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F&G ANNUITIES & LIFE, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations for the years endedDecember 31, 2022 andDecember 31, 2021 , the period fromJune 1, 2020 toDecember 31, 2020 (following the FNF Acquisition), and the "Predecessor" results for the period fromJanuary 1, 2020 toMay 31, 2020 (prior to the FNF Acquisition) should be read together with, and is qualified in its entirety by reference to, our Consolidated Financial Statements and related notes included elsewhere in this Annual Report which have been prepared in accordance with GAAP. The following discussion may contain forward-looking statements based on assumptions we believe to be reasonable. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Annual Report, particularly in "Risk Factors" and "Note Regarding Forward-Looking Statements."
Overview
For a description of our business see the discussion under "Business" in Item 1 of Part I of this Annual Report, and Note A Business and Summary of Significant Accounting Policies in Item 8 of Part II of this Annual Report, which are incorporated by reference into this Item 7 of Part II of this Annual Report.
Business Trends and Conditions
The following factors represent some of the key trends and uncertainties that have influenced the development of the Company and its historical financial performance, and we believe these key trends and uncertainties will continue to influence the business and financial performance of the Company in the future.
COVID-19 Pandemic
The health, economic and business conditions precipitated by the worldwide
COVID-19 pandemic that emerged in 2020 increased our mortality experience in
2021 and 2020 in both our single premium immediate annuity ("SPIA") and IUL
business which largely offset each other. As of December 31, 2022 , we have not
seen a sustained elevated level of adverse policyholder experience from the
impact of COVID-19 on the overall business.
Market Conditions
Market volatility has affected, and may continue to affect, our business and financial performance in varying ways. Volatility can pressure sales and reduce demand as consumers hesitate to make financial decisions. To enhance the attractiveness and profitability of our products and services, we continually monitor the behavior of our customers, as evidenced by annuitization rates and lapse rates, which vary in response to changes in market conditions. See "Risk Factors" in this Annual Report for further discussion of risk factors that could affect market conditions. Interest Rate Environment Some of our products include guaranteed minimum crediting rates, most notably our fixed rate annuities. As ofDecember 31, 2022 andDecember 31, 2021 , our reserves, net of reinsurance, and average crediting rate on our fixed rate annuities were$6 billion and 3%, respectively, and$5 billion and 3%, respectively. We are required to pay the guaranteed minimum crediting rates even if earnings on our investment portfolio decline, which would negatively impact earnings. In addition, we expect more policyholders to hold policies with comparatively high guaranteed rates for a longer period in a low interest rate environment. Conversely, a rise in average yield on our investment portfolio would increase earnings if the average interest rate we pay on our products does not rise correspondingly. Similarly, we expect that policyholders would be less likely to hold policies with existing guarantees as interest rates rise and the relative value of other new business offerings are increased, which would negatively impact our earnings and cash flows.
See "Quantitative and Qualitative Disclosure about Market Risk" and "Risk
Factors" in this Annual Report for a more detailed discussion of interest rate
risk.
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Aging of theU.S. Population We believe that the aging of theU.S. population will increase the demand for our FIA and IUL products. As the "baby boomer" generation prepares for retirement, we believe that demand for retirement savings, growth, and income products will grow. Over 10,000 people will turn 65 each day inthe United States over the next 15 years, and according to theU.S. Census Bureau , the proportion of theU.S. population over the age of 65 is expected to grow from 18% in 2022 to 21% in 2035. The impact of this growth may be offset to some extent by asset outflows as an increasing percentage of the population begins withdrawing assets to convert their savings into income.
Industry Factors and Trends Affecting Our Results of Operations
We operate in the sector of the insurance industry that focuses on the needs of middle-income Americans. The underserved middle-income market represents a major growth opportunity for us. As a tool for addressing the unmet need for retirement planning, we believe that many middle-income Americans have grown to appreciate the financial certainty that we believe annuities such as our FIA products afford. Accordingly, the FIA market grew from nearly$12 billion of sales in 2002 to$66 billion of sales in 2021. Additionally, this market demand has positively impacted the IUL market as it has expanded from$100 million of annual premiums in 2002 to$2 billion of annual premiums in 2021.
Critical Accounting Policies and Estimates
The accounting estimates described below are those we consider critical in preparing our Consolidated Financial Statements. Management is required to make estimates and assumptions that can affect the reported amounts of assets and liabilities and disclosures with respect to 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 amounts could differ from those estimates. See Note A Business and Summary of Significant Accounting Policies to our Consolidated Financial Statements included in this Annual Report for additional description of the significant accounting policies that have been followed in preparing our Consolidated Financial Statements.
Reserves for Future Policy Benefits and Product Guarantees and Certain
Information on Contractholder Funds
The determination of future policy benefit reserves is dependent on actuarial assumptions. The principal assumptions used to establish liabilities for future policy benefits are based on our experience. These assumptions are established at issue of the contract and include mortality, morbidity, contract full and partial surrenders, investment returns, annuitization rates and expenses. The assumptions used require considerable judgment. We review overall policyholder experience at least annually and update these assumptions when deemed necessary based on additional information that becomes available. For traditional life and immediate annuity products, assumptions used in the reserve calculation can only be changed if the reserve is deemed to be insufficient. For all other insurance products, changes in assumptions will be used to calculate reserves. These changes in assumptions will also incorporate changes in risk free rates and option market values. Changes in, or deviations from, the assumptions previously used can significantly affect our reserve levels and related results of operations. Mortality is the incidence of death amongst policyholders triggering the payment of underlying insurance coverage by the insurer. In addition, mortality also refers to the ceasing of payments on life-contingent annuities due to the death of the annuitant. We utilize a combination of actual and industry experience when setting our mortality assumptions. A surrender rate is the percentage of account value surrendered by the policyholder. A lapse rate is the percentage of account value canceled by us due to nonpayment of premiums. We make estimates of expected full and partial surrenders of our fixed annuity products. Our surrender rate experience in the years endedDecember 31, 2022 andDecember 31, 2021 , the period fromJune 1, 2020 toDecember 31, 2020 and the Predecessor period fromJanuary 1, 2020 toMay 31, 2020 on the fixed annuity products averaged 7%, 7%, 4% and 3% respectively, which is within our assumed ranges. Management's best estimate of surrender behavior incorporates actual experience over the entire period, as we believe that, over the duration of the policies, we will experience the full range of 61 --------------------------------------------------------------------------------
policyholder behavior and market conditions. If actual surrender rates are
significantly different from those assumed, such differences could have a
significant effect on our reserve levels and related results of operations.
The assumptions used to establish the liabilities for our product guarantees require considerable judgment and are established as management's best estimate of future outcomes. We periodically review these assumptions and, if necessary, update them based on additional information that becomes available. Changes in or deviations from the assumptions used can significantly affect our reserve levels and related results of operations. At issue, and at each subsequent valuation, we determine the present value of the cost of the GMWB rider benefits and certain GMDB riders in excess of benefits that are funded by the account value. We also calculate the present value of total expected policy assessments, including investment margins, if applicable. We accumulate a reserve equal to the portion of these assessments that would be required to fund the future benefits less benefits paid to date. In making these projections, a number of assumptions are made and we update these assumptions as experience emerges, and determined necessary. We began issuing our GMWB products in 2008, and future experience could lead to significant changes in our assumptions. If emerging experience deviates from our assumptions on GMWB utilizations, such deviations could have a significant effect on our reserve levels and related results of operations.
Our aggregate reserves for contractholder funds, future policy benefits and
product guarantees on a direct and net basis as of
As of December 31, 2022
Direct Reinsurance Recoverable
Net
Fixed indexed annuities ("FIA") $ 24,812 $ - $ 24,812
Fixed rate annuities ("MYGA") 9,359 (3,719) $ 5,640
Immediate annuities ("IA") 4,007 (135) $ 3,872
Universal life ("IUL") 2,127 (947) $ 1,180
Traditional life ("TRAD") 1,777 (786) $ 991
Funding agreements 2,613 - $ 2,613
PRT 2,461 - $ 2,461
Total $ 47,156 $ (5,587) $ 41,569
As of December 31, 2021
Direct Reinsurance Recoverable Net
FIA $ 23,370 $ - $ 23,370
MYGA 6,369 (1,689) 4,680
IA 3,657 (133) 3,524
IUL 1,981 (983) 998
TRAD 1,823 (805) 1,018
Funding Agreements 1,904 - 1,904
PRT 1,153 - 1,153
Total $ 40,257 $ (3,610) $ 36,647
FIA and IUL products contain an embedded derivative; a feature that permits the
holder to elect an interest rate return or an equity-index linked component,
where interest credited to the contract is linked to the performance of various
equity indices. The FIA/IUL embedded derivatives are valued at fair value and
included in the liability for Contractholder funds in our Consolidated Balance
Sheets with changes in fair value included as a component of Benefits and other
changes in policy reserves in our Consolidated Statements of Earnings.
Valuation of Fixed Maturity,
and Reinsurance Recoverable
Our 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 in AOCI, net of associated adjustments for
VOBA, DAC, DSI, unearned revenue ("UREV"), Statement of Position 03-1,
"Accounting and
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Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts," ("SOP 03-1") reserves, and deferred income
taxes. Our equity securities are carried at fair value with unrealized gains and
losses included in net income (loss). Realized gains and losses on the sale of
investments are determined on the basis of the cost of the specific investments
sold and are credited or charged to income on a trade date basis.
Management's assessment of all available data when determining fair value of the
AFS securities is necessary to appropriately apply fair value accounting.
Management utilizes information from independent pricing services, who take into
account perceived market movements and sector news, as well as a security's
terms and conditions, including any features specific to that issue that may
influence risk and marketability. Depending on the security, the priority of the
use of observable market inputs may change as some observable market inputs may
not be relevant or additional inputs may be necessary. We generally obtain one
value from our primary external pricing service. In situations where a price is
not available from the independent pricing service, we may obtain broker quotes
or prices from additional parties 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. When
quoted prices in active markets are not available, the determination of
estimated fair value is based on market standard valuation methodologies,
including discounted cash flows, matrix pricing, or other similar techniques.
We validate external valuations at least quarterly through a combination of
procedures that include the evaluation of methodologies used by the pricing
services, comparisons to valuations from other independent pricing services,
analytical reviews and performance analysis of the prices against trends, and
maintenance of a securities watch list. See Note B Fair Value of Financial
Instruments and Note C Investments to our Consolidated Financial Statements
included in this Annual Report.
