FORTITUDE LIFE INSURANCE & ANNUITY CO – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations

Prior to April 1, 2022, Fortitude Life Insurance & Annuity Company ("FLIAC" or
the "Company"), which was previously named Prudential Annuities Life Assurance
Corporation ("PALAC"), was a wholly-owned subsidiary of Prudential Annuities,
Inc ("PAI"), an indirect wholly-owned subsidiary of Prudential Financial, Inc.
("Prudential Financial"), a New Jersey Corporation. On April 1, 2022 PAI
completed the sale of its equity interest in the Company to Fortitude Group
Holdings, LLC ("FGH"). As a result, the Company is no longer an affiliate of
Prudential Financial or any of its affiliates.

Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of FLIAC as of June 30,
2022 and its results of operations for the three months ended June 30, 2022. The
MD&A also addresses the results of operations of PALAC for the three months
ended March 31, 2022 compared to the same prior year period. Other periods
presented on the statement of financial condition or statement of operations are
not comparable due to the election to apply "pushdown" accounting to the Company
following its acquisition by FGH. See Accounting Pronouncements and Policies for
further information. You should read the following analysis of our financial
condition and results of operations in conjunction with the MD&A, the "Risk
Factors" section, and the audited Financial Statements included in the
Predecessor Company's Annual Report on Form 10-K for the year ended December 31,
2021, as well as the statements under "Forward-Looking Statements", and the
Unaudited Interim Financial Statements included elsewhere in this Quarterly
Report on Form 10-Q.

                                    Overview

The Company was established in 1969 and has been a provider of annuity contracts
for the individual market in the United States. The Company's products have been
sold primarily to individuals to provide for long-term savings and retirement
needs and to address the economic impact of premature death, estate planning
concerns and supplemental retirement income.

The Company has sold a wide array of annuities, including deferred and immediate
variable annuities with (1) fixed interest rate allocation options, subject to a
market value adjustment, that are registered with the United States Securities
and Exchange Commission (the "SEC"), and (2) fixed-rate allocation options
subject to a limited market value adjustment or no market value adjustment and
not registered with the SEC. The Company ceased offering these products.

Predecessor Company Reinsurance Transactions

Effective April 1, 2016, the Company reinsured the variable annuity base
contracts, along with the living benefit guarantees, from Pruco Life Insurance
Company ("Pruco Life"), excluding the Pruco Life Insurance Company of New Jersey
("PLNJ") business which was reinsured to The Prudential Insurance Company of
America ("Prudential Insurance"), in each case under a coinsurance and modified
coinsurance agreement. This reinsurance agreement covers new and in force
business and excludes business reinsured externally. As of December 31, 2020,
Pruco Life discontinued the sales of traditional variable annuities with
guaranteed living benefit riders. The discontinuation has no impact on the
reinsurance agreement between Pruco Life and the Company.

Effective July 1, 2021, Pruco Life recaptured the risks related to its business,
as discussed above, that had previously been reinsured to the Company from April
1, 2016 through June 30, 2021. The product risks related to the previously
reinsured business that were being managed in the Company, were transferred to
Pruco Life. In addition, the living benefit hedging program related to the
previously reinsured living benefit riders will be managed within Pruco Life
after the recapture. This transaction is referred to as the "2021 Variable
Annuities Recapture". See Note 1 to the Financial Statements included in the
Predecessor Company's Annual Report on Form 10-K for the year ended December 31,
2021, for more details.

Effective December 1, 2021, the Company entered into a reinsurance agreement
with Pruco Life under which the Company reinsured certain of its variable and
fixed indexed annuities and fixed annuities with a guaranteed lifetime
withdrawal income feature to Pruco Life.

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COVID-19

Since the first quarter of 2020, the COVID-19 pandemic has at times caused
extreme stress and disruption in the global economy and financial markets and
elevated mortality and morbidity for the global population. The COVID-19
pandemic impacted our results of operations in the current period and is
expected to impact our results of operations in future periods. The Company has
taken several measures to manage the impacts of this crisis.

•Results of Operations. See "Results of Operations" for a discussion of results
for the second quarter of 2022.

