Newswires
Part II, Item 7. 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 should be read in conjunction with "Selected Financial Data" and our annual financial statements included elsewhere herein. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Actual results may differ materially from those discussed in the forward-looking statements as a result of various factors. Factors that could or do contribute to these differences include those factors discussed below and elsewhere in this Form 10-K, particularly under the captions "Risk Factors" and "Note Regarding Forward-Looking Statements and Information." Executive Summary Overview We are one of America's leading financial services companies, providing: (i) advice and solutions for helping Americans set and meet their retirement goals and protect and transfer their wealth across generations; and (ii) a wide range of investment management insights, expertise and innovations to drive better investment decisions and outcomes for clients worldwide. We manage our business through four segments:Individual Retirement, Group Retirement, Investment Management and Research, and Protection Solutions. We report certain activities and items that are not included in these segments in Corporate and Other. See Note 19 of the Notes to these Consolidated Financial Statements for further information on our segments. We benefit from our complementary mix of businesses. This business mix provides diversity in our earnings sources, which helps offset fluctuations in market conditions and variability in business results, while offering growth opportunities.
Reinsurance of Legacy Variable Annuity Block and Sale of Runoff Variable Annuity
Reinsurance Entity
OnJune 1, 2021 , Holdings completed the sale of CS Life to VIAC pursuant to the Master Transaction Agreement, among the Company, VIAC and, solely with respect to Article XIV thereof, Venerable. Pursuant to the Master Transaction Agreement, immediately prior to the closing of the Venerable Transaction, CS Life effected the recapture of all of the business that was ceded to the Reinsurance Subsidiary, and sold 100% of the equity of the Reinsurance Subsidiary to another wholly owned subsidiary of the Company. Immediately following the closing of the Venerable Transaction, CS Life and Equitable Financial entered into a the Reinsurance Agreement, pursuant to which Equitable Financial ceded to CS Life, on a combined coinsurance and modified coinsurance basis the Block, comprised of non-New York "Accumulator" policies containing fixed rate Guaranteed Minimum Income Benefit and/or Guaranteed Minimum Death Benefit guarantees.
In addition, upon the completion of the Venerable Transaction, EIMG acquired an
approximate 9.09% equity interest in Venerable's parent holding company,
Capital Company LLC
member to the
COVID-19 Impact
We continue to closely monitor developments related to the COVID-19 pandemic. The COVID-19 pandemic has negatively impacted theU.S. and global economies and financial markets continue to experience significant volatility as the pandemic evolves. As a financial services company, factors such as the volatility and strength of equity markets, interest rates, 72 -------------------------------------------------------------------------------- Table of Contents consumer spending, and government debt and spending all affect the business and economic environment and, ultimately, the amount and profitability of our business. The ongoing economic impact and the potential for continued volatility and declines in the capital markets could have a significant adverse effect on our business, results of operations and financial condition, particularly if economic activity and financial markets do not recover or recover slowly. The pandemic and related economic impacts could adversely affect demand for our products and services and our investment returns. The profitability of many of our retirement, protection and investment products depends in part on the value of the AUM supporting them, which could decline substantially depending on any of the foregoing conditions. In addition, the growing number of COVID-19 related deaths could have an adverse effect on our insurance business due to increased mortality and morbidity rates. To date, COVID-19 related impacts, including adverse mortality experience, have been manageable and below initial expectations. Efforts to prevent the spread of COVID-19 have affected our business directly in a number of ways, including through the temporary closures of many businesses and schools and the institution of social distancing requirements in many states and local communities. In response to the pandemic, we have adapted our processes to meet client needs. For example, we modified our underwriting policies to offer a fluid-less, touchless process to help more clients access the protection they need. In addition, we accelerated our digital adoption programs, leading to improved outcomes for clients, advisors, and the Company. Given the challenges over the last year our advisors have faced in engaging with our educator clients, we have developed digital tools and enhanced our remote engagement, which is resulting in improved retention and increases in retirement plan contributions. While the COVID-19 pandemic significantly affected the capital markets and economy, we believe the actions we have previously taken help assure that our economic balance sheet is protected from interest rate and equity declines. These actions include redesigning our product