The fair value of derivative assets and liabilities is based upon valuation
pricing models and 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 using a conventional model and market observable inputs,
including interest rates, yield curve volatilities and other factors. Credit
risk related to the counterparty is considered when estimating the fair values
of these derivatives. However, we are largely protected by collateral
arrangements with counterparties when individual counterparty exposures exceed
certain thresholds. The fair value of futures contracts (specifically for FIA
contracts) at the balance sheet date represents the cumulative unsettled
variation margin (open trade equity net of cash settlements). The fair values of
the embedded derivatives in our FIA and IUL contracts are derived using market
value of options, use of current and budgeted option cost, swap rates, mortality
rates, surrender rates, partial withdrawals, and non-performance spread and are
classified as Level 3. The discount rate used to determine the fair value of our
FIA/IUL embedded derivative liabilities includes an adjustment to reflect the
risk that these obligations will not be fulfilled ("non-performance risk"). For
the years ended December 31, 2022 and December 31, 2021 , our non-performance
risk adjustment was based on the expected loss due to default in debt
obligations for similarly rated financial companies. See Note B Fair Value of
Financial Instruments and Note D Derivative Financial Instruments to our
Consolidated Financial Statements included in this Annual Report.
As discussed in Note J Reinsurance of our Consolidated Financial Statements
included in this Annual Report, F&G entered into a reinsurance agreement with
Kubera effective December 31, 2018 , to cede certain MYGAs and deferred annuity
GAAP and statutory reserves on a coinsurance funds withheld basis, net of
applicable existing reinsurance. Effective October 31, 2021 , this agreement was
novated from Kubera to Somerset. 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 create 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 swaps are 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. The reinsurance related embedded
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derivatives are reported in Accounts payable and accrued liabilities 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.
We categorize our fixed maturity securities, preferred securities, equity
securities and derivatives into a three-level hierarchy based on the priority of
the inputs to the valuation technique. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets (Level
1) and the lowest priority to unobservable inputs (Level 3). If the inputs used
to measure fair value fall within different levels of the hierarchy, the
category level is based on the lowest priority level input that is significant
to the fair value measurement of the instrument. The following table presents
the fair value of fixed maturity securities and equity securities by pricing
source, hierarchy level and net asset value ("NAV") as of December 31, 2022 ,
December 31, 2021 and December 31, 2020 .
As of December 31, 2022
Quoted Prices in
Active Markets for Significant Significant
Identical Assets (Level
Observable Inputs (Level Unobservable Inputs
(Dollars in millions) 1) 2) (Level 3) NAV
Total
Fixed maturity securities available-for-sale and equity securities: Prices via third-party pricing services $ 427 $ 23,493 $ 1,234 $ - $
25,154
Priced via independent broker quotations - - 6,840 - 6,840 Priced via other methods - - - 47 47 Total $ 427 $ 23,493 $ 8,074$ 47 $ 32,041 % of Total 1 % 74 % 25 % - % 100 % As of December 31, 2021 Quoted Prices in Active Markets for Significant Significant Identical Assets (Level Observable Inputs (Level Unobservable Inputs (Dollars in millions) 1) 2) (Level 3) NAV
Total
Fixed maturity securities available-for-sale and equity securities: Prices via third-party pricing services $ 684 $ 25,224 $ 928 $ - $
26,836
Priced via independent broker quotations - - 4,248 - 4,248 Priced via other methods - - 1 48 49 Total $ 684 $ 25,224 $ 5,177$ 48 $ 31,133 % of Total 2 % 81 % 17 % - % 100 % As of December 31, 2020 Quoted Prices in Active Markets for Significant Significant Identical Assets (Level Observable Inputs (Level Unobservable Inputs (Dollars in millions) 1) 2) (Level 3) NAV
Total
Fixed maturity securities available-for-sale and equity securities: Prices via third-party pricing services $ 607 $ 22,741 $ 1,133 $ - $
24,481
Priced via independent broker quotations - - 2,064 - 2,064 Priced via other methods - - 1 - 1 Total $ 607 $ 22,741 $ 3,198 $ -$ 26,546 % of Total 2 % 86 % 12 % - % 100 % 64
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Goodwill As ofDecember 31, 2022 andDecember 31, 2021 , goodwill was$1,756 million . The goodwill was recorded in connection with the FNF Acquisition. Refer to Note IGoodwill to our Consolidated Financial Statements included in this Annual Report for a summary of additional information on our goodwill balance. 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. Based on the results of this analysis, an annual goodwill impairment test may be completed based on an analysis of the discounted future cash flows generated by the underlying assets. The process of determining whether or not goodwill is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Future cash flow estimates are based partly on projections of market conditions such as the volume and mix of refinance and purchase transactions and interest rates, which are beyond our control and are likely to fluctuate. While we believe that our estimates of future cash flows are reasonable, these estimates are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ from what is assumed in our impairment tests. Such analyses are particularly sensitive to changes in estimates of future cash flows and discount rates. Changes to these estimates might result in material changes in fair value and determination of the recoverability of goodwill, which may result in charges against earnings and a reduction in the carrying value of our goodwill in the future. We completed annual goodwill impairment analyses in the fourth quarter of each period presented using aSeptember 30 measurement date. For the years endedDecember 31, 2022 andDecember 31, 2021 , the period fromJune 1, 2020 toDecember 31, 2020 and for the Predecessor period fromJanuary 1, 2020 toMay 31, 2020 , we determined there were no events or circumstances that indicated that the carrying value exceeded the fair value.
VOBA, DAC and DSI
Our intangible assets include an intangible asset reflecting 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. Additionally, acquisition costs that
are incremental, direct costs of successful contract acquisition are capitalized
as DAC. Indirect or unsuccessful acquisition costs, maintenance, product
development and overhead expenses are charged to expense as incurred. DSI
consists of contract enhancements such as premium and interest bonuses credited
to policyholder account balances.
VOBA, DAC and DSI are subject to loss recognition testing on a quarterly basis
or when an event occurs that may warrant loss recognition.
For annuity and IUL products, VOBA, DAC and DSI are generally being amortized in
proportion to estimated gross profits from the excess of net investment income
earned over the sum of interest credited to policyholders and the cost of
hedging our risk on indexed product policies, surrender charges and other
product fees, policy benefits, maintenance expenses, mortality, and recognized
gains and losses on investments. Current and future period gross profits for FIA
contracts also include the impact of amounts recorded for the change in fair
value of derivatives and the change in fair value of embedded derivatives. At
each valuation date, the most recent quarter's estimated gross profits are
updated with actual gross profits and the assumptions underlying future
estimated gross profits are evaluated for continued reasonableness. If the
update of assumptions causes estimated gross profits to increase, VOBA, DAC and
DSI amortization will decrease, resulting in lower amortization expense in the
period. The
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opposite result occurs when the assumption update causes estimated gross profits
to decrease. Current period amortization is adjusted retrospectively through an
unlocking process when estimates of current or future gross profits (including
the impact of recognized investment gains and losses) to be realized from a
group of products are revised. Our estimates of future gross profits are based
on actuarial assumptions related to the underlying policies' terms, lives of the
policies, duration of contract, yield on investments supporting the liabilities,
cost to fund policy obligations, and level of expenses necessary to maintain the
polices over their entire lives.
Changes in assumptions can have a significant impact on VOBA, DAC and DSI,
amortization rates and results of operations. Assumptions are management's best
estimate of future outcomes, and require considerable judgment. We periodically
review assumptions against actual experience, and update our assumptions based
on historical results and our best estimates of future experience when
additional information becomes available.
Estimated future gross profits are sensitive to changes in interest rates, which
are the most significant component of gross profits. Assumptions related to
interest rate spreads and credit losses also impact estimated gross profits for
products with credited rates. These assumptions are based on the current
investment portfolio yields and credit quality, estimated future crediting
rates, capital markets, and estimates of future interest rates and defaults.
Significant assumptions also include policyholder behavior assumptions, such as
surrender, lapse, and annuitization rates. We use a combination of actual and
industry experience when setting and updating our policyholder behavior
assumptions.
We perform sensitivity analyses to assess the impact that certain assumptions
have on VOBA, DAC and DSI. The following table presents the estimated
instantaneous net impact to income before income taxes of various assumption
changes on our VOBA, DAC and DSI. The effects, increase or (decrease), presented
are not representative of the aggregate impacts that could result if a
combination of such changes to interest rates and other assumptions occurred.
As of December As of December
(Dollars in millions) 31, 2022 31, 2021
A change to the long-term interest rate assumption of -50
basis points
$
(113) $ (91)
A change to the long-term interest rate assumption of +50
basis points
93 75 An assumed 10% increase in surrender rate (6) (4)
Assumptions regarding shifts in market factors may be overly simplistic and not
indicative of actual market behavior in stress scenarios.
Lower assumed interest rates or higher assumed annuity surrender rates tend to decrease the balances of VOBA, DAC and DSI, thus decreasing income before income taxes. Higher assumed interest rates or lower assumed annuity surrender rates tend to increase the balances of VOBA, DAC and DSI, thus increasing income before income taxes.
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.
Accounting for Income Taxes
As part of the process of preparing the Consolidated Financial Statements, we
are required to determine income taxes in each of the jurisdictions in which we
operate. This process involves estimating actual current tax expense together
with assessing temporary differences resulting from differing recognition of
items for income tax and accounting purposes. These differences result in
deferred income tax assets and liabilities, which are included within the
Consolidated Balance Sheets. We must then assess the likelihood that deferred
income tax assets will be realized and, to the extent we believe that
realizability is not likely, establish a valuation allowance. Determination of
income tax expense requires estimates and can involve complex issues that may
require an extended period to resolve. Further, the estimated level of annual
pre-tax income can cause the overall effective income tax rate to vary from
period to period. We believe that our tax positions comply with applicable tax
law and that we adequately provide for any known tax contingencies. We believe
the estimates and assumptions used to support our evaluation of tax benefit
realization are reasonable. Final determination of prior-year tax liabilities,
either by settlement with tax
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Refer to Note N Income Taxes to our Consolidated Financial Statements included
in this Annual Report for details.