•Risk Factors. The COVID-19 pandemic has adversely impacted our results of
operations, financial position, investment portfolio, new business opportunities
and operations, and these impacts are expected to continue. For additional
information on the risks to our business posed by the COVID-19 pandemic, see
"Risk Factors" included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2021.

Impact of a Changing Interest Rate Environment

As a financial services company, market interest rates are a key driver of our
results of operations and financial condition. Changes in interest rates can
affect our results of operations and/or our financial condition in several ways,
including favorable or adverse impacts to:

•investment-related activity, including: investment income returns, net interest
margins, net investment spread results, new money rates, mortgage loan
prepayments and bond redemptions;
•hedging costs and other risk mitigation activities;
•insurance reserve levels and market experience true-ups;
•customer account values, including their impact on fee income;
•product design features, crediting rates and sales mix; and
•policyholder behavior, including surrender or withdrawal activity.

For more information on interest rate risks, see "Risk Factors-Market Risk"
included in the Predecessor Company's Annual Report on Form 10-K for the year
ended December 31, 2021.

Revenues and Expenses

The Company earns revenues principally from contract charges, mortality and
expense fees, asset administration fees from annuity and investment products and
from net investment income on the investment of general account and other funds.
The Company earns contract fees, mortality and expense fees and asset
administration fees primarily from the sale and servicing of annuity products.
The Company's operating expenses principally consist of annuity benefit
guarantees provided and reserves established for anticipated future annuity
benefit guarantees and costs of managing risk related to these products,
interest credited to contractholders' account balances, general business
expenses, reinsurance premiums, commissions and other costs of selling and
servicing the various products it sold.

                      Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires
the application of accounting policies that often involve a significant degree
of judgment. Management on an ongoing basis, reviews estimates and assumptions
used in the preparation of financial statements. If management determines that
modifications in assumptions and estimates are appropriate given current facts
and circumstances, the Company's results of operations and financial position as
reported in the Unaudited Interim Financial Statements could change
significantly.

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Following the acquisition of FLIAC, we have elected to apply "pushdown"
accounting to the Company. The application of "pushdown" accounting creates a
new basis of accounting for all assets and liabilities based on fair values. As
a result, the Company's financial position and results of operations subsequent
to the acquisition are not comparable with those prior to April 1, 2022, and
therefore have been segregated to indicate pre-acquisition and post-acquisition
periods. The pre-acquisition period to March 31, 2022 is referred to as the
Predecessor Company named "PALAC". The post-acquisition period, April 1, 2022
and forward, includes the impact of acquisition accounting and is referred to as
the Successor Company, named "FLIAC".

Management believes the accounting policies relating to the following areas are
most dependent on the application of estimates and assumptions and require
management's most difficult, subjective, or complex judgments:

•Insurance liabilities;
•Valuation of investments, including derivatives;
•Reinsurance recoverables/payables;
•Taxes on income; and
•Reserves for contingencies, including reserves for losses in connection with
unresolved legal matters.

Future Adoption of New Accounting Pronouncements

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements
to the Accounting for Long-Duration Contracts, was issued by the Financial
Accounting Standards Board ("FASB") on August 15, 2018. Large calendar-year
public companies that early adopt ASU 2018-12 are allowed to apply the guidance
either as of January 1, 2020 or January 1, 2021 (and record transition
adjustments as of January 1, 2020 or January 1, 2021, respectively) in the 2022
financial statements. Companies that do not early adopt ASU 2018-12 would apply
the guidance as of January 1, 2021 (and record transition adjustments as of
January 1, 2021) in the 2023 financial statements.

As previously discussed, the Company has elected to apply the fair value option
for all of its insurance liabilities. As a result of this election, the
Company's insurance liabilities are no longer within the scope of ASU 2018-12.

