net earnings (loss) attributable to common shares | $ | 481 | | | $ | 865 | | | $ | 136 | | | | $ | (322) | |
| | | | | | | | |
Weighted-average common shares outstanding - basic | 115 | | | 105 | | | 105 | | | | 213 | |
Dilutive effect of unvested restricted stock | — | | | — | | | — | | | | — | |
Dilutive effect of stock options | — | | | — | | | — | | | | — | |
Weighted-average shares outstanding - diluted | 115 | | | 105 | | | 105 | | | | 213 | |
| | | | | | | | |
Net earnings (loss) per common share: | | | | | | | | |
Basic - continuing | $ | 4.18 | | | $ | 8.16 | | | $ | 1.54 | | | | $ | (0.97) | |
Basic - discontinued operations | — | | | 0.08 | | | (0.24) | | | | (0.54) | |
Basic - net | $ | 4.18 | | | $ | 8.24 | | | $ | 1.30 | | | | $ | (1.51) | |
Diluted - continuing | 4.18 | | | 8.16 | | | 1.54 | | | | (0.97) | |
Diluted - discontinued operations | — | | | 0.08 | | | (0.24) | | | | (0.54) | |
Diluted - net | $ | 4.18 | | | $ | 8.24 | | | $ | 1.30 | | | | $ | (1.51) | |
On June 24, 2022, the following actions previously approved by the F&G board of directors became effective: (i) a stock split in a ratio of 105,000 for 1. Earnings per share has been retrospectively adjusted to reflect as if the split occurred as of June 1, 2020 in accordance with GAAP; (ii) a resolution to enter an exchange agreement with FNF pursuant to which F&G transferred shares of its common stock to FNF in exchange for the $400 million FNF Promissory Note, after which the note was retired.
Restricted stock, options or other instruments, which provide the ability to acquire shares of our common stock that are antidilutive are excluded from the computation of diluted earnings per share. For the year ended December 31, 2022, the diluted earnings per share calculation excluded the weighted average effect of 120 thousand restricted stock units issued under the 2022 F&G Omnibus Plan due to their antidilutive effect. For the year ended December 31, 2021 and for the period from June 1, 2020 to December 31, 2020, the Company did not have any share-based plans involving the issuance of the Company's equity and, therefore, no impact to the diluted earnings per share calculation.
Under applicable accounting guidance, companies in a loss position are required to use basic weighted average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss for the Predecessor period from January 1, 2020 to May 31, 2020, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share, as the inclusion of 19 thousand restricted shares and 456 thousand stock options would have been antidilutive to the calculation. If we had not incurred a net loss in the
Predecessor period from January 1, 2020 to May 31, 2020, dilutive potential common shares would have been 213,721 thousand. This calculation also excluded the potential dilutive effect of the 438 thousand preferred stock shares outstanding for the Predecessor period from January 1, 2020 to May 31, 2020, as the contingency that would allow for the preferred shares to be converted to common shares has not yet been met. The calculation of diluted earnings per share for the Predecessor period from January 1, 2020 to May 31, 2020 would have also excluded the incremental effect of 447 thousand weighted average equivalent shares related to certain outstanding stock options due to their antidilutive effect.
Note Q - Recent Accounting Pronouncements
Adopted Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). The amendments in this ASU introduce broad changes to accounting for credit impairment of financial instruments. The primary updates include the introduction of a new current expected credit loss ("CECL") model that is based on expected rather than incurred losses and amendments to the accounting for impairment of fixed maturity securities available for sale. The method used to measure estimated credit losses for fixed maturity available-for-sale securities will be unchanged; however, the amendments require credit losses to be recognized through an allowance rather than as a reduction to the amortized cost of those securities. We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost. We adopted this standard using a modified-retrospective approach, as required. As a result of the adoption, the Company recorded a cumulative-effect adjustment, which decreased opening 2020 retained earnings by $27 million, net of tax. We recorded offsetting increases to the allowance for expected credit losses for mortgage loans and reinsurance recoverables and a decrease for deferred tax impacts. Refer to Note C Investments and Note J Reinsurance for additional information.
In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The amendments in this update defer the sunset provision within Topic 848 that provides a temporary, optional expedient and exception for contracts affected by reference rate reform by not applying certain modification accounting requirements and instead accounting for the modified contract as a continuation of the existing contract. This guidance eases the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting through December 31, 2024. We adopted this standard upon issuance and this standard had no impact on our Consolidated Financial Statements and related disclosures upon adoption.
Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944), Targeted Improvements to the Accounting for Long-Duration Contracts, as clarified and amended by ASU 2019-09, Financial Services-Insurance: Effective Date and ASU 2020-11, Financial Services-Insurance: Effective Date and Early Application, effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. This update introduced the following requirements: assumptions used to measure cash flows for traditional and limited-payment contracts must be reviewed at least annually with the effect of changes in those assumptions being recognized in the statement of operations; the discount rate applied to measure the liability for future policy benefits and limited-payment contracts must be updated at each reporting date with the effect of changes in the rate being recognized in other comprehensive income (“OCI”); market risk benefits ("MRBs") associated with deposit contracts must be measured at fair value, with the effect of the change in the fair value recognized in earnings, except for the change attributable to instrument-specific credit risk which is recognized in OCI; deferred acquisition costs are no longer required to be amortized in proportion to premiums, gross profits, or gross margins; instead, those balances must be amortized on a constant level basis over the expected term of the related contracts; deferred acquisition costs must be written off for unexpected contract terminations; and disaggregated rollforwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, MRBs, separate account liabilities and deferred acquisition costs, as well as information about significant inputs, judgments, assumptions, and methods used in measurement are required to be disclosed. The
amendments in this ASU may be early adopted as of the beginning of an annual reporting period for which financial statements have not yet been issued, including interim financial statements.