Business Overview
We have five distribution channels across retail and institutional markets. Our three retail channels include agent-based IMOs, banks and broker dealers. We have deep, long-tenured relationships with our network of leading IMOs and their agents to serve the needs of the middle-income market and develop competitive annuity and life products to align with their evolving needs. Upon the FNF Acquisition and F&G's subsequent rating upgrades in mid-2020, we launched into banks and broker dealers. Further, in 2021, we launched two institutional channels to originate FABN and PRT transactions. The FABN Program offers funding agreements to institutional clients by means of capital markets transactions through investment banks. The funding agreements issued under the FABN Program are in addition to those issued to the FHLB. The PRT solutions business was launched by building an experienced team and then working with brokers and institutional consultants for distribution. These markets leverage our existing team's spread-based capabilities as well as our strategic partnership withBlackstone . In setting the features and pricing of our flagship FIA products relative to our targeted net margin, we take into account our expectations regarding (1) the difference between the net investment income we earn and the sum of the interest credited to policyholders and the cost of hedging our risk on the policies; (2) fees, including surrender charges and rider fees, partly offset by vesting bonuses that we pay our policyholders; and (3) a number of related expenses, including benefits and changes in reserves, acquisition costs, and general and administrative expenses. OnMarch 16, 2022 , FNF announced its intention to partially spin off F&G through a dividend to FNF shareholders. OnDecember 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. EffectiveDecember 1, 2022 , F&G commenced "regular-way" trading of its common stock on theNew York Stock Exchange ("NYSE") under the symbol "FG".
Key Components of Our Historical Results of Operations
Through our insurance subsidiaries, we issue a broad portfolio of deferred
annuities (FIA and fixed rate annuities), IUL insurance, immediate annuities,
funding agreements and PRT solutions. A deferred annuity is a type of contract
that accumulates value on a tax deferred basis and typically begins making
specified periodic or lump sum payments a certain number of years after the
contract has been issued. IUL insurance is a complementary type of contract that
accumulates value in a cash value account and provides a payment to designated
beneficiaries upon the policyholder's death. An immediate annuity is a type of
contract that begins making specified payments within one annuity period (e.g.,
one month or one year) and typically makes payments of principal and interest
earnings over a period of time.
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Under GAAP, premium collections for FIAs, fixed rate annuities, immediate
annuities and PRT without life contingency, and deposits 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 are 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.
F&G hedges certain portions of its exposure to product related equity market
risk by entering into derivative transactions. We purchase derivatives
consisting predominantly of call options and, to a lesser degree, futures
contracts (specifically for FIA contracts) on the equity indices underlying the
applicable policy. These derivatives are used to offset the reserve impact of
the index credits due to policyholders under the FIA and IUL contracts. The
majority of all such call options are one-year options purchased to match the
funding requirements underlying the FIA/IUL contracts. We attempt to manage the
cost of these purchases through the terms of our FIA/IUL contracts, which permit
us to change caps, spread, or participation rates on each policy's annual
anniversary, subject to certain guaranteed minimums that must be maintained. The
call options and futures contracts are marked to fair value with the change in
fair value included as a component of net investment gains (losses). The change
in fair value of the call options and futures contracts includes the gains and
losses recognized at the expiration of the instruments' terms or upon early
termination and the changes in fair value of open positions.
Earnings from products accounted for as deposit liabilities are primarily
generated from the excess of net investment income earned over the sum of
interest credited to policyholders and the cost of hedging our risk on FIA/IUL
policies. With respect to FIAs/IULs, the cost of hedging our risk includes the
expenses incurred to fund the index credits. Proceeds received upon expiration
or early termination of call options purchased to fund annual index credits are
recorded as part of the change in fair value of derivatives, and are largely
offset by an expense for index credits earned on annuity contractholder fund
balances.
Our profitability depends in large part upon the amount of AUM (see "-Non-GAAP
Financial Measures"), the excess of net investment income earned over the sum of
interest credited to policyholders and the cost of hedging our risk on indexed
product policies, earned on our average assets under management ("AAUM" - see
"-Non-GAAP Financial Measures"), our ability to manage our operating expenses
and the costs of acquiring new business (principally commissions to agents and
bonuses credited to policyholders). As we grow AUM, earnings generally increase.
AUM increases when cash inflows, which include sales, exceed cash outflows.
Managing the excess of net investment income earned over the sum of interest
credited to policyholders and the cost of hedging our risk on indexed product
policies, involves the ability to maximize returns on our AUM and minimize risks
such as interest rate changes and defaults or impairment of investments. It also
includes our ability to manage interest rates credited to policyholders and
costs of the options and futures purchased to fund the annual index credits on
the FIA/IULs. We analyze returns on AAUM, pre- and post-VOBA, DAC and DSI as
well as pre- and post-tax to measure our profitability in terms of growth and
improved earnings.
In June 2021 , we established a FABN Program, pursuant to which FGL Insurance may
issue funding agreements to a special purpose statutory trust (the "Trust") for
spread lending purposes. The maximum aggregate principal amount permitted to be
outstanding at any one time under the FABN Program is currently $5.0 billion . We
also issue funding agreements through the FHLB.
In
NY Insurance
liabilities from a pension plan sponsor. Life contingent PRT premiums are
included in life insurance premiums and other fees below.
Non-GAAP Financial Measures
In addition to reporting financial results in accordance with GAAP, this
document includes non-GAAP financial measures, which the Company believes are
useful to help investors better understand its financial performance,
68 -------------------------------------------------------------------------------- competitive position and prospects for the future. Management believes these non-GAAP financial measures may be useful in certain instances to provide additional meaningful comparisons between current results and results in prior operating periods. Our non-GAAP measures may not be comparable to similarly titled measures of other organizations because other organizations may not calculate such non-GAAP measures in the same manner as we do. The presentation of this financial information is not intended to be considered in isolation of or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. By disclosing these non-GAAP financial measures, the Company believes it offers investors a greater understanding of, and an enhanced level of transparency into, the means by which the Company's management operates the Company. Any non-GAAP measures should be considered in context with the GAAP financial presentation and should not be considered in isolation or as a substitute for GAAP net earnings, net earnings attributable to common shareholders, or any other measures derived in accordance with GAAP as measures of operating performance or liquidity. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are provided within. Adjusted Net Earnings
Adjusted net earnings is a non-GAAP economic measure we use to evaluate
financial performance each period. Adjusted net earnings is calculated by
adjusting net earnings (loss) from continuing operations to eliminate:
(i) Recognized (gains) and losses, net: the impact of net investment
gains/losses, including changes in allowance for expected credit losses and
other than temporary impairment ("OTTI") losses, recognized in operations; and
the effect of changes in fair value of the reinsurance related embedded
derivative;
(ii) Indexed product related derivatives: the impacts related to changes in the fair value, including both realized and unrealized gains and losses, of index product related derivatives and embedded derivatives, net of hedging cost;
(iii) Purchase price amortization: the impacts related to the amortization of
certain intangibles (internally developed software, trademarks and value of
distribution asset ("VODA")) recognized as a result of acquisition activities;
(iv) Transaction costs: the impacts related to acquisition, integration and
merger related items;
(v) Other "non-recurring," "infrequent" or "unusual items": Management excludes certain items determined to be "non-recurring," "infrequent" or "unusual" from adjusted net earnings when incurred if it is determined these expenses are not a reflection of the core business and when the nature of the item is such that it is not reasonably likely to recur within two years and/or there was not a similar item in the preceding two years.
(vi) Amortization of actuarial intangibles and SOP 03-1 reserve offset: The
intangibles amortization and SOP 03-1 change offsets related to the above
mentioned adjustments; and
(vii) Income taxes: the income tax impact related to the above mentioned
adjustments is measured using an effective tax rate, as appropriate by tax
jurisdiction.
While these adjustments are an integral part of the overall performance of F&G,
market conditions and/or the non-operating nature of these items can overshadow
the underlying performance of the core business. Accordingly, management
considers this to be a useful measure internally and to investors and analysts
in analyzing the trends of our operations. Adjusted net earnings should not be
used as a substitute for net earnings (loss). However, we believe the
adjustments made to net earnings (loss) in order to derive adjusted net earnings
provide an understanding of our overall results of operations.
For example, we could have strong operating results in a given period, yet
report net income that is materially less, if during such period the fair value
of our derivative assets hedging the FIA and IUL index credit obligations
decreased due to general equity market conditions but the embedded derivative
liability related to the index credit obligation did not decrease in the same
proportion as the derivative assets because of non-equity market factors such as
interest rate and non-performance credit spread movements. Similarly, we could
also have poor operating results in a given period yet show net earnings (loss)
that is materially greater, if during such period the fair value of the
69
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derivative assets increased but the embedded derivative liability did not
increase in the same proportion as the derivative assets. We hedge our index
credits with a combination of static and dynamic strategies, which can result in
earnings volatility, the effects of which are generally likely to reverse over
time. Our management and board of directors review adjusted net earnings and net
earnings (loss) as part of their examination of our overall financial results.
However, these examples illustrate the significant impact derivative and
embedded derivative movements can have on our net earnings (loss). Accordingly,
our management performs a review and analysis of these items, as part of their
review of our hedging results each period.
Amounts attributable to the fair value accounting for derivatives hedging the
FIA and IUL index credits and the related embedded derivative liability
fluctuate from period to period based upon changes in the fair values of call
options purchased to fund the annual index credits, changes in the interest
rates and non-performance credit spreads used to discount the embedded
derivative liability, and the fair value assumptions reflected in the embedded
derivative liability. The accounting standards for fair value measurement
require the discount rates used in the calculation of the embedded derivative
liability to be based on risk-free interest rates adjusted for our
non-performance as of the reporting date. The impact of the change in fair
values of FIA-related derivatives, embedded derivatives and hedging costs has
been removed from net earnings (loss) in calculating adjusted net earnings.
Adjusted Return on Assets
Adjusted return on assets is calculated by dividing annualized adjusted net earnings by year-to-date AAUM. Return on assets is comprised of net investment income, less cost of funds, and less expenses (including operating expenses, interest expense and income taxes) consistent with our adjusted net earnings definition and related adjustments. Cost of funds includes liability costs related to cost of crediting on both deferred annuities and institutional products as well as other liability costs. Management considers this non-GAAP financial measure to be useful internally and to investors and analysts when assessing financial performance and profitability earned on AAUM.
Assets Under Management ("AUM")
AUM is a non-GAAP measure that we use to assess the rate of return on assets
available for reinvestment. AUM uses the following components:
(i)total invested assets at amortized cost, excluding derivatives, net of
reinsurance qualifying for risk transfer in accordance with GAAP;
(ii)related party loans and investments;
(iii)accrued investment income;
(iv)the net payable/receivable for the purchase/sale of investments, and
(v)cash and cash equivalents excluding derivative collateral at the end of the
period
Management considers this non-GAAP financial measure to be useful internally and to investors and analysts when assessing the rate of return on assets available for reinvestment.
