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
September 30, 2022 and its results of operations for the three and six months
ended September 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 in the consolidated statement of financial
condition or consolidated statement of operations are not comparable due to the
election to apply push-down accounting to the Company following its acquisition
by FGH. See "Accounting Policies & Pronouncements" 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 Consolidated
Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
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                                    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.

Novation of Ceded Business

In the second quarter of 2022, in accordance with applicable state law, a
program was instituted to novate a significant portion of the Ceded Business
policies from FLIAC to Pruco Life Insurance Company ("Pruco Life"). The program
does not have an impact on stockholders' equity or net income but has resulted
in the reduction of certain activity/balances associated with these policies.
During the six months ended September 30, 2022, approximately $6 billion of
account value, which generally approximates fair values of insurance
liabilities, was transferred out of the Company as a result of the novation
program, which represents approximately 60 percent of account value since the
acquisition of the Company on April 1, 2022.

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, 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.

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 third quarter of 2022.

•Risk Factors. The COVID-19 pandemic has at times adversely impacted our results
of operations, financial position, investment portfolio, new business
opportunities and operations, and these impacts may 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.

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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;
•the recoverability of deferred tax assets related to losses on our fixed
maturity securities portfolio;
•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 fees, mortality and expense
fees, and asset administration fees from annuity and investment products, all of
which primarily result from the sale and servicing of annuity products. The
Company also earns net investment income from the investment of general account
and other funds. The Company's operating expenses principally consist of annuity
benefit guarantees provided, reserves established for anticipated future annuity
benefit guarantees, and costs of managing risk related to these products. The
Company's operating expenses also include interest credited to policyholders'
account balances, general business expenses, reinsurance premiums, and
commissions and other costs of selling and servicing the various products it
sold.
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                      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.

Following the acquisition of FLIAC, purchase accounting was applied to FGH's
financial statements and we have elected to "push down" the basis to FLIAC in
accordance with Accounting Standards Codification ("ASC") 805, Business
Combinations. The application of push-down accounting created a new basis of
accounting for all assets and liabilities based on fair value at the date of
acquisition. As a result, FLIAC's financial position, results of operations, and
cash flows 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 through March 31, 2022
is referred to as the Predecessor Company. The post-acquisition period, April 1,
2022 and forward, includes the impact of push-down accounting and is referred to
as the Successor Company.

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, including valuation allowances; 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, and was amended by ASU
2019-09, Financial Services - Insurance (Topic 944): Effective Date, issued in
October 2019, and ASU 2020-11, Financial Services-Insurance (Topic 944):
Effective Date and Early Application, issued in November 2020. 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 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, commonly known as guaranteed
minimum withdrawal benefits, which entitle the holder to elect to withdraw a
guaranteed amount from the contract while alive, irrespective of the balance in
their separate account. Almost all of the contracts also offer a guaranteed
amount payable to a beneficiary upon the death of the holder, which is commonly
known as a guaranteed minimum death benefit.

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 Prudential Insurance and 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 represent the economic impact of Prudential Insurance and
Pruco Life. See also "Novation of Ceded Business" within the "Overview" section
herein Item 2 for information regarding the impacts of the novation program on
the Ceded Business.
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                         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 Successor 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 $6.0 billion from $32.1 billion at April 1, 2022
to $26.1 billion at September 30, 2022. The decrease was primarily driven by a
$5.8 billion decline in separate account assets due to market depreciation
resulting mostly from unfavorable equity market performance.

Liabilities decreased approximately $5.9 billion from $30.3 billion at April 1,
2022 to $24.4 billion at September 30, 2022. The decrease was primarily driven
by a $5.8 billion decline in separate account liabilities, corresponding to the
decrease in separate account assets, as discussed above.

Equity was approximately $1.8 billion at both April 1, 2022 and September 30,
2022, with a net loss of $337 million offset by an increase in our own-credit
risk (OCR) impact on the fair value of insurance liabilities, net of tax, of
$311 million reflected in accumulated other comprehensive income (loss).

Ceded Business

Assets decreased $7.4 billion from $13.2 billion at April 1, 2022 to $5.8
billion at September 30, 2022. The decrease was primarily driven by a $5.0
billion decline in total investments due primarily to the previously mentioned
novations during the second and third quarters of 2022. Also contributing to the
$5.0 billion decline in total investments were losses in the derivatives
portfolio, primarily related to equity options. The remainder of the decline in
assets was driven primarily by a $1.8 billion decrease in the deposit asset
which moved commensurately with the novation-related decline in the associated
insurance liabilities under its fixed indexed annuity reinsurance agreement with
Pruco Life. Also contributing to the decline in the insurance liabilities under
the reinsurance agreement with Pruco life was a decrease in equity markets.

Liabilities decreased $7.4 billion from $13.2 billion at April 1, 2022 to $5.8
billion at September 30, 2022. The decrease was primarily driven by a $7.0
billion decline in the fair value of insurance liabilities, which was primarily
due to the previously mentioned novations during the second and third quarters
of 2022.

There was no equity within our Ceded Business at both April 1, 2022 and
September 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.