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                          Segment and Product Overview


Our business is comprised of two major blocks of in-force policies, which we
refer to as the "Retained Business" and the "Ceded Business". The Retained
Business consists of variable annuity products with guaranteed lifetime
withdrawal benefit features as well as smaller blocks of variable annuity
products with certain other living benefit and death benefit features. The
Retained Business also includes variable universal life and fixed payout annuity
products. The Retained Business is actively managed by FLIAC management and the
Successor Company retains the full economic benefits and risks. The Retained
Business consists of approximately 230,000 variable annuity contracts originated
between 1993 - 2010. These products allow the holder to direct investments into
certain separate account funds to receive tax deferred build-up within the
contract. Most of the contracts have optional living benefit riders, which
entitle the holder to elect to withdraw a guaranteed amount from the contract
while he/she is alive, irrespective of the balance in his/her separate account
(GMWB). Almost all of the contracts also offer a guaranteed amount payable to a
beneficiary upon the death of the holder (GMDB).


The Ceded Business represents certain business (primarily registered index
linked-annuities and fixed annuities, which includes fixed indexed and fixed
deferred annuities, and other variable annuities) where 100 percent of the
assets and liabilities have been fully ceded to The Prudential Insurance Company
of America (PICA) and Pruco Life Insurance Company (Pruco Life) under existing
coinsurance and modified coinsurance agreements. The Ceded Business will
continue to impact certain line items within the Company's financial statements
but will not have a material impact to stockholders' equity or net income and
will be the economic impact of PICA and Pruco Life.

In addition, PFI has instituted, in accordance with applicable state law, a
program to novate a significant portion of the Ceded Business policies from
FLIAC to either PICA or Pruco Life. This program was initiated in May 2022 and
is not expected to have a material impact on the financial statements but will
result in the reduction of certain activity/balances associated with these
policies.

                         Changes in Financial Position

As noted under Accounting Policies and Pronouncements, the Company's financial
position subsequent to the acquisition is not comparable with that prior to
April 1, 2022. As a result, the following discussion regarding changes in the
financial position of the Company will be based on changes subsequent to the
acquisition-date balance sheet as of April 1, 2022. Also included below is
discussion regarding the changes from December 31, 2021 to March 31, 2022 as
previously disclosed in the Predecessor Company's first quarter of 2022 10-Q.

Successor Company

Retained Business

Assets decreased approximately $3.8 billion from $32.1 billion at April 1, 2022
to $28.3 billion at June 30, 2022. The decrease was primarily driven by a $4.0
billion decline in separate account assets due to market depreciation resulting
mostly from unfavorable equity market performance.

Liabilities decreased approximately $3.8 billion from $30.3 billion at April 1,
2022 to $26.5 billion at June 30, 2022. The decrease was primarily driven by a
decline in separate account liabilities, corresponding to the decrease in
separate account assets, as discussed above.

Equity was $1.8 billion at both April 1, 2022 and June 30, 2022, with a net loss
of $180 million offset by an increase in our own-credit risk (OCR) impact on the
fair value of insurance liabilities of $194 million reflected in accumulated
other comprehensive income (loss).

Ceded Business

Assets decreased $2.1 billion from $13.2 billion at April 1, 2022 to $11.2
billion at June 30, 2022. The decrease was primarily driven by a $1.7 billion
decline in total investments due to the previously mentioned novations during
the second quarter of 2022. Also contributing to the decline in total
investments were losses related to derivatives and losses in the fixed maturity
securities portfolio resulting from rising interest rates.

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Liabilities decreased $2.1 billion from $13.2 billion at April 1, 2022 to $11.2
billion at June 30, 2022. The decrease was primarily driven by a $2.4 billion
decline in the fair value of insurance liabilities, which was primarily driven
by the previously mentioned novation of a portion of the business during the
second quarter of 2022.

There was no equity within our Ceded Business at both April 1, 2022 and June 30,
2022 as the assets are fully offset by the liabilities.

Predecessor Company

Total assets decreased $4.2 billion from $58.6 billion at December 31, 2021 to
$54.4 billion at March 31, 2022. Significant components were:

•$2.8 billion decrease in Separate account assets primarily driven by
unfavorable equity market performance and net outflows.

Total liabilities decreased $3.8 billion from $56.9 billion at December 31, 2021
to $53.1 billion at March 31, 2022. Significant components were:

•$0.7 billion decrease in Future policy benefits driven by a decrease in
reserves related to our variable annuity living benefit guarantees due to
widening non-performance risk ("NPR") spreads and rising interest rates.
•$2.8 billion decrease in Separate account liabilities corresponding to the
decrease in Separate account assets, as discussed above.