Average Assets Under Management ("AAUM")
AAUM is calculated as AUM at the beginning of the period and the end of each month in the period, divided by the total number of months in the period plus one. Management considers this non-GAAP financial measure to be useful internally and to investors and analysts when assessing rate of return on assets available for reinvestment. Sales
Annuity, IUL, funding agreement and non-life contingent PRT sales are not
derived from any specific GAAP income statement accounts or line items and
should not be viewed as a substitute for any financial measure determined in
accordance with GAAP. Sales from these products are recorded as deposit
liabilities (i.e.,
70 -------------------------------------------------------------------------------- contractholder funds) within our Consolidated Financial Statements in accordance with GAAP. Life contingent PRT sales are recorded as premiums in revenues within the consolidated financial statements. Management believes that presentation of sales, as measured for management purposes, enhances the understanding of our business and helps depict longer term trends that may not be apparent in the results of operations due to the timing of sales and revenue recognition.
Total Equity excluding AOCI
Total equity excluding AOCI is based on total equity excluding the effect of AOCI. Since AOCI fluctuates from quarter to quarter due to unrealized changes in the fair value of available for sale investments, management considers this non-GAAP financial measure to provide useful supplemental information internally and to investors and analysts assessing the level of earned equity on total equity.
Yield on AAUM
Yield on AAUM is calculated by dividing annualized net investment income by
AAUM. Management considers this non-GAAP financial measure to be useful
internally and to investors and analysts when assessing the level of return
earned on AAUM.
Results of Operations
The results of operations for the years endedDecember 31, 2022 andDecember 31, 2021 , the period fromJune 1, 2020 toDecember 31, 2020 (following theJune 1, 2020 acquisition by FNF), and the Predecessor results for the period fromJanuary 1, 2020 toMay 31, 2020 were as follows (in millions): Period from Period from June January 1 to May Year ended 1 to December 31, 31, December 31, December 31, 2022 2021 2020 2020 Predecessor Revenues: Life insurance premiums and other fees$ 1,695 $ 1,395 $ 138 $ 90 Interest and investment income 1,655 1,852 743 403 Recognized gains and (losses), net (1,010) 715 352 (338) Total revenues 2,340 3,962 1,233 155 Benefits and expenses: Benefits and other changes in policy reserves 1,125 2,138 866 298 Personnel costs 157 129 65 34 Other operating expenses 102 105 75 75 Depreciation and amortization 329 484 123 (51) Interest expense 29 29 18 13 Total benefits and expenses 1,742 2,885 1,147 369 Pre-tax earnings (loss) 598 1,077 86 (214) Income tax expense (benefit) 117 220 (75) (14) Net earnings (loss) from continuing operations$ 481 $ 857 $ 161 $ (200) Earnings from discontinued operations, net of tax - 8 (25) (114) Net earnings (loss)$ 481 $ 865 $ 136 $ (314) Less: Preferred stock dividend - - - 8 Net earnings (loss) attributable to common shareholders$ 481 $ 865 $ 136 $ (322) 71
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The following table summarizes sales by product type of the Company, which are
not affected by the acquisition, (in millions):
Year ended
December 31, December 31, December 31,
2022 2021 2020
Fixed indexed annuities ("FIA") $ 4,550 $ 4,310 $ 3,459
Fixed rate annuities ("MYGA") 3,744 1,738 776
Total annuity 8,294 6,048 4,235
Indexed universal life ("IUL") 127 87 50
Funding agreements ("FABN/FHLB") 1,443 2,310 200
Pension risk transfer ("PRT") 1,390 1,147 -
Gross Sales $ 11,254 $ 9,592 $ 4,485
Sales attributable to flow reinsurance to third parties (2,248) (869) -
Net Sales $ 9,006 $ 8,723 $ 4,485
•Total annuity sales increased during the years ended December 31, 2022 and
December 31, 2021 , reflecting F&G's productive and expanding retail distribution
through independent agents, banks and broker dealers and pricing actions taken
to align to the macro environment.
•Funding agreements during the year ended
to the year ended
current rate environment. We launched the FABN Program in 2021.
•PRT sales increased during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , reflecting our first full year in the PRT market, and due to the nature of the transactions are also subject to fluctuation period to period. Revenues
Life insurance premiums and other fees
Life insurance premiums and other fees primarily reflect premiums on
life-contingent PRTs and traditional life insurance products, which are
recognized as revenue when due from the policyholder, as well as policy rider
fees primarily on FIA policies, the cost of insurance on IUL policies and
surrender charges assessed against policy withdrawals in excess of the
policyholder's allowable penalty-free amounts (up to 10% of the prior year's
value, subject to certain limitations). The following table summarizes the Life
insurance premiums and other fees, on the Consolidated Statements of Earnings
for the respective periods (in millions):
Period from June Period from January
Year ended 1 to December 31, 1 to May 31,
December 31, December 31,
2022 2021 2020 2020
Predecessor
Life-contingent pension risk transfer premiums
- $ - Traditional life insurance premiums 15 18 13 7 Life-contingent immediate annuity premiums 17 13 10 11 Surrender charges 58 33 13 10 Policyholder fees and other income 243 184 102 62
Life insurance premiums and other fees
$ 90 •Life-contingent pension risk transfer premiums for the year endedDecember 31, 2022 increased compared to the year endedDecember 31, 2021 , due to increased PRT premiums, reflecting our first full year in the PRT market. As noted above, PRT premiums are subject to fluctuation period to period. 72 -------------------------------------------------------------------------------- •Surrender charges increased for the years endedDecember 31, 2022 andDecember 31, 2021 , primarily reflecting an increase in market value adjustments ("MVA") assessed on certain surrendered FIA policies. A market value adjustment ("MVA") will apply in most states to any withdrawal that incurs a surrender charge, subject to certain exceptions. The MVA is based on a formula that takes into account changes in interest rates since contract issuance. Generally, if interest rates have risen, the MVA will decrease surrender value, whereas if rates have fallen, it will increase surrender value. In addition, surrender charges increases as a result of increased amounts assessed against policy withdrawals in excess of the policyholder's allowable penalty-free amounts primarily on our FIA policies. •Policyholder fees and other income increased for the years endedDecember 31, 2022 andDecember 31, 2021 , primarily due to increased GMWB rider fees, cost of insurance charges on IUL policies and IUL premium loads. GMWB rider fees are based on the policyholder's benefit base and are collected at the end of the policy year.
Interest and investment income
Below is a summary of interest and investment income (in millions):
Period from June Period from January
Year ended 1 to December 31, 1 to May 31,
December 31, December 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)
Net 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 years
ended December 31, 2022 and December 31, 2021 , the period from June 1, 2020 to
December 31, 2020 and the period from January 1, 2020 to May 31, 2020 ,
respectively.
Our AAUM and yield on AAUM are summarized as follows (annualized) (dollars in
millions) (see "Non-GAAP Financial Measures"):
Period from June Period from January
Year ended 1 to December 31, 1 to May 31,
December 31, December 31,
2022 2021 2020 2020
Predecessor
AAUM $ 40,069 $ 31,938 $ 27,322 $ 26,824
Yield on AAUM 4.13 % 5.80 % 4.66 % 3.60 %
73
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•The increases in AAUM for all periods reflect new business asset flows, offset
by net reinsurance and other activity.
•Interest and investment income was lower for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 primarily driven by$686 million of lower returns on alternative investments due to decreases in fair value of these investments (primarily limited partnerships), partially offset by$472 million from invested asset growth and$17 million of all other rate impacts.
•Interest and investment income was higher for the year ended
primarily driven by invested asset growth and higher returns on alternative
investments due to increases in fair value of these investments (primarily
limited partnerships).
•Interest and investment income of$743 million for the seven months period fromJun 1, 2020 toDecember 31, 2020 was primarily driven by$643 million in fixed maturity securities,$75 million of interest and investment income related to our investments in limited partnerships, and$50 million in mortgage loans, partially offset by$75 million in investment expenses. •Interest and investment income of$403 million for the 5 month period fromJanuary 1, 2020 toMay 31, 2020 was primarily driven by$426 million in fixed maturity securities and$36 million in mortgage loans, partially offset by$51 million in investment expenses and$37 million of investment losses on limited partnership.
Recognized gains and losses, net
Below is a summary of the major components included in recognized gains and
losses, net (in millions):
Period from
Period from June January 1 to May
Year ended 1 to December 31, 31,
December 31, December 31, 2020 2020
2022 2021
Predecessor
Net realized and unrealized (losses) gains on
fixed maturity available-for-sale securities,
equity securities and other invested assets $ (461) $ 57 $ 179 $ (121)
Change in allowance for expected credit losses (34) 4 (19) (23)
Net realized and unrealized (losses) gains on
certain derivatives instruments (857) 615 237 (212)
Change in fair value of reinsurance related
embedded derivatives 352 34 (53) 19
Change in fair value of other derivatives and
embedded derivatives (10) 5 8 (1)
Recognized gains and (losses), net $ (1,010) $ 715 $ 352 $ (338)
Recognized gains and losses are 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 period from January 1 to May 31, 2020 ,
respectively.
•For the year ended
include
securities and
result of mark-to-market losses).
•For the year ended
include
securities and
of mark-to-market losses).
•For the period from
(losses), net include
available-for-sale securities and
74 -------------------------------------------------------------------------------- on equity securities (as a result of mark-to-market gains). For the predecessor period fromJanuary 1, 2020 toMay 31, 2020 , recognized gains and (losses), net include$49 million of realized losses on fixed maturity available-for-sale securities and$70 million of unrealized losses on equity securities (as a result of mark-to-market losses).
•For all periods, the change in allowance for expected credit losses primarily
relates to available for sale securities.
•For all periods, net realized and unrealized gains (losses) on certain
derivative instruments primarily relate to the net realized and unrealized gains
(losses) on options and futures used to hedge FIA and IUL products, including
gains on option and futures expiration. See the table below for primary drivers
of gains (losses) on certain derivatives.
•The fair value of reinsurance related embedded derivative is based on the
change in fair value of the underlying assets held in the funds withheld ("FWH")
portfolio.
We utilize a combination of static (call options) and dynamic (long futures
contracts) instruments in our hedging strategy. A substantial portion of the
call options and futures contracts are based upon the S&P 500 Index with the
remainder based upon other equity, bond and gold market indices.