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                             Results of Operations

As noted under Accounting Policies and Pronouncements, the Company's results of
operations subsequent to the acquisition are 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 periods 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 and
third quarter of 2021 10-Q's.

SUCCESSOR COMPANY

LOSS FROM OPERATIONS BEFORE INCOME TAXES

Three Months Ended September 30, 2022

Retained Business

The loss from operations before income taxes of $154 million was driven
primarily by investment losses in the fixed maturity securities portfolio
resulting from higher interest rates. Partially offsetting the investment losses
were favorable changes in the fair value of insurance liabilities, excluding
changes in OCR, driven primarily by higher interest rates. Also 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 all
revenues and expenses are ceded back to Prudential Insurance or Pruco Life.

Six Months Ended September 30, 2022

Retained Business

The loss from operations before income taxes of $337 million was driven
primarily by investment losses in the fixed maturity securities portfolio
resulting from higher interest rates. Also contributing to the loss were changes
in the fair value of insurance liabilities, excluding changes in OCR, driven
primarily by a decline in equity markets, partially offset by higher interest
rates. Further contributing to the loss were 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 all
revenues and expenses are ceded back to Prudential Insurance or Pruco Life.

REVENUES, BENEFITS, AND EXPENSES

Three Months Ended September 30, 2022
Retained Business

Revenues were $(255) million for the three months ended September 30, 2022,
driven primarily by investment losses in the fixed maturity securities portfolio
resulting from higher interest rates, partially offset by policy charges and fee
income and net investment income.

Benefits and expenses were $(101) million for the three months ended September
30, 2022, driven primarily by favorable changes in the fair value of insurance
liabilities, excluding changes in OCR, due to higher interest rates.

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Ceded Business

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

Six Months Ended September 30, 2022
Retained Business

Revenues were $(173) million for the six months ended September 30, 2022, driven
primarily by investment losses in the fixed maturity securities portfolio
resulting from higher interest rates. Partially offsetting the impact of the
investment losses were policy charges and fee income and net investment income.

Benefits and expenses were $212 million for the six months ended September 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 Prudential Insurance 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 September 30, 2021

Income (loss) from operations before income taxes increased $3.8 billion from a
loss of $47.6 million for the three months ended September 30, 2020 to a gain of
$3.7 billion for the three months ended September 30, 2021, primarily driven by:

•Significant investment gains (losses), net reflecting a favorable impact
related to the 2021 Variable Annuities Recapture and the portion of our U.S.
GAAP liability before NPR, that are excluded from our hedge targets driven by
rising interest rates. Also contributing is an unfavorable NPR adjustment.

Nine Months Ended September 30, 2021

Income (loss) from operations before income taxes increased $9.7 billion from a
loss of $3.7 billion for the nine months ended September 30, 2020 to income of
$6.0 billion for the nine months ended September 30, 2021. Excluding the impact
of our annual reviews and update of assumptions and other refinements, income
(loss) from operations increased $9.7 billion primarily driven by:

•Significant investment gains (losses), net reflecting a favorable impact
related to the 2021 Variable Annuities Recapture and the portions of our U.S.
GAAP liability before NPR, that are excluded from our hedge target driven by
rising interest rates and favorable equity market performance. Also contributing
is an unfavorable NPR adjustment.

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.

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                                                                          Predecessor Company
                                                        Three Months          Three Months           Nine Months
                                                           Ended                  Ended                 Ended
                                                          March 31            September 30          September 30
                                                            2022                             2021
                                                                          

(in millions) (1)
U.S. GAAP embedded derivative and hedging positions
Change in value of U.S.GAAP liability, pre-NPR(2) $ 459

          $         47          $      5,628
Change in the NPR adjustment                                    156                   (47)                 (950)
Change in fair value of hedge assets, excluding
capital hedges(3)                                              (392)                   63                (3,049)
Change in fair value of capital hedges(4)                        39                    37                  (766)
2021 Variable Annuities Recapture Impact                          -                 5,142                 5,142
Other                                                           218                  (203)                  903

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

                                                     480                 5,039                 6,908
Market experience updates(5)                                    (57)                  (14)                  147
Charges related to realized investments gains
(losses), net                                                   (97)                   14                  (246)

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         

$ 5,039 $ 6,809

(1) Positive amount represents income; negative amount represents a loss.
(2) Represents the change in the liability (excluding NPR) for our variable
annuities which is measured utilizing a valuation         methodology that is
required under U.S. GAAP. This liability includes such items as risk margins
which are required by U.S. GAAP but not included in our best estimate of the
liability.
(3) Represents the changes in fair value of the derivatives utilized to hedge
potential claims associated with our variable annuity living benefit guarantees.
(4) Represents the changes in fair value of equity derivatives of the capital
hedge program intended to protect a portion of the overall capital position of
our business against exposure to the equity markets.
(5) Represents the immediate impacts in current period results from changes in
current market conditions on estimates of profitability.
(6) Excludes amounts from the changes in unrealized gains and losses from fixed
income instruments recorded in OCI (versus net income) of $(70) million for the
three months ended March 31, 2022 and $(45) million and $1,673 million for the
three and nine months ended September 30, 2021, respectively.