Total equity decreased $0.4 billion from $1.7 billion at December 31, 2021 to
$1.3 billion at March 31, 2022, primarily driven by $0.4 billion of unrealized
losses on investments driven by rising interest rates reflected in Accumulated
other comprehensive income (loss) and a return of capital of $0.3 billion,
partially offset by net income of $0.4 billion.

                             Results of Operations

As noted under Accounting Policies and Pronouncements, the Company's results of
operations subsequent to the acquisition is not comparable with those prior to
April 1, 2022. As a result, the following discussion regarding the results of
operations of the Successor Company will not be compared to previous periods and
will be based solely on activity for the period subsequent to the acquisition.
Also included below is discussion regarding the results of operations as
previously disclosed in the Predecessor Company's first quarter of 2022 10-Q.

SUCCESSOR COMPANY

LOSS FROM OPERATIONS BEFORE INCOME TAXES

Three Months Ended June 30, 2022

Retained Business

The loss from operations before income taxes of $231 million was driven
primarily by changes in the fair value of insurance liabilities from April 1,
2022, excluding changes in OCR, driven primarily by a decline in equity markets,
partially offset by higher interest rates. Also contributing to the loss from
operations before income taxes were investment losses primarily in the fixed
maturity securities portfolio resulting from higher interest rates and elevated
general, administrative and other expenses driven by acquisition-related
expenses that we expect to decline in future periods. Partially offsetting the
drivers of the loss from operations before income taxes were policy charges and
fee income and net investment income.

Ceded Business

There was no impact to the loss from operations before income tax as net
investment income and investment losses were fully offset by changes in the fair
value of insurance liabilities and policyholder benefits.

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REVENUES, BENEFITS, AND EXPENSES

Three Months Ended June 30, 2022
Retained Business

Revenues were $82 million for the three months ended June 30, 2022, driven
primarily by policy charges and fee income, net investment income, and
investment losses that resulted from market interest rate increases during the
period which resulted in a corresponding impact on the fair value of fixed
maturity securities and interest rate swaps.

Benefits and expenses were $313 million for the three months ended June 30, 2022
and primarily driven by the increase in the fair value of insurance liabilities.
Also contributing to benefits and expenses for the period were general,
administrative and other expenses driven by acquisition-related expenses that we
expect to decline in future periods.
Ceded Business

There was no impact to the loss from operations before income taxes as all
revenues and expenses are ceded back to PICA or Pruco Life.

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PREDECESSOR COMPANY

LOSS FROM OPERATIONS BEFORE INCOME TAXES

Three Months Ended March 31, 2022

Income (loss) from operations before income taxes decreased $2 billion from a
gain of $2.4 million for the three months ended March 31, 2021 to a gain of $0.4
billion for the three months ended March 31, 2022, primarily driven by:

•Realized investment gains (losses), net decrease reflecting prior year's
favorable impact related to the portions of our U.S. GAAP liability before NPR,
that are excluded from our hedge targets driven by rising interest rates and
favorable prior year equity market performance.

Three Months Ended June 30, 2021

Income (loss) from operations before income taxes increased $2,519 million from
a loss of $2,618 million for the three months ended June 30, 2020 to a loss of
$99 million for the three months ended June 30, 2021. Excluding the impact of
our annual reviews and update of assumptions and other refinements, income
(loss) from operations increased $2,437 million primarily driven by:
•Favorable impact related to the portions of our U.S. GAAP liability before
non-performance risk ("NPR"), that are excluded from our hedge target, driven by
favorable equity market performance, partially offset by declining interest
rates. Also contributing is an unfavorable NPR adjustment. Prior year period
reflected an increase in these reserves primarily driven by an unfavorable NPR
adjustment and unfavorable hedge breakage driven by tightening of credit
spreads, partially offset by the tightening of credit spreads used to measure
our living benefit liability.