The components of the realized and unrealized gains (losses) on certain
derivative instruments hedging our indexed annuity and universal life products
are summarized in the table below (dollars in millions):
Period from June 1 to Period from January
Year ended December 31, 1 to May 31,
December 31,
2022 December 31, 2021 2020 2020
Predecessor
Call options:
Realized (losses) gains $ (170) $ 437 $ 62 $ 7
Change in unrealized (losses) gains (692) 160 167 (228)
Futures contracts:
(Losses) gains on futures contracts
expiration (6) 9 21 3
Change in unrealized gains (losses) (1) (1) (6) 5
Foreign currency forward:
Gains on foreign currency forward 11 10 (7) 1
Total net change in fair value $ (858) $ 615 $ 237 $ (212)
Year-to-Date Point-to-Point Change in S&P 500
Index during the periods (19) % 27 % 23 % (6) %
•Realized gains and losses on certain derivative instruments are directly
correlated to the performance of the indices upon which the call options and
futures contracts are based and the value of the derivatives at the time of
expiration compared to the value at the time of purchase. Gains (losses) on
option expiration reflect the movement during each period on options settled
during the respective period.
•The change in unrealized gains (losses) due to fair value of call options is
primarily driven by the underlying performance of the S&P 500 Index during each
respective period relative to the S&P 500 Index on the policyholder buy dates.
•The net change in fair value of the call options and futures contracts was
primarily driven by movements in the S&P 500 Index relative to the policyholder
buy dates.
75
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The average index credits to policyholders are as follows:
Period from June Period from January
Year ended 1 to December 31, 1 to May 31,
December 31,
2022 December 31, 2021 2020 2020
Predecessor
Average Crediting Rate 1 % 5 % 3 % 2 %
S&P 500 Index:
Point-to-point strategy 1 % 4 % 5 % 2 %
Monthly average strategy 2 % 3 % 2 % 3 %
Monthly point-to-point strategy - % 7 % - % 1 %
3 year high water mark 13 % 16 % 19 % 14 %
•Actual amounts credited to contractholder fund balances may differ from the
index appreciation due to contractual features in the FIA contracts and certain
IUL contracts (caps, spreads and participation rates), which allow us to manage
the cost of the options purchased to fund the annual index credits.
•The credits for the periods presented were based on comparing the S&P 500 Index
on each issue date in the period to the same issue date in the respective prior
year periods.
Benefits and expenses
Benefits and other changes in policy reserves
Below is a summary of the major components included in Benefits and other
changes in policy reserves (in millions):
Period from June Period from January
Year ended 1 to December 31, 1 to May 31,
December 31, December 31,
2022 2021 2020 2020
Predecessor
PRT agreements $ 1,365 $ 1,149 $ - $ -
FIA/IUL market related liability movements (1,010) (378) 317 (15)
Index credits, interest credited & bonuses 610 1,024 319 210
Annuity payments and other 160 343 230 103
Total benefits and other changes in policy
reserves $ 1,125 $ 2,138 $ 866 $ 298
•PRT agreements for the years ended
reflect our entrance into the PRT market in the second half of 2021. PRT
agreements are subject to fluctuation period to period.
•The FIA/IUL market related liability movements for all periods are mainly driven by changes in the equity markets, non-performance spreads, and risk-free rates during the respective periods. Additionally, 2021 includes the system implementation and assumption review process impacts discussed below. The change in risk free rates and non-performance spreads (decreased)/ increased the FIA market related liability by$(656) million ,$(74) million ,$268 million and$141 million during the years endedDecember 31, 2022 andDecember 31, 2021 , the period fromJune 1, 2020 toDecember 31, 2020 and the Predecessor period fromJanuary 1, 2020 toMay 31, 2020 , respectively. The remaining change in market value of the market related liability movements was driven by equity market impacts. See "Recognized gains and (losses)" above for summary and discussion of net unrealized gains (losses) on certain derivative instruments. •Annually, typically in the third quarter, we review assumptions associated with reserves for policy benefits and product guarantees. 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 76 -------------------------------------------------------------------------------- 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 . During the third quarter of 2021, we implemented a new actuarial valuation system, and 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 included refinements in the calculation of the fair value of the embedded derivative component of our fixed indexed annuities. These changes, taken together, resulted in a decrease in contractholder funds and future policy reserves of$397 million . •Index credits, interest credited & bonuses for the year endedDecember 31, 2022 were lower compared to the year endedDecember 31, 2021 and primarily reflected lower index credits on FIA policies as a result of market movement during the respective periods. Index credits, interest credited & bonuses for the year endedDecember 31, 2021 were higher compared with the combined periods fromJune 1, 2020 toDecember 31, 2020 and the Predecessor period fromJanuary 1, 2020 toMay 31, 2020 , and primarily reflected higher index credits on FIA policies as a result of market movement during the respective periods. Refer to average policyholder index discussion above for details on drivers.
Amortization of intangibles
Below is a summary of the major components included in depreciation and
amortization (in millions):
Period from June Period from January
Year ended 1 to December 31, 1 to May 31,
December 31, December 31,
2022 2021 2020 2020
Predecessor
Amortization of DAC, VOBA and DSI $ 353 $ 517 $ 131 $ (46)
Interest (57) (44) (22) (17)
Unlocking 4 (12) 2 11
Amortization of other intangible assets and
other depreciation 29 23 16 1
Total depreciation and amortization
$ (51) •Amortization of VOBA, DAC and DSI is based on current and future expected gross margins (pre-tax operating income before amortization) and includes the impacts of the assumption changes and system implementation discussed below. The amortization for each period presented is the result of AGPs in the respective periods. •Annually, typically in the third quarter, we review assumptions associated with the 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 to intangible assets of$47 million .
During the third quarter of 2021, we implemented a new actuarial valuation
system and as a result, our third quarter 2021 assumption updates include model
refinements and assumption updates resulting from the implementation. The
changes, taken together, increased amortization of intangibles by
77 --------------------------------------------------------------------------------
Other items affecting net earnings
Income tax expense (benefit)
Below is a summary of the major components included in income tax expense
(benefit) (dollars in millions):
Period from June 1 to Period from January
Year ended December 31, 1 to May 31,
December 31,
December 31, 2022 2021 2020 2020
Predecessor
Earnings from continuing operations before
taxes $ 598 $ 1,077 $ 86 $ (214)
Income tax expense (benefit) before
valuation allowance 90 234 (21) (41)
Change in valuation allowance 27 (14) (54) 27
Federal income tax expense (benefit) $ 117 $ 220 $ (75) $ (14)
Effective rate 20 % 20 % (87) % 7 %
•The income tax expense for the year ended December 31, 2022 was $117 million
compared to income tax expense of $220 million for the year ended December 31,
2021 . The effective tax rate was 20% for both years, which differs from the
statutory rate of 21% primarily due to favorable permanent tax adjustments.
•Income tax benefit for the period from June 1, 2020 to December 31, 2020 was
$75 million . The income tax benefit was primarily driven by the change in tax
status benefit recorded at December 31, 2020 and valuation allowance releases on
the current period activity in Front Street Re Cayman Ltd. ("FSRC") included in
continuing operations and the US non-life companies.
•Income tax benefit for the Predecessor period from
2020
allowance recorded on the ordinary deferred tax assets in FSRC included in
continuing operations, as well as the impact of low taxed international losses.
•See Note N Income Taxes to the Consolidated Financial Statements for further
information.
78
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Adjusted Net Earnings (See "Non-GAAP Financial Measures")
The table below shows the adjustments made to reconcile Net earnings from
continuing operations to Adjusted net earnings (in millions):
Period from
Period from June January 1 to May
Year ended 1 to December 31, 31,
December 31, December 31,
2022 2021 2020 2020
Predecessor
Net earnings from continuing operations
857 $ 161 $ (200) Less preferred stock dividend - - - (8) Net earnings (loss) from continuing operations attributable to common shareholders 481 857 161 (208) Non-GAAP adjustments: Recognized (gains) and losses, net Net realized and unrealized (gains) losses on fixed maturity available-for-sale securities, equity securities and other invested assets 446 (56) (176) 121 Change in allowance for expected credit losses 24 (5) 40 23 Change in fair value of reinsurance related embedded derivatives (352) (34) 53 (19) Change in fair value of other derivatives and embedded derivatives (1) (14) - 1 Recognized (gains) losses, net 117 (109) (83) 126 Indexed product related derivatives (354) (146) 123 195 Purchase price amortization 21 26 16 - Transaction costs and other non-recurring items (a) 10 (279) 21 37 Amortization of actuarial intangibles and SOP-03-1 reserve offset on non-GAAP adjustments 6 123 24 (97) Income taxes on non-GAAP adjustments 64 79 (29) (39) Adjusted net earnings$ 345 $ 551 $ 233 $ 14
(a) For the twelve months ended
favorable adjustment to benefits and other changes in policy reserves and
depreciation and amortization resulting from an actuarial system conversion
which reflects modeling enhancement and other refinements of
The commentary below is intended to provide additional information on the significant income and expense items that help explain the trends in our ANE for each time period, as we believe these items provide further clarity to the financial performance of the business. Those significant income and expense items are reported after actuarial intangibles and SOP 03-1 reserve offsets and taxes. •Adjusted net earnings of$345 million for the year endedDecember 31, 2022 includes alternative investments net investment income of$100 million . Alternative investments net investment income based on management's long-term expected return of approximately 10% was$265 million . Actual net investment income was lower due to decreases in fair value of these investments. Other significant income and expense items included in adjusted net earnings were$49 million income from actuarial assumption and reserve updates,$21 million income of CLO redemption gains and other income,$20 million of net income tax benefits, and$5 million of other expense. •Adjusted net earnings of$551 million for the twelve months endedDecember 31, 2021 includes alternative investments net investment income of$359 million . Alternative investments net investment income based on management's long-term expected return of approximately 10% was$169 million . Actual net investment income was higher due to increases in fair value of these investments. Other significant income and expense items included$46 million of CLO redemption gains and other income,$10 million income from net favorable mortality experience and other reserve changes, and$8 million income from actuarial intangibles unlocking. 79 -------------------------------------------------------------------------------- •Adjusted net earnings of$233 million for the period fromJune 1, 2020 toDecember 31, 2020 includes$14 million income from net favorable mortality experience and other reserve changes and$70 million income of other net favorable items, primarily related to a favorable income tax benefit. Actual alternative investment income was materially consistent with management's long-term expectation. •Adjusted net earnings of$14 million for the Predecessor period fromJanuary 1, 2020 toMay 31, 2020 includes alternative investments net investment loss of$23 million . Alternative investments net investment income based on management's long-term expected return of approximately 11% was$27 million . Actual net investment income was lower due to decreases in the fair value of these investments. Other significant income and expense items included$16 million primarily from tax valuation allowance expense. •.
Investment Portfolio
The types of assets in which we may invest are influenced by various state laws,
which prescribe qualified investment assets applicable to insurance companies.