portfolio to concentrate on offering less capital intensive products and implementing a hedging strategy that manages and protects against the economic risks associated with our in-force GMxB products. In addition to our hedging strategy, we employ various other methods to manage the risks of our in-force variable annuity products, including reinsurance, asset-liability matching, volatility management tools within the Separate Accounts and an active in-force management program, including buyout offers for certain products. Due to the General Account's exposure toU.S. government bonds and credit quality of the portfolio, we feel that our balance sheet is well positioned to withstand the extreme volatility in the capital markets. While the COVID-19 pandemic has negatively impacted our business and financial results, the extent and nature of its full financial impact cannot reasonably be estimated at this time due to developments that are still highly uncertain, including the severity and duration of the pandemic, actions taken by governmental authorities and other third parties in response to the pandemic and the availability and efficacy of vaccines against COVID-19 and its variants. For additional information regarding the potential impacts of the COVID-19 pandemic, see "Risk Factors-Risks Relating to Conditions in the Financial Markets and Economy-The coronavirus (COVID-19) pandemic."
Revenues
Our revenues come from three principal sources:
•fee income derived from our retirement and protection products and our
investment management and research services;
•premiums from our traditional life insurance and annuity products; and
•investment income from our General Account investment portfolio.
Our fee income varies directly in relation to the amount of the underlying AV or
benefit base of our retirement and protection products and the amount of AUM of
our Investment Management and Research business. AV and AUM, each as defined in
"Key Operating Measures," are influenced by changes in economic conditions,
primarily equity market returns, as well as net flows. Our premium income is
driven by the growth in new policies written and the persistency of our in-force
policies, both of which are influenced by a combination of factors, including
our efforts to attract and retain customers and market conditions that influence
demand for our products. Our investment income is driven by the yield on our
General Account investment portfolio and is impacted by the prevailing level of
interest rates as we reinvest cash associated with maturing investments and net
flows to the portfolio.
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Benefits and Other Deductions
Our primary expenses are:
•policyholders' benefits and interest credited to policyholders' account
balances;
•sales commissions and compensation paid to intermediaries and advisors that
distribute our products and services; and
•compensation and benefits provided to our employees and other operating
expenses.
Policyholders' benefits are driven primarily by mortality, customer withdrawals, and benefits which change in response to changes in capital market conditions. In addition, some of our policyholders' benefits are directly tied to the AV and benefit base of our variable annuity products. Interest credited to policyholders varies in relation to the amount of the underlying AV or benefit base. Sales commissions and compensation paid to intermediaries and advisors vary in relation to premium and fee income generated from these sources, whereas compensation and benefits to our employees are more constant and impacted by market wages and decline with increases in efficiency. Our ability to manage these expenses across various economic cycles and products is critical to the profitability of our company.
Net Income Volatility
We have offered and continue to offer variable annuity products with GMxB features. The future claims exposure on these features is sensitive to movements in the equity markets and interest rates. Accordingly, we have implemented hedging and reinsurance programs designed to mitigate the economic exposure to us from these features due to equity market and interest rate movements. Changes in the values of the derivatives associated with these programs due to equity market and interest rate movements are recognized in the periods in which they occur while corresponding changes in offsetting liabilities not measured at fair value are recognized over time. This results in net income volatility as further described below. See "-Significant Factors Impacting Our Results-Impact of Hedging and GMxB Reinsurance on Results." In addition to our dynamic hedging strategy, we have static hedge positions designed to mitigate the adverse impact of changing market conditions on our statutory capital. We believe this program will continue to preserve the economic value of our variable annuity contracts and better protect our target variable annuity asset level. However, these static hedge positions increase the size of our derivative positions and may result in higher net income volatility on a period-over-period basis. Due to the impacts on our net income of equity market and interest rate movements and other items that are not part of the underlying profitability drivers of our business, we evaluate and manage our business performance using Non-GAAP Operating Earnings, a non-GAAP financial measure that is intended to remove these impacts from our results. See "-Key Operating Measures-Non-GAAP Operating Earnings."