Six Months Ended June 30, 2021

Income (loss) from operations before income taxes increased $5,962 million from
a loss of $3,677 million for the six months ended June 30, 2020 to income of
$2,285 million for the six months ended June 30, 2021. Excluding the impact of
our annual reviews and update of assumptions and other refinements, income
(loss) from operations increased $5,879 million primarily driven by:

•Favorable impact related to the portions of our U.S. GAAP liability before NPR,
that are excluded from our hedge target driven by favorable equity market
performance and rising interest rates. These increases were partially offset by
an unfavorable NPR adjustment. Prior year period reflected an increase in these
reserves primarily driven by declining interest rates, widening of credit
spreads, and unfavorable hedge breakage, partially offset by a favorable NPR
adjustment used to measure our living benefit liability.


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The following table provides the net impact to the Unaudited Interim Statements
of Operations for the Predecessor Company, which is primarily driven by the
changes in the U.S. GAAP embedded derivative liability and hedge positions under
the Asset Liability Management ("ALM") strategy, and the related amortization of
DAC and other costs.

                                                                             Predecessor Company
                                                        Three Months          Three Months
                                                           Ended                  Ended              Six Months Ended
                                                          March 31               June 30                 June 30
                                                            2022                                2021
                                                                            

(in millions)
U.S. GAAP embedded derivative and hedging positions
Change in value of U.S.GAAP liability, pre-NPR(2) $ 459

          $     (1,883)         $           5,581
Change in the NPR adjustment                                    156                  (104)                      (903)
Change in fair value of hedge assets, excluding
capital hedges(3)                                              (392)                1,334                     (3,112)
Change in fair value of capital hedges(4)                        39                  (503)                      (803)
Other                                                           218                   578                      1,106

Realized investment gains (losses), net, and related
adjustments

                                                     480                  (578)                     1,869
Market experience updates(5)                                    (57)                   92                        161
Charges related to realized investments gains
(losses), net                                                   (97)                   74                       (260)

Net impact from changes in the U.S. GAAP embedded
derivative and hedge positions, after the impact of
NPR, DAC and other costs(6)

                           $         326          $       (412)         $           1,770

REVENUES, BENEFITS, AND EXPENSES

Three Months Ended March 31, 2022

Revenues decreased $2.4 billion from a gain of $3.1 billion for the three months
ended March 31, 2021 to a gain of $0.7 billion for the three months ended March
31, 2022 primarily driven by:

•Realized investment gains (losses), net decrease reflecting prior year's
favorable impact related to the portions of our U.S. GAAP liability before NPR,
that are excluded from our hedge targets driven by rising interest rates and
favorable prior year equity market performance.

Three Months Ended June 30, 2021

Revenues increased $2,841 million from a loss of $2,641 million for the three
months ended June 30, 2020 to a gain of $200 million for the three months ended
June 30, 2021. Excluding the impact of our annual reviews and update of our
assumptions and other refinements, revenues increased $2,955 million primarily
driven by:

•Higher Realized investment gains (losses), net reflecting favorable impact
related to the portions of our U.S. GAAP liability before NPR, that are excluded
from our hedge target driven by favorable equity market performance, partially
offset by declining interest rates. Also contributing is an unfavorable NPR
adjustment.

Benefits and expenses increased $321 million from income of $22 million for the
three months ended June 30, 2020 to an expense of $299 million for the three
months ended June 30, 2021. Excluding the impact of our annual reviews and
update of our assumptions and refinements, benefits and expenses increased $518
million primarily driven by:

•Higher Amortization of deferred policy acquisition costs driven by changes to
expected gross profits reflecting change in market conditions; and
•Higher Policyholders' benefits driven by our guaranteed minimum death benefits
due to unfavorable market conditions, resulting in higher reserve provisions.



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Six Months Ended June 30, 2021

Revenues increased $5,939 million from a loss of $2,617 million for the six
months ended June 30, 2020 to a gain of $3,322 million for the six months ended
June 30, 2021. Excluding the impact of our annual reviews and update to our
assumptions and other refinements, revenues increased $6,053 million primarily
driven by:

•Higher Realized investment gains (losses), net reflecting favorable impact
related to the portions of our U.S. GAAP liability before NPR, that are excluded
from our hedge target driven by favorable equity market performance and rising
interest rates. These increases were partially offset by an unfavorable NPR
adjustment.