Within the parameters of these laws, we invest in assets giving consideration to
four primary investment objectives: (i) maintain robust absolute returns;
(ii) provide reliable yield and investment income; (iii) preserve capital; and
(iv) provide liquidity to meet policyholder and other corporate obligations.
Our investment portfolio is designed to contribute stable earnings, excluding
short-term mark-to-market effects, and balance risk across diverse asset classes
and is primarily invested in high quality fixed income securities.
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As of December 31, 2022 and December 31, 2021 , the fair value of our investment
portfolio was approximately $41 billion and $39 billion , respectively, and was
divided among the following asset classes and sectors (dollars in millions):
December 31, 2022 December 31, 2021
Fair Value Percent Fair Value Percent
Fixed maturity securities, available for sale:
United States Government full faith and credit $ 32 - % $ 50 - %
United States Government sponsored entities 42 - % 74 - %
United States municipalities, states and
territories 1,410 3 % 1,441 4 %
Foreign Governments 148 - % 205 1 %
Corporate securities:
Finance, insurance and real estate 5,085 12 % 5,109 13 %
Manufacturing, construction and mining 737 2 % 932 2 %
Utilities, energy and related sectors 2,275 6 % 2,987 8 %
Wholesale/retail trade 2,008 5 % 2,627 7 %
Services, media and other 2,794 7 % 3,349 8 %
Hybrid securities 705 2 % 881 2 %
Non-agency residential mortgage-backed
securities 1,479 4 % 648 2 %
Commercial mortgage-backed securities 3,036 7 % 2,964 7 %
Asset-backed securities 7,245 18 % 4,550 12 %
Collateral loan obligations ("CLO") 4,222 10 % 4,145 11 %
Total fixed maturity available for sale
securities $ 31,218 76 % $ 29,962 77 %
Equity securities (a) 823 2 % 1,171 3 %
Limited partnerships:
Private equity 1,129 3 % 1,181 3 %
Real assets 431 1 % 340 1 %
Credit 867 2 % 829 2 %
Limited partnerships $ 2,427 6 % $ 2,350 6 %
Commercial mortgage loans 2,083 5 % 2,265 6 %
Residential mortgage loans 1,892 5 % 1,549 4 %
Other (primarily derivatives and company owned
life insurance) 809 2 % 1,305 3 %
Short term investments 1,556 4 % 373 1 %
Total investments $ 40,808 100 % $ 38,975 100 %
(a)Includes investment grade non-redeemable preferred stocks (
Insurance statutes regulate the type of investments that our life insurance subsidiaries are permitted to make and limit the amount of funds that may be used for any one type of investment. In light of these statutes and regulations, and our business and investment strategy, we generally seek to invest in (i) corporate securities rated investment grade by established nationally recognized statistical rating organizations (each, an "NRSRO"), (ii)U.S. Government and government-sponsored agency securities, or (iii) securities of comparable investment quality, if not rated. 81 -------------------------------------------------------------------------------- As ofDecember 31, 2022 andDecember 31, 2021 , our fixed maturity available-for-sale ("AFS") securities portfolio was approximately$31 billion and$30 billion , respectively. The following table summarizes the credit quality, by NRSRO rating, of our fixed income portfolio (dollars in millions): December 31, 2022 December 31, 2021 Rating Fair Value Percent Fair Value Percent AAA $ 1,358 4 % $ 660 2 % AA 2,297 7 % 2,181 7 % A 8,076 26 % 7,667 26 % BBB 8,158 26 % 10,462 35 % Not rated (a) 9,529 31 % 6,642 22 % Total investment grade 29,418 94 % 27,612 92 % BB 986 3 % 1,372 5 % B and below (b) 236 1 % 432 1 % Not rated (a) 578 2 % 546 2 % Total below investment grade 1,800 6 % 2,350 8 % Total $ 31,218 100 % $ 29,962 100 % (a)Securities denoted as not-rated by an NRSRO were classified as investment or non-investment grade according to the securities' respective NAIC designation (b)Includes$46 million and$68 million atDecember 31, 2022 andDecember 31, 2021 , respectively, of non-agency RMBS (as defined below) that carry a NAIC 1 designation. The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day credit quality assessment and valuation of securities owned by state regulated insurance companies. Insurance companies report ownership of securities to the SVO when such securities are eligible for regulatory filings. The SVO conducts credit analysis on these securities for the purpose of assigning an NAIC designation or unit price. Typically, if a security has been rated by an NRSRO, the SVO utilizes that rating and assigns an NAIC designation based upon the following system: NAIC Designation NRSRO Equivalent Rating 1 AAA/AA/A 2 BBB 3 BB 4 B 5 CCC and lower 6 In or near default The NAIC uses designation methodologies for non-agency RMBS, including RMBS backed by subprime mortgage loans and for CMBS. The NAIC's objective with the designation methodologies for these structured securities is to increase accuracy in assessing expected losses and to use the improved assessment to determine a more appropriate capital requirement for such structured securities. The NAIC assigns a NAIC designation based on the loss expectation for each security. Several of our RMBS securities carry a NAIC 1 designation while the NRSRO rating indicates below investment grade. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from such structured securities. In the tables below, we present the rating of structured securities based on ratings from the NAIC rating methodologies described above (which in some cases do not correspond to rating agency designations). All NAIC designations (e.g., NAIC 1-6) are based on the NAIC methodologies. 82 --------------------------------------------------------------------------------
The tables below present our fixed maturity securities by NAIC designation as of
December 31, 2022
NAIC Designation Amortized Cost Fair Value Percent of Total Fair Value
1 $ 21,917 $ 19,234 62 %
2 11,889 10,250 33 %
3 1,571 1,419 4 %
4 240 220 1 %
5 54 39 - %
6 52 56 - %
Total $ 35,723 $ 31,218 100 %
December 31, 2021
NAIC Designation Amortized Cost Fair Value Percent of Total Fair Value
1 $ 15,636 $ 15,848 54 %
2 10,779 11,441 38 %
3 1,603 1,850 6 %
4 567 669 2 %
5 80 93 - %
6 59 61 - %
Total $ 28,724 $ 29,962 100 %
Investment Industry Concentration
The tables below present the top ten industry categories of our fixed maturity and equity securities and FHLB common stock, including the fair value and percent of total fixed maturity and equity securities and FHLB common stock fair value as ofDecember 31, 2022 andDecember 31, 2021 (dollars in millions):
Percent of Total
Top 10 Industry Concentration Fair Value Fair Value
ABS Other $ 7,245 23 %
CLO securities 4,222 13 %
Whole loan collateralized mortgage obligation ("CMO") 3,655 12 %
Banking 2,855 9 %
Municipal 1,410 4 %
Electric 1,379 4 %
Life insurance 1,376 4 %
Technology 855 3 %
Healthcare 659 2 %
Commercial MBS 571 2 %
Total $ 24,227 76 %
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December 31, 2021
Percent of Total
Top 10 Industry Concentration Fair Value Fair Value
ABS Other $ 4,550 15 %
CLO securities 4,145 13 %
Banking 2,919 9 %
Whole loan collateralized mortgage obligation ("CMO") 2,622 8 %
Life insurance 1,795 6 %
Electric 1,701 6 %
Municipal 1,441 5 %
Healthcare 947 3 %
Technology 932 3 %
Other Financial Institutions 760 2 %
Total $ 21,812 70 %
The amortized cost and fair value of fixed maturity AFS securities by
contractual maturities as of
millions), are shown below. Actual maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations.
December 31, 2022 December 31, 2021
Amortized Cost Fair Value Amortized Cost Fair Value
Corporate, 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
Non-Agency RMBS Exposure
Our investment in non-agency RMBS securities is predicated on the conservative
and adequate cushion between purchase price and NAIC 1 rating, general lack of
sensitivity to interest rates, positive convexity to prepayment rates and
correlation between the price of the securities and the unfolding recovery of
the housing market.
The fair value of our investments in subprime and Alt-A RMBS securities was $40
million and $54 million as of December 31, 2022 , respectively, and $52 million
and $75 million as of December 31, 2021 , respectively. As of December 31, 2022
and December 31, 2021 , approximately 91% and 94%, respectively, of the subprime
and Alt-A RMBS exposures were rated NAIC 2 or higher.
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ABS and CLO Exposures
Our ABS exposures are largely diversified by underlying collateral and issuer
type. Our CLO exposures are generally senior tranches of CLOs which have
leveraged loans as their underlying collateral.
As ofDecember 31, 2022 , the CLO and ABS positions were trading at a net unrealized loss position of$236 million and$499 million , respectively. As ofDecember 31, 2021 , the CLO and ABS positions were trading at a net unrealized gain position of$145 million and$37 million , respectively.
Municipal Bond Exposure
Our municipal bond exposure is a combination of general obligation bonds (fair value of$188 million and$258 million and an amortized cost of$231 million and$247 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively) and special revenue bonds (fair value of$1,017 million and$1,183 and an amortized cost of$1,248 million and$1,138 as ofDecember 31, 2022 andDecember 31, 2021 , respectively). Across all municipal bonds, the largest issuer represented 6% and 7% of the category as ofDecember 31, 2022 andDecember 31, 2021 , respectively, less than 1% of the entire portfolio and is rated NAIC 1. Our focus within municipal bonds is on NAIC 1 rated instruments, and 96% of our municipal bond exposure is rated NAIC 1 as ofDecember 31, 2022 .
Mortgage Loans
Commercial Mortgage Loans
We diversify our commercial mortgage loans ("CMLs") 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 level to secure the related debt. LTV and DSC
ratios are utilized to assess the risk and quality of CMLs. As of December 31,
2022 and December 31, 2021 , our mortgage loans on real estate portfolio had a
weighted average DSC ratio of 2.3 times and 2.4 times, respectively, and a
weighted average LTV ratio of 57% and 56%, respectively.
We consider a CML delinquent when a loan payment is greater than 30 days past
due. For mortgage loans that are determined to require foreclosure, the carrying
value is reduced to the fair value of the underlying collateral, net of
estimated costs to obtain and sell at the point of foreclosure. At December 31,
2022 we had one CML that was delinquent in principal or interest payments and
none in the process of foreclosure. At December 31, 2021 we had no CMLs that
were delinquent in principal or interest payments or in process of foreclosure.
See Note C Investments to the Consolidated Financial Statements included in this
report for additional information on our CMLs, including our distribution by
property type, geographic region, LTV and DSC ratios.