Significant Factors Impacting Our Results
The following significant factors have impacted, and may in the future impact,
our financial condition, results of operations or cash flows.
Impact of Hedging and GMxB Reinsurance on Results
We have offered and continue to offer variable annuity products with GMxB
features. The future claims exposure on these features is sensitive to movements
in the equity markets and interest rates. Accordingly, we have implemented
hedging and reinsurance programs designed to mitigate the economic exposure to
us from these features due to equity market and interest rate movements. These
programs include:
•Variable annuity hedging programs. We use a dynamic hedging program (within
this program, generally, we reevaluate our economic exposure at least daily and
rebalance our hedge positions accordingly) to mitigate certain risks associated
with the GMxB features that are embedded in our liabilities for our variable
annuity products. This program utilizes various derivative instruments that are
managed in an effort to reduce the economic impact of unfavorable changes in
GMxB features' exposures attributable to movements in the equity markets and
interest rates. Although this program is designed to provide a measure of
economic protection against the impact of adverse market conditions, it does not
qualify for hedge accounting treatment. Accordingly, changes in value of the
derivatives will be recognized in the period in which they occur with offsetting
changes in reserves partially recognized in the current period, resulting in net
income volatility. In addition to our dynamic hedging program, we have a hedging
program using static hedge positions (derivative positions intended to be HTM
with less frequent re-balancing) to protect our
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statutory capital against stress scenarios. This program in addition to our
dynamic hedge program has increased the size of our derivative positions,
resulting in an increase in net income volatility. The impacts are most
pronounced for variable annuity products in our Individual Retirement segment.
•GMxB reinsurance contracts. Historically, GMIB reinsurance contracts were used to cede to non-affiliated reinsurers a portion of our exposure to variable annuity products that offer a GMIB feature. We account for the GMIB reinsurance contracts as derivatives and report them at fair value. Gross GMIB reserves are calculated on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts. Accordingly, our gross reserves will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts. Because changes in the fair value of the GMIB reinsurance contracts are recorded in the period in which they occur and a majority of the changes in gross reserves for GMIB are recognized over time, net income will be more volatile. In addition, onJune 1, 2021 , we ceded legacy variable annuity policies sold by Equitable Financial between 2006-2008 (the "Block"), comprised of non-New York "Accumulator" policies containing fixed rate GMIB and/or GMDB guarantees. As this contract provides full risk transfer and thus has the same risk attributes as the underlying direct contracts, the benefits of this treaty are accounted for in the same manner as the underlying gross reserves.
Effect of Assumption Updates on Operating Results
During the third quarter of each year, we conduct our annual review of the assumptions underlying the valuation of DAC, deferred sales inducement assets, unearned revenue liabilities, liabilities for future policyholder benefits and embedded derivatives for our Individual Retirement, Group Retirement, and Protection Solution segments (assumption reviews are not relevant for the Investment Management and Research segment). Assumptions are based on a combination of Company experience, industry experience, management actions and expert judgment and reflect our best estimate as of the date of the applicable financial statements. Most of the variable annuity products, variable universal life insurance and universal life insurance products we offer maintain policyholder deposits that are reported as liabilities and classified within either Separate Accounts liabilities or policyholder account balances. Our products and riders also impact liabilities for future policyholder benefits and unearned revenues and assets for DAC and DSI. The valuation of these assets and liabilities (other than deposits) are based on differing accounting methods depending on the product, each of which requires numerous assumptions and considerable judgment. The accounting guidance applied in the valuation of these assets and liabilities includes, but is not limited to, the following: (i) traditional life insurance products for which assumptions are locked in at inception; (ii) universal life insurance and variable life insurance secondary guarantees for which benefit liabilities are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the accumulation period based on total expected assessments; (iii) certain product guarantees for which benefit liabilities are accrued over the life of the contract in proportion to actual and future expected policy assessments; and (iv) certain product guarantees reported as embedded derivatives at fair value. For further details of our accounting policies and related judgments pertaining to assumption updates, see Note 2 of the Notes to these Consolidated Financial Statements and "-Summary of Critical Accounting Estimates-Liability for Future Policy Benefits".