We have identified specific areas that will be impacted by the new guidance. This guidance will bring significant changes to how we account for certain insurance and annuity products within our business and expand disclosures. As part of the implementation process, to date our progress includes, but is not limited to the following: identifying and documenting contracts and contract features in scope of the guidance; identifying actuarial models, systems, and processes to be updated; building and running models; generating and analyzing preliminary output; evaluating and finalizing key accounting policies; evaluating transition requirements and impacts; and establishing, documenting, and executing appropriate internal controls. We will not early adopt this standard and have selected the full retrospective transition method, which requires the new guidance be applied as of the beginning of the earliest period presented or January 1, 2021, referred to as the transition date.
Adoption of this standard is expected to increase total stockholders’ equity as of the transition date, January 1, 2021, up to approximately $200 million, net of tax. This transition adjustment is expected to primarily increase Retained Earnings, as well as OCI. The most significant driver of this transition adjustment expected to increase Retained Earnings is the measurement of certain benefits historically recorded as insurance liabilities which will now be classified and measured as MRBs, along with their subsequent changes in fair value, excluding changes attributable to instrument-specific credit risk, which are recorded as a component of OCI. The most significant drivers of this transition adjustment expected to increase OCI are the reversal of intangible balances previously recorded as an adjustment to unrealized gains (losses) on available for sale securities, the remeasurement of the liability for future policyholder benefits using a discount rate assumption that reflects upper-medium grade fixed-income instruments, and the effect of changes in the fair value of MRBs attributable to changes in the instrument-specific credit risk.
As of December 31, 2022, the Company continues to expect the measurement drivers above, in relation to the current market conditions, to support a favorable impact to total stockholders’ equity at or greater than the transition impact, contingent upon the completion of our ongoing implementation process. Further, the specific impacts on Retained Earnings and OCI upon adoption of this standard on January 1, 2023 may also differ materially from the transition impact based on the performance of the Company’s business and macroeconomic conditions, including changes in interest rates.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this update affect all entities that have investments in equity securities measured at fair value that are subject to a contractual sale restriction and clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. Additionally, the amendments require the following disclosures for equity securities subject to contractual sale restrictions: the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet, the nature and remaining duration of the restriction(s), and the circumstances that could cause a lapse in the restriction(s). The amendments in this update do not change the principles of fair value measurement, rather, they clarify those principles when measuring the fair value of an equity security subject to a contractual sale restriction and improve current GAAP by reducing diversity in practice, reducing the cost and complexity in measuring fair value, and increasing comparability of financial information across reporting entities that hold those investments. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, though early adoption is permitted. We do not currently expect to early adopt this standard and are in the process of assessing this standard and its impact on our accounting and disclosures upon adoption.
Note R - Discontinued Operations
In connection with the FNF acquisition, certain third party offshore reinsurance businesses were deemed discontinued operations and are presented as such within our consolidated financial statements for all periods presented through the date of their disposition, in accordance with GAAP. On December 18, 2020, we sold F&G Reinsurance Ltd (“F&G Re”) to Aspida Holdings Ltd (“Aspida”). On May 31, 2021, we sold Front Street Re Cayman Ltd (“FSRC”) to Archipelago Lexa (C) Limited. The transactions did not have a material impact to our GAAP financial results. There were no discontinued operations for the year ended December 31, 2022.
A summary of the major components of discontinued operations reported in the Consolidated Statements of Earnings are as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Period from June 1 to December 31, | | | Period from January 1 to May 31, |
| | 2021 | | 2020 | | | 2020 |
| | | | | | | Predecessor |
Revenues: | | | | | | | |
Life insurance premiums and other fees | | $ | — | | | $ | — | | | | $ | 1 | |
Interest and investment income | | 3 | | | 42 | | | | 24 | |
Recognized gains and (losses), net | | — | | | 196 | | | | (95) | |
Total revenues | | 3 | | | 238 | | | | (70) | |
Expenses: | | | | | | | |
Other operating expenses | | — | | | 19 | | | | (41) | |
Benefits and other changes in policy reserves | | (5) | | | 244 | | | | (5) | |
Other expenses | | — | | | — | | | | 2 | |
Total expenses | | (5) | | | 263 | | | | (44) | |
Earnings (loss) from discontinued operations before income taxes | | 8 | | | (25) | | | | (114) | |
Income tax (expense) benefit | | — | | | — | | | | — | |
Net earnings (loss) from discontinued operations, net of tax | | $ | 8 | | | $ | (25) | | | | $ | (114) | |
| | | | | | | |
Cash flow from discontinued operations data: | | — | | | — | | | | |
Net cash provided by (used in) operating activities | | (26) | | | 121 | | | | (39) | |
Note S — Subsequent Events
Refer to Note A Business and Summary of Significant Accounting Policies - Recent Events for information about certain subsequent events. In addition to what is disclosed in Note A, we had the following additional subsequent event.
Syncis Investment
On January 30, 2023, we purchased a 49% minority ownership stake in Syncis Holdings, LLC. Syncis is an approximately 1,200 agent NMG that focuses on cultural markets including Korean, African-American and Persian.