Residential Mortgage Loans
Our residential mortgage loans are closed end, amortizing loans and 100% of the properties are inthe United States . We diversify our RML portfolio by state to attempt to reduce concentration risk. RMLs have a primary credit quality indicator of either a performing or nonperforming loan. We define nonperforming RMLs as those that are 90 or more days past due and/or in nonaccrual status. Loans are placed on nonaccrual status when they are over 90 days delinquent. If a loan becomes over 90 days delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current can be put in place. See Note C Investments to the Consolidated Financial Statements included in this Annual Report for additional information on our RMLs. 85 --------------------------------------------------------------------------------
Unrealized Losses
The amortized cost and fair value of the fixed maturity securities and the
equity securities that were in an unrealized loss position as of
2022
December 31, 2022
Allowance for
Amortized Expected Unrealized
Number of Securities Cost Credit Losses Losses Fair Value
Fixed maturity securities, available
for sale:
United States Government full faith and
credit 6 $
34 $ - $ (2)
United States Government sponsored
agencies
58 39 - (4) 35United States municipalities, states and territories 167 1,590 - (289) 1,301 Foreign Governments 44 169 - (37) 132 Corporate securities: Finance, insurance and real estate 526 5,586 (15) (876) 4,695 Manufacturing, construction and mining 120 850 - (160) 690 Utilities, energy and related sectors 333 2,825 - (644) 2,181 Wholesale/retail trade 316 2,418 - (532) 1,886 Services, media and other 360 3,354 - (783) 2,571 Hybrid securities 43 706 - (84) 622 Non-agency residential mortgage-backed securities 241 1,353 (5) (105) 1,243 Commercial mortgage-backed securities 365 2,850 - (284) 2,566 Asset-backed securities 1,147 11,511 (1) (770) 10,740 Total fixed maturity available for sale securities 3,726 33,285 (21) (4,570) 28,694 Equity securities 59 879 - (174) 705 Total investments 3,785$ 34,164 $ (21) $ (4,744) $ 29,399 December 31, 2021 Allowance for Amortized Expected Unrealized Number of Securities Cost Credit Losses Losses Fair Value Fixed maturity securities, available for sale: United States Government full faith and credit 9 $
36 $ - $ -
United States Government sponsored
agencies
41 42 - (1) 41United States municipalities, states and territories 50 503 - (11) 492 Foreign Governments 28 27 - - 27 Corporate securities: Finance, insurance and real estate 366 1,365 - (31) 1,334 Manufacturing, construction and mining 97 281 - (3) 278 Utilities, energy and related sectors 280 1,243 - (46) 1,197 Wholesale/retail trade 313 1,188 - (33) 1,155 Services, media and other 339 1,486 - (39) 1,447 Hybrid securities 3 3 - - 3 Non-agency residential mortgage-backed securities 46 316 (2) (3) 311 Commercial mortgage-backed securities 89 616 (1) (11) 604 Asset-backed securities 375 4,603 (2) (38) 4,563 Total fixed maturity available for sale securities 2,036 11,709 (5) (216) 11,488 Equity securities 20 259 - (33) 226 Total investments 2,056$ 11,968 $ (5) $ (249) $ 11,714 86
-------------------------------------------------------------------------------- The gross unrealized loss position on the fixed maturity available-for-sale fixed and equity portfolio was$4,744 million and$249 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively. Most components of the portfolio exhibited price depreciation caused by higher treasury rates and wider spreads. The total amortized cost of all securities in an unrealized loss position was$34,164 million and$11,968 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively. The average market value/book value of the investment category with the largest unrealized loss position was 84% for finance, insurance and real estate as ofDecember 31, 2022 . In the aggregate, finance, insurance and real estate represented 18% of the total unrealized loss position as ofDecember 31, 2022 . The average market value/book value of the investment category with the largest unrealized loss position was 96% for utilities, energy and related sectors as ofDecember 31, 2021 . In aggregate, utilities, energy and related sectors represented 18% of the total unrealized loss position as ofDecember 31, 2021 . The amortized cost and fair value of fixed maturity available for sale securities under watch list analysis and the number of months in a loss position with investment grade securities (NRSRO rating of BBB/Baa or higher) as ofDecember 31, 2022 andDecember 31, 2021 , were as follows (dollars in millions): December 31, 2022 Allowance for Gross Unrealized Number of Securities Amortized Cost Fair Value Credit Loss Losses Investment grade: Less than six months 6 $ 5$ 3 $ - $ (2) Six months or more and less than twelve months 49 299 200 - (99) Twelve months or greater 76 969 634 - (335) Total investment grade 131 1,273 837 - (436) Below investment grade: Less than six months 1 32 13 15 (4) Six months or more and less than twelve months 12 124 94 - (30) Twelve months or greater 2 6 4 - (2) Total below investment grade 15 162 111 15 (36) Total 146$ 1,435 $ 948 $ 15$ (472) December 31, 2021 Allowance for Gross Unrealized Number of Securities Amortized Cost Fair Value Credit Loss Losses Investment grade: Less than six months 4 $ 82$ 79 $ - $ (3) Six months or more and less than twelve months 2 34 32 - (2) Twelve months or greater - - - - - Total investment grade 6 116 111 - (5) Below investment grade: Less than six months - - - - - Six months or more and less than twelve months - - - - - Twelve months or greater 2 16 14 - (2) Total below investment grade 2 16 14 - (2) Total 8 $ 132$ 125 $ - $ (7)
Expected Credit Losses and
We prepare a watch list to identify securities to evaluate for expected credit
losses. Factors used in preparing the watch list include fair values relative to
amortized cost, ratings and negative ratings actions and other factors. Detailed
analysis is performed for each security on the watch list to further assess the
presence of credit impairment
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loss indicators and, where present, calculate an allowance for expected credit
loss or direct write-down of a security's amortized cost.
AtDecember 31, 2022 , our watch list included 146 securities in an unrealized loss position with an amortized cost of$1,435 million , allowance for expected credit losses of$15 million , unrealized losses of$472 million and a fair value of$948 million . AtDecember 31, 2021 , our watch list included seven securities in an unrealized loss position with an amortized cost of$132 million , allowance for expected credit losses of$0 million , unrealized losses of$7 million and a fair value of$125 million .
The watch list excludes structured securities as we have separate processes to
evaluate the credit quality on the structured securities.
There were 64 and 36 structured securities with a fair value of$162 million and$45 million to which we had potential credit exposure as ofDecember 31, 2022 andDecember 31, 2021 , respectively. Our analysis of these structured securities, which included cash flow testing, resulted in allowances for expected credit losses of$16 million and$8 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively.
Exposure to Sovereign Debt and Certain Other Exposures
Our investment portfolio had an immaterial amount of direct exposure to European sovereign debt as ofDecember 31, 2022 andDecember 31, 2021 , respectively. We have no exposure to investments inRussia orUkraine and de minimis investments in peripheral countries in the region.
Interest and Investment Income
For discussion regarding our net investment income and net investment gains
(losses) refer to Note C Investments to the Consolidated Financial Statements
included in this Annual Report.
For additional information regarding our AFS securities, including the amortized cost, gross unrealized gains (losses), and fair value as well as the amortized cost and fair value of fixed maturity AFS securities by contractual maturities, as ofDecember 31, 2022 andDecember 31, 2021 , refer to Note C Investments to the Consolidated Financial Statements included in this Annual Report.
Concentrations of Financial Instruments
For certain information regarding our concentrations of financial instruments, refer to Note C Investments to the Consolidated Financial Statements included in this Annual Report. Derivatives
We are exposed to credit loss in the event of nonperformance by our
counterparties on call options. We attempt to reduce this credit risk by
purchasing such options from large, well-established financial institutions.
We also hold cash and cash equivalents received from counterparties for call option collateral, as well asU.S. Government securities pledged as call option collateral, if our counterparty's net exposures exceed pre-determined thresholds. 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 reduce the negative interest cost associated with cash collateral posted from counterparties under various ISDA agreements by reinvesting derivative cash collateral. This program permits collateral cash received to be invested in short termTreasury securities, bank deposits and commercial paper rated A1/P1, which are included in Cash and cash equivalents in the accompanying Consolidated Balance Sheets. 88
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See Note D Derivatives to the Consolidated Financial Statements included in this
Annual Report for additional information regarding our derivatives and our
exposure to credit loss on call options.
Liquidity and Capital Resources
Liquidity refers to the ability of an enterprise to generate adequate amounts of cash from its normal operations to meet cash requirements with a prudent margin of safety. Our principal sources of cash flow from operating activities are annuity considerations, insurance premiums, and fees and investment income. We also generate cash inflows from investing activities resulting from maturities and sales of invested assets and from financing activities including inflows on our investment-type products and proceeds from borrowing activities. Our operating activities provided cash of$3,171 million and$1,871 million for the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. When considering our liquidity and cash flow, it is important to distinguish between the needs of our insurance subsidiaries and the needs of the holding company,F&G Annuities & Life, Inc. As a holding company with no operations of its own,F&G Annuities & Life, Inc. derives its cash primarily from its insurance subsidiaries andCF Bermuda Holdings Ltd. ("CF Bermuda"), aBermuda exempted limited liability company and a wholly owned direct subsidiary of the Company, a downstream holding company that provides additional sources of liquidity. Dividends from our insurance subsidiaries flow through CF Bermuda toF&G Annuities & Life, Inc. . F&G Cayman Re, a licensed class D insurer in theCayman Islands and a wholly owned direct subsidiary of the Company, could also provide dividends directly toF&G Annuities & Life, Inc. The sources of liquidity of the holding company are principally comprised of dividends from subsidiaries, lines of credit (at theF&G Annuities & Life, Inc. level), existing surplus notes, investment income on holding company assets and the ability to raise long-term public financing under anSEC -filed registration statement or private placement offering. These sources of liquidity and cash flow support the general corporate needs of the holding company, interest and debt service, funding acquisitions and investment in core businesses. Our cash flows associated with collateral received from and posted with counterparties change as the market value of the underlying derivative contract changes. As the value of a derivative asset declines (or increases), the collateral required to be posted by our counterparties would also decline (or increase). Likewise, when the value of a derivative liability declines (or increases), the collateral we are required to post to our counterparties would also decline (or increase).
Cash Requirements. Our current cash requirements include personnel costs,
operating expenses, benefit payments, funding agreement payments, taxes,
payments of interest and principal on our debt, capital expenditures, business
acquisitions, stock repurchases and dividends on our common stock.