Assumption Updates and Model Changes
We conduct our annual review of our assumptions and models during the third quarter of each year. We also update our assumptions as needed in the event we become aware of economic conditions or events that could require a change in our assumptions that we believe may have a significant impact to the carrying value of product liabilities and assets and consequently materially impact our earnings in the period of the change.
Impact of Assumption Updates and Model Changes on Income from Continuing
Operations before income taxes and Net income (loss)
The table below presents the impact of our actuarial assumption update during
2021, 2020 and 2019 to our income (loss) from continuing operations, before
income taxes and net income (loss).
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Year Ended December 31,
2021 2020 2019
(in millions)
Impact of assumption update on Net income (loss):
Variable annuity product features related assumption
update
$ (91) $ (1,531) $ (1,467) Assumption updates for other business (17) (1,060) 76
Impact of assumption updates on Income (loss) from
continuing operations, before income tax
(108) (2,591) (1,391) Income tax benefit on assumption update 23 544 292 Net income (loss) impact of assumption update$ (85) $ (2,047) $ (1,099) 2021 Assumption Updates The impact of the assumption update during 2021 was a decrease of$108 million to income (loss) from continuing operations, before income taxes and a decrease to net income (loss) of$85 million . As part of this annual update completed as ofSeptember 30, 2021 , the reference interest rate utilized in our GAAP fair value calculations was updated from the LIBOR swap curve to theUS Treasury curve, which represents a reasonable proxy of the cost of funding the derivative positions backing our GMxB liabilities. Concurrently, our GAAP fair value liability risk margins were increased. which when considered with the change from LIBOR, resulted in an immaterial impact to overall valuation as our view regarding market participant pricing of our guarantees has not changed at the time of this update.
The net impact of this assumption update on income (loss) from continuing
operations, before income taxes of
policy charges and fee income of
benefits of
and a decrease in the amortization of DAC of
2020 Assumption Updates
Our annual review in 2020 resulted in the removal of the credit risk adjustment from our fair value scenario calibration to reflect our revised view of market participant practices, offset by updates to our mortality and policyholder behavior assumptions to reflect emerging experience. In 2020, in addition to the annual review, we updated our assumptions in the first quarter due to the extraordinary economic conditions driven by the COVID-19 pandemic. The first quarter update included an update to the interest rate assumption to grade from the current interest rate environment at that time to an ultimate five-year historical average over a 10-year period. As such, the 10-yearU.S. Treasury yield grades from the current level to an ultimate 5-year average of 2.25%. The low interest rate environment and update to the interest rate assumption caused a loss recognition event for our life interest-sensitive products, as well as to certain run-off business included in Corporate and Other. This loss recognition event caused an acceleration of DAC amortization on our life interest-sensitive products and an increase in the premium deficiency reserve on the run-off business in the first quarter of 2020. The net impact of assumption changes during 2020 was an increase in policy charges and fee income of$23 million , an increased policyholders' benefits by$1.6 billion , decreased interest credited to policyholders' account balances by$1 million , increased net derivative gains (losses) by$112 million and increased amortization of DAC by$1.1 billion . This resulted in a decrease in income (loss) from operations, before income taxes of$2.6 billion and decreased net income (loss) by$2.0 billion . The 2020 impacts related to assumption updates were primarily driven by the first quarter updates.
2019 Assumption Updates
The impact of assumption updates in 2019 was a decrease of$1.4 billion to income (loss) from continuing operations, before income taxes and a decrease to net income (loss) of$1.1 billion . This includes a$1.5 billion unfavorable impact on the reserves for our variable annuity product features as a result of unfavorable updates to our: (i) interest rate assumptions; and (ii) policyholder behavior, primarily lapse and withdrawal assumptions, further magnified by low interest rates.