Benefits and expenses decreased $23 million from $1,060 million for the six
months ended June 30, 2020 to $1,037 million for the six months ended June 30,
2021. Excluding the impact of our annual reviews and update to our assumptions
and other refinements, benefits and expenses increased $174 million primarily
driven by:

•Higher Amortization of deferred policy acquisition costs driven by changes to
expected gross profits reflecting change in market conditions.

                Retained Business Strategies and Risk Management


We manage the Retained Business with a focus on long-term economics and a
willingness to sustain short-term volatility in our earnings, while remaining
compliant with our risk appetite framework. Our overall business strategy is to
generate above-market risk adjusted returns by:

•Ensuring we have a strong statutory balance sheet following capital market
stresses, including but not limited to, sharp reductions in equity prices and
interest rates and increases in credit spreads,
•Leveraging our investment capabilities to deploy a portion of our asset
portfolio into private fixed income securities with a sufficiently wide spread
to comparable public securities,
•Investing in high-quality liquid public fixed income securities and preserving
a cash balance sufficient to pay current claims and expenses, while maintaining
collateral to satisfy margin requirements in connection with the derivative
transactions forming our Asset Liability Matching (ALM) strategy, as described
below.

The primary risk exposures of our Retained Business relate to actual deviations
from, or changes to, the pricing assumptions developed at acquisition for these
products, including capital markets assumptions such as equity market returns,
interest rates and market volatility, along with actuarial assumptions such as
contractholder mortality, the timing and amount of annuitization and
withdrawals, and contract lapses. For these risk exposures, achievement of our
expected returns is subject to the risk that actual experience will differ from
the pricing assumptions developed at acquisition for these products. We have
developed and implemented a risk management strategy to mitigate the potential
adverse effects of fluctuations in capital markets, specifically equity markets
and interest rates, primarily through a combination of i) Product Design
Features and ii) our ALM strategy.

Product Design Features

A portion of the variable annuity contracts includes an asset transfer feature.
This feature is implemented at the contract level, and transfers assets between
certain variable investment sub-accounts selected by the annuity contractholder
and, depending on the benefit feature, a fixed-rate account in the general
account or a bond fund sub-account within the separate account. The objective of
the asset transfer feature is to reduce our exposure to equity market risk and
market volatility. The transfers are based on a static mathematical formula used
with the particular benefit which considers a number of factors, including, but
not limited to, the impact of investment performance on the contractholder's
total account value. Other product design features we utilize include, among
others, asset allocation restrictions, minimum issuance age requirements and
certain limitations on the amount of contractholder purchase payments.

ALM Strategy

We employ an ALM strategy that utilizes a combination of both fixed income
instruments and derivatives to meet expected claims associated with our variable
annuity living and death benefit guarantees. The economic liability we manage
with this ALM strategy consists of expected living and death benefit claims net
of expected separate account fee revenue. For the portion of our ALM strategy
executed with derivatives, we enter into a range of exchange-traded and
over-the-counter ("OTC") equity, interest rate and credit derivatives,
including, but not limited to: equity and treasury futures; total return, credit
default and interest rate swaps; and options, including equity options,
swaptions, and floors and caps. The intent of this strategy is to
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more efficiently manage the capital and liquidity associated with these
products. We explicitly consider liquidity and risk-based capital as well as
current market conditions in our asset/liability management strategies. Below is
specific discussion on our ALM strategy regarding interest and equity risks:

Market Risk Related to Interest Rates

In order to mitigate the impact that an unfavorable interest rate environment
has on our net interest margins, we employ strategic asset allocations and
derivative strategies within a disciplined risk management framework. These
strategies seek to target the interest rate sensitivity of the assets to a
certain percentage of the estimated interest rate sensitivity of the product
liabilities. Our asset/liability management program is holistic, in that it
considers contributions from both our fixed income asset portfolio, as well as
our interest rate derivatives, in offsetting the interest rate sensitivity of
our liabilities.