For the three months ended March 31, 2022, the gain of $326 million was driven
by a favorable impact related to the U.S. GAAP liability before NPR, net of
change in fair value of hedge assets (excluding capital hedge) largely due to
rising interest rates.

For the three months ended September 30, 2021, the gain of $5,039 million was
driven by the favorable impact related to the 2021 Variable Annuities Recapture.
See Note 1 to the Unaudited Interim Financial Statements for further details.

For the nine months ended September 30, 2021, the gain of $6,809 million was
driven by the favorable impact related to the 2021 Variable Annuities Recapture
and the portions of our U.S. GAAP liability before NPR, net of the change in
fair value of hedge assets (excluding capital hedges) primarily driven by rising
interest rates and favorable equity market performance. Also contributing is an
unfavorable NPR adjustment.
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.

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Three Months Ended September 30, 2021

Revenues increased $4.8 billion from a gain of $0.5 billion for the three months
ended September 30, 2020 to a gain of $5.3 billion for the three months ended
September 30, 2021 primarily driven by:

•Significant investment gains (losses), net reflecting a favorable impact
related to the 2021 Variable Annuities Recapture and the portion of our U.S.
GAAP liability before NPR, that are excluded from our hedge targets driven by
rising interest rates. Also contributing is an unfavorable NPR adjustment.

Benefits and expenses increased $0.9 billion from $0.6 billion for the three
months ended September 30, 2020 to $1.5 billion for the three months ended
September 30, 2021 primarily driven by:

•Higher Commission expense primarily driven by the unwinding of assumed deferred
acquisition costs, partially offset by ceding allowance received as part of the
2021 Variable Annuities Recapture.

Nine Months Ended September 30, 2021

Revenues increased $10.7 billion from a loss of $2.1 billion for the nine months
ended September 30, 2020 to a gain of $8.6 billion for the nine months ended
September 30, 2021. Excluding the impact of our annual reviews and update to our
assumptions and other refinements, revenues increased $10.8 billion primarily
driven by:

•Significant Realized investment gains (losses), net reflecting a favorable
impact related to the 2021 Variable Annuities Recapture and the portions of our
U.S. GAAP liability before NPR, that are excluded from our hedge target driven
by rising interest rates and favorable equity market performance. Also
contributing is an unfavorable NPR adjustment.

Benefits and expenses increased $1.0 billion from $1.6 billion for the nine
months ended September 30, 2020 to $2.6 billion for the nine months ended
September 30, 2021. Excluding the impact of our annual reviews and update to our
assumptions and other refinements, benefits and expenses increased $1.1 billion
primarily driven by:

•Higher Commission expense primarily driven by the unwinding of assumed deferred
acquisition costs, partially offset by ceding allowance received as part of the
2021 Variable Annuities Recapture.
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                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 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:
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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
liability 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 the Predecessor
Company's 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.

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.
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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 periods
indicated below. Following the previously discussed change in ownership, the
Successor Company made no dividends to FGH during the six months ended September
30, 2022.

                                       Return of Capital    Dividends
                                                (in millions)
                 March 31, 2022       $              306   $        -
                 September 30, 2021   $            3,813   $        -
                 June 30, 2021        $                -   $      188
                 March 31, 2021       $                -   $      192



Liquidity

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 September 30, 2022 and
December 31, 2021, the Company had liquid assets of $7 billion and $12 billion,
respectively. The portion of liquid assets comprised of cash and cash
equivalents and short-term investments was $1.3 billion and $2.9 billion as of
September 30, 2022 and December 31, 2021, respectively.

Effective April 1, 2022 FLIAC entered into an intercompany liquidity agreement
with FGH that allowed the Successor Company to borrow funds of up to $50 million
to meet its short-term liquidity and other capital needs. During the third
quarter of 2022, the borrowing capacity of the agreement was increased to $150
million. As of September 30, 2022, there were no borrowings under the agreement.
In November 2022, FLIAC borrowed $75 million of funds under the agreement and
expects to repay the outstanding amount, plus interest, in full within one month
of borrowing.
Liquidity Regarding Hedging Activities

The hedging portion of our risk management strategy for the Retained Business is
being managed within the Company. We enter into a range of exchange-traded,
cleared, and other OTC derivatives in order to hedge 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.

Repurchase Agreements and Securities Lending

In the normal course of business, we may enter into repurchase agreements and
securities lending agreements with unaffiliated financial institutions, which
are typically large or highly rated, to earn spread income and facilitate
trading activity. Under these agreements, the Company transfers securities to
the counterparty and receives cash as collateral. The cash received is generally
invested in short-term investments or fixed maturity securities.

For repurchase agreements, a liability representing the amount that the
securities will be repurchased is recorded in "Other liabilities" in our
consolidated statement of financial position. For securities lending agreements,
a liability representing the return of cash collateral is recorded in "Other
liabilities" in our consolidated statement of financial position. As of
September 30, 2022, the liabilities associated with our outstanding repurchase
and securities lending agreements were $200 million and $169 million,
respectively.


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