As ofDecember 31, 2022 andDecember 31, 2021 , we had cash and cash equivalents of$960 million and$1,533 million , respectively, short term investments of$1,556 million and$373 million , respectively, and as ofDecember 31, 2022 available capacity under our revolving credit facility with FNF of$200 million (the "FNF Credit Facility"). No amounts were outstanding under this revolving note agreement as ofDecember 31, 2022 orDecember 31, 2021 . We continually assess our capital allocation strategy, including decisions relating to the amount of our dividend, if any, reducing debt, investing in growth of our subsidiaries, making acquisitions and/or conserving cash. We believe that all anticipated cash requirements for current operations will be met from internally generated funds, through cash dividends from subsidiaries, cash generated by investment securities, potential sales of non-strategic assets, potential issuances of additional debt or equity securities, and borrowings on the FNF Credit Facility. Our short-term and long-term liquidity requirements are monitored regularly to ensure that we can meet our cash requirements. We forecast the needs of all of our subsidiaries and periodically review their short-term and long-term projected sources and uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying such forecasts. Refer to Financing arrangements below for further information regarding our borrowings. Our two significant sources of internally generated funds are dividends and other payments from our subsidiaries. As a holding company, we receive cash from our subsidiaries in the form of dividends and as reimbursement for operating and other administrative expenses we incur. The reimbursements are paid within the guidelines of management agreements among us and our subsidiaries. As discussed below, our insurance subsidiaries are restricted by state regulation and other laws in their ability to pay dividends and make distributions. 89 --------------------------------------------------------------------------------
As of
restricted from dividend payments without prior approval from the relevant
departments of insurance.
The maximum dividend permitted by law is not necessarily indicative of an insurer's actual ability to pay dividends, which may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer's ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends.
Dividend and Other Distribution Payment Limitations
The insurance laws ofIowa andNew York regulate the amount of dividends that may be paid in any year byFGL Insurance andFGL NY Insurance , respectively. Likewise, the insurance laws ofBermuda limit the maximum amount of annual dividends and distributions that may be paid or distributed by F&G Life Re without prior regulatory approval and those of theCayman 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. Please refer to "Item 1. Business" and Note L Insurance Subsidiary Financial Information and Regulatory Matters to the Consolidated Financial Statements, included in this Annual Report, for additional details on dividends from insurance subsidiaries, statutory capital and risk-based capital.
Cash flow from our operations
Cash flow from our operations will be used for general corporate purposes
including to reinvest in operations, repay debt, pay dividends, repurchase
stock, pursue other strategic initiatives and/or conserve cash.
Operating Cash Flow. Our cash flows provided by (used in) operations for the years endedDecember 31, 2022 andDecember 31, 2021 , for the period fromJune 1, 2020 toDecember 31, 2020 (following theJune 1, 2020 acquisition by FNF), and for the Predecessor period fromJanuary 1, 2020 toMay 31, 2020 were$3,171 million ,$1,871 million ,$287 million , and$(224) million , respectively. The primary cash inflows from operating activities include net investment income and insurance premiums. The primary cash outflows from operating activities are comprised of benefit payments and operating expenses. Cash provided by operations for the years endedDecember 31, 2022 andDecember 31, 2021 included approximately$1,300 million and$840 million of cash received for PRT transactions, respectively, included in the change in future policy benefits, reflecting our expansion into the PRT institutional market during 2021. Investing Cash Flows. Our cash used in investing activities for the years endedDecember 31, 2022 andDecember 31, 2021 , for the period fromJune 1, 2020 toDecember 31, 2020 , and for the Predecessor period fromJanuary 1, 2020 toMay 31, 2020 were$9,370 million ,$6,862 million ,$1,865 million ,$724 million , respectively. The primary cash inflows from investing activities are the proceeds from sales, calls, maturities and redemptions of investments, including those resulting from our portfolio repositioning. The primary cash outflows from investing activities are the purchases of fixed maturity securities and other investments. Cash used in investing activities for the years endedDecember 31, 2022 andDecember 31, 2021 included purchases of fixed maturity securities and other investments associated with investing the cash received from FABN transactions, generating from financing cash flows and PRT transactions, generated from operating activities, reflecting our expansion into institutional markets during 2021, as well as cash received from borrowings generated from financing activities in both periods. Financing Cash Flows. Our cash flows provided by financing activities for the years endedDecember 31, 2022 andDecember 31, 2021 , for the period fromJune 1, 2020 toDecember 31, 2020 , and for the Predecessor results for the period fromJanuary 1, 2020 toMay 31, 2020 were$5,626 million ,$5,635 million ,$1,640 million and$877 million , respectively. The primary cash inflows from financing activities are inflows on our investment-type products and proceeds from borrowing activities. The primary cash outflows from financing activities are withdrawals on our investment-type products and repayments of outstanding borrowings. Cash provided by financing activities for the years endedDecember 31, 2022 andDecember 31, 2021 also included proceeds from revolving credit borrowings of$550 million in 2022 and from a promissory note with FNF for$400 million used to fund our continued growth. Cash provided by financing activities for the years endedDecember 31, 2022 andDecember 31, 2021 included approximately$700 million and$1,900 million , respectively, of net cash received for FABN transactions, reflecting our expansion into the FABN institutional market during 2021. 90 -------------------------------------------------------------------------------- Financing Arrangements. AtDecember 31, 2022 , we had outstanding (i)$550 million of borrowings under an unsecured revolving credit agreement withBank of America, N.A ., as administrative agent, the lenders and guarantors party thereto and the other parties thereto (the "Credit Agreement") and (ii)$550 million aggregate principal amount of 5.50% senior notes due 2025 (the "5.50% F&G Notes"). OnJanuary 13, 2023 , we completed the issuance and sale of$500 million aggregate principal amount of our 7.40% Senior Notes due 2028 (the "7.40% F&G Notes"). As ofDecember 31, 2022 , the revolving credit facility was fully drawn. A net partial revolver paydown of$35 million was made onJanuary 6, 2023 and, onFebruary 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 description of our financing arrangements see Note E Notes Payable to the Consolidated Financial Statements included in this Annual Report.
The Credit Agreement imposes significant operating and financial restrictions,
including financial covenants, and the Credit Agreement and the indenture
governing the 5.50% F&G Notes limit, among other things, our and our
subsidiaries' ability to:
•incur or assume additional indebtedness, including guarantees;
•incur or assume liens;
•engage in mergers or consolidations;
•convey, transfer, lease or dispose of assets;
•make certain investments;
•enter into transactions with affiliates;
•declare or make any dividend payments or distributions or repurchase capital
stock or other equity interests;
•change the nature of our business materially,
•make changes in accounting treatment or reporting practices that affect the
calculation of financial covenants, or change our fiscal year; and
•enter into certain agreements that would restrict the ability of subsidiaries
to make payments to us.
As of
OnDecember 29, 2020 , we entered into a revolving note agreement with FNF for up to$200 million capacity (the "FNF Credit Facility") to be used for working capital and other general corporate purposes. No amounts were outstanding under this revolving note agreement as ofDecember 31, 2022 orDecember 31, 2021 . Obligations - Contractual and Other. As ofDecember 31, 2022 , our required annual payments relating to contractual and other obligations were as follows: 2023 2024 2025 2026 2027 Thereafter Total Notes payable principal repayment$ 550 $ -$ 550 $ - $ - $ -$ 1,100 Operating lease payments 2 2 2 2 2 5 15 Annuity and universal life products 4,044 3,775 4,908 3,653 3,988 29,341 49,709 Pension risk transfer annuity payments 397 383 370 357 343 4,308 6,158 Funding agreements (FABN/FHLB) 760 908 761 816 661 878 4,784 Interest on fixed rate notes payable 30 30 15 - - - 75 Total$ 5,783 $ 5,098 $ 6,606 $ 4,828 $ 4,994 $ 34,532 $ 61,841
Equity and Preferred Security Investments. Our equity and preferred security
investments may be subject to significant volatility. Currently prevailing
accounting standards require us to record the change in fair value of
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equity and preferred security investments held as of any given period end within
earnings. Our results of operations in future periods are anticipated to be
subject to such volatility.
Off-Balance Sheet Arrangements. Throughout our history, we have entered in indemnifications in the ordinary course of business with our customers, suppliers, service providers, business partners and in certain instances, when we sold businesses. Additionally, we have indemnified our directors and officers who are, or were, serving at our request in such capacities. Although the specific terms or number of such arrangements is not precisely known due to the extensive history of our past operations, costs incurred to settle claims related to these indemnifications have not been material to our financial statements. We have no reason to believe that future costs to settle claims related to our former operations will have a material impact on our financial position, results of operations or cash flows. We have unfunded investment commitments as ofDecember 31, 2022 andDecember 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. Please refer to Note C Investments and Note F Commitments and Contingencies to the Consolidated Financial Statements included in this Annual Report for additional details on unfunded investment commitments. FHLB Collateral. We are currently a member of the FHLB and are required to maintain a collateral deposit that backs any funding agreements issued. We use these funding agreements as part of a spread enhancement strategy. We have the ability to obtain funding from the FHLB based on a percentage of the value of our assets, subject to the availability of eligible collateral. Collateral is pledged based on the outstanding balances of FHLB funding agreements. The amount of funding varies based on the type, rating and maturity of the collateral posted to the FHLB. Generally,U.S. government agency notes, mortgage-backed securities, municipal bonds, and commercial and residential whole loans are pledged to the FHLB as collateral. Market value fluctuations resulting from changes in interest rates, spreads and other risk factors for each type of asset are monitored and additional collateral is either pledged or released as needed. Our borrowing capacity under these credit facilities does not have an expiration date as long as we maintain a satisfactory level of creditworthiness based on the FHLB's credit assessment. As ofDecember 31, 2022 andDecember 31, 2021 , we had$1,983 million and$1,543 million , respectively, in FHLB non-putable funding agreements included under Contractholder Funds on our Consolidated Balance Sheet. As ofDecember 31, 2022 andDecember 31, 2021 , we had assets with a fair value of approximately$3,387 million and$2,469 million , respectively, which collateralized the FHLB funding agreements. Assets pledged to the FHLB are included in fixed maturities, AFS, on our Consolidated Balance Sheets. Collateral-Derivative Contracts. Under the terms of our ISDA agreements, we may receive from, or deliver to, counterparties collateral to assure that all terms of the ISDA agreements will be met with regard to the Credit Support Annex ("CSA"). The terms of the CSA call for us to pay interest on any cash received equal to the federal funds rate. As ofDecember 31, 2022 andDecember 31, 2021 ,$219 million and$790 million , respectively, of collateral was posted by our counterparties as they did not meet the net exposure thresholds. Collateral requirements are monitored on a daily basis and incorporate changes in market values of both the derivatives contract as well as the collateral pledged. Market value fluctuations are due to changes in interest rates, spreads and other risk factors.
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