We use duration and convexity analyses to measure price sensitivity to interest
rate changes. Duration measures the relative sensitivity of the fair value of a
financial instrument to changes in interest rates. Convexity measures the rate
of change in duration with respect to changes in interest rates. We use
asset/liability management and derivative strategies to manage our interest rate
exposure by managing the relative sensitivity of asset and liability values to
interest rate changes to within a certain prescribed tolerance range.

Market Risk Related to Equity Prices

We have exposure to equity risk primarily through the impact of changes in
equities prices on the incidence and magnitude of future contractholder claims,
as well as fee revenue. We manage this risk using equity-based derivatives. As
with interest rate risk, we target the equity sensitivity of the assets (equity
derivatives) to a certain percentage of the estimated equity market sensitivity
of the economic liability. We manage the relative sensitivity of asset and
liabilitiy values to equity price changes to within a certain prescribed
tolerance range.

We manage equity risk against benchmarks in respective markets. We benchmark
returns of equity holdings against a blend of market indices, mainly the S&P 500
and Russell 2000 for U.S. equities. We benchmark foreign equity returns against
the MSCI EAFE, a market index of European, Australian and Far Eastern equities.
We target price sensitivities that approximate those of the benchmark indices.
For equity investments within the separate accounts, the investment risk is
borne by the separate account contractholder rather than by the Company.


                                  Income Taxes

For information regarding income taxes, see Note 8 to the Unaudited Interim
Financial Statements.

                        Liquidity and Capital Resources

This section supplements and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" included in our Annual Report on
Form 10-K for the year ended December 31, 2021.

Overview

Liquidity is a measure of a company's ability to generate cash flows sufficient
to meet the short-term and long-term cash requirements of the Company. Capital
refers to the long-term financial resources available to support the operations
of our business, fund business growth, and provide a cushion to withstand
adverse circumstances. Our ability to generate and maintain sufficient liquidity
and capital depends on the profitability of our business, general economic
conditions, our ability to borrow and our access to capital markets.

Effective and prudent liquidity and capital management is a priority across the
organization. Management monitors the liquidity of the Company on a daily basis
and projects borrowing and capital needs over a multi-year time horizon. We use
a Risk Appetite Framework ("RAF") to ensure that all risks taken by the Company
aligns with our capacity and willingness to take those risks. The RAF provides a
dynamic assessment of capital and liquidity stress impacts, including scenarios
similar to, and more severe than, those occurring due to COVID-19, and is
intended to ensure that sufficient resources are available to absorb those
impacts. We believe that our capital and liquidity resources are sufficient to
satisfy the capital and liquidity requirements of the Company.

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Our businesses are subject to comprehensive regulation and supervision by
domestic and international regulators. These regulations currently include
requirements (many of which are the subject of ongoing rule-making) relating to
capital, leverage, liquidity, stress-testing, overall risk management, credit
exposure reporting and credit concentration. For information on these regulatory
initiatives and their potential impact on us, see "Business-Regulation" and
"Risk Factors" included in the Predecessor Company's Annual Report on Form 10-K
for the year ended December 31, 2021.

Capital

We manage FLIAC to regulatory capital levels and utilize the risk-based capital
("RBC") ratio as a primary measure of capital adequacy. RBC is calculated based
on statutory financial statements and risk formulas consistent with the
practices of the National Association of Insurance Commissioners ("NAIC"). RBC
considers, among other things, risks related to the type and quality of the
invested assets, insurance-related risks associated with an insurer's products
and liabilities, equity market and interest rate risks and general business
risks. RBC determines the minimum amount of capital required of an insurer to
support its operations and underwriting coverage. The ratio of a company's Total
Adjusted Capital (TAC) to RBC is the corresponding RBC ratio. RBC ratio
calculations are intended to assist insurance regulators in measuring an
insurer's solvency and ability to pay future claims. The reporting of RBC
measures is not intended for the purpose of ranking any insurance company or for
use in connection with any marketing, advertising or promotional activities, but
is available to the public. The Company's capital levels substantially exceed
the minimum level required by applicable insurance regulations. Our regulatory
capital levels may be affected in the future by changes to the applicable
regulations, proposals for which are currently under consideration by both
domestic and international insurance regulators.

The regulatory capital level of the Company can be materially impacted by
interest rate and equity market fluctuations, changes in the values of
derivatives, the level of impairments recorded, and credit quality migration of
the investment portfolio, among other items. In addition, the reinsurance of
business or the recapture of business subject to reinsurance arrangements due to
defaults by, or credit quality migration affecting, the reinsurers or for other
reasons could negatively impact regulatory capital levels. The Company's
regulatory capital level is also affected by statutory accounting rules, which
are subject to change by each applicable insurance regulator.

The Predecessor Company made distributions to its parent, PAI, for the three
month periods indicated below. Following the previously discussed change in
ownership, the Successor Company will no longer make dividends to PAI.

                                            Return of Capital
                                              (in millions)
                      March 31, 2022       $              306
                      December 31, 2021    $              451
                      September 30, 2021   $            3,813



Our liquidity is managed to ensure stable, reliable and cost-effective sources
of cash flows to meet all of our obligations. Liquidity is provided by a variety
of sources, as described more fully below, including portfolios of liquid
assets. Our investment portfolios are integral to the overall liquidity of the
Company. We use a projection process for cash flows from operations to ensure
sufficient liquidity to meet projected cash outflows, including claims.

Liquidity is measured against internally-developed benchmarks that take into
account the characteristics of both the asset portfolio and the liabilities that
they support. We consider attributes of the various categories of liquid assets
(for example, type of asset and credit quality) in calculating internal
liquidity measures to evaluate our liquidity under various stress scenarios,
including company-specific and market-wide events. We continue to believe that
cash generated by ongoing operations and the liquidity profile of our assets
provide sufficient liquidity under reasonably foreseeable stress scenarios.

The principal sources of the Company's liquidity are premiums and certain
annuity considerations, investment and fee income, investment maturities, sales
of investments and internal borrowings. The principal uses of that liquidity
include benefits, claims, and payments to policyholders and contractholders in
connection with surrenders, withdrawals and net policy loan activity. Other uses
of liquidity include commissions, general and administrative expenses, purchases
of investments, the payment of dividends and returns of capital to the parent
company, hedging and reinsurance activity and payments in connection with
financing activities.

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In managing liquidity, we consider the risk of policyholder and contractholder
withdrawals of funds earlier than our assumptions when selecting assets to
support these contractual obligations. We also consider the risk of future
collateral requirements under stressed market conditions in respect of the
derivatives we utilize.

Liquid Assets

Liquid assets include cash and cash equivalents, short-term investments, U.S.
Treasury fixed maturities and fixed maturities that are not designated as
held-to-maturity, and public equity securities. As of June 30, 2022 and December
31, 2021, the Company had liquid assets of $9 billion and $12 billion,
respectively. The portion of liquid assets comprised cash and cash equivalents
and short-term investments was $1.6 billion and $2.9 billion as of June 30, 2022
and December 31, 2021, respectively.

Financing activities

Hedging activities associated with living benefit guarantees and other market
sensitive exposures

The hedging portion of our risk management strategy associated with our living
benefit guarantees, including those assumed from Pruco Life, is being managed
within the Company. For the portion of the risk management strategy executed
through hedging, we enter into a range of exchange-traded, cleared and other OTC
equity and interest rate derivatives in order to hedge certain living benefit
guarantees and other market sensitive exposures against changes in certain
capital market risks. The portion of the risk management strategy comprising the
hedging portion requires access to liquidity to meet the Company's payment
obligations relating to these derivatives, such as payments for periodic
settlements, purchases, maturities and terminations. These liquidity needs can
vary materially due to, among other items, changes in interest rates, equity
markets, mortality and policyholder behavior.

The hedging portion of the risk management strategy may also result in
derivative-related collateral postings to (when we are in a net pay position) or
from (when we are in a net receive position) counterparties. The net collateral
position depends on changes in interest rates and equity markets related to the
amount of the exposures hedged. Depending on market conditions, the collateral
posting requirements can result in material liquidity needs when we are in a net
pay position.

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