The net impact of these assumption updates on income (loss) from continuing
operations, before income taxes of
policy charges and fee income of
benefits of
76 -------------------------------------------------------------------------------- Table of Contents million, a decrease in interest credited to policyholders' account balances of$13 million , a decrease in net derivative gains (losses) of$578 million and a decrease in the amortization of DAC of$46 million .
2021 and 2019 Model Changes
There was no material impact to our income (loss) from continuing operations,
before income taxes or net income (loss) from model changes during 2021 and
2019.
2020 Model Changes
In the first quarter of 2020, we adopted a new economic scenario generator to calculate the fair value of the GMIB reinsurance contract asset and GMxB derivative features liability, eliminating reliance on AXA for scenario production. The new economic scenario generator allows for a tighter calibration ofU.S. indices, better reflecting our actual portfolio. The net impact of the new economic scenario generator resulted in an increase in income (loss) from continuing operations, before income taxes of$201 million , and an increase to net income (loss) of$159 million for the year endedDecember 31,2020 . There were no other model changes that made a material impact to our income (loss) from continuing operations, before income taxes or net income (loss).
Impact of Assumption Updates and Model Changes on Pre-tax Non-GAAP Operating
Earnings Adjustments
The table below presents the impact on pre-tax Non-GAAP Operating Earnings of
our actuarial assumption updates during 2021, 2020 and 2019 by segment and
Corporate and Other.
Year Ended December 31,
2021 2020 2019
(in million)
Impact of assumption updates by segment:
Individual Retirement$ (47) $ (28) $ 104 Group Retirement 35 (3) 3 Protection Solutions 20 4 (4) Impact of assumption updates on Corporate and Other -
(12) (27)
Total impact on pre-tax Non-GAAP Operating Earnings$ 8 $ (39) $ 76 2021 Assumption Updates The impact of our 2021 annual review on Non-GAAP Operating Earnings was favorable by$8 million before taking into consideration the tax impacts or$6 million after tax. For Individual Retirement segment, the impacts primarily reflect updated mortality on our older payout business. For Group Retirement segment, the impacts reflect updated economic assumptions. The annual update for Protection Solutions segment reflects favorable economic conditions and surrenders primarily on the VUL line. This, in turn, creates future profits and lowers the accrual on our PFBL reserve. The net impact of assumption changes on Non-GAAP Operating Earnings in the third quarter of 2021 decreased Policy charges and fee income by$28 million , increased Policyholders' benefits by$22 million , and decreased Amortization of DAC by$58 million . Non-GAAP Operating Earnings excludes items related to Variable annuity product features, such as changes in the fair value of the embedded derivatives associated with the GMIBNLG liability and the effect of benefit ratio unlock adjustments.
2020 Assumption Updates
The impact of our 2020 annual review on Non-GAAP Operating Earnings was unfavorable by$39 million before taking into consideration the tax impacts or$31 million after tax. For the Individual Retirement segment, the impacts primarily reflect higher surrenders at the end of the surrender charge period on Retirement Cornerstone policies. The impact of our 2020 annual review was not material for our Group Retirement and Protection Solutions segments. The net impact of assumption changes on Non-GAAP Operating Earnings in the third quarter of 2020 decreased Policy charges and fee income by$23 million , increased Policyholders' benefits by$46 million , increased Interest credited to policyholders' account balances by$5 million and decreased Amortization of DAC by$35 million . Non-GAAP Operating Earnings excludes items related to Variable annuity product features and the impact of COVID-19, such as changes in the fair value of the embedded derivatives associated with the GMIBNLG liability and the effect of benefit ratio unlock adjustments. 77
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2019 Assumption Updates
The impact of our 2019 annual review on Non-GAAP Operating Earnings was
favorable by
tax impacts.
•For the Individual Retirement segment, the impacts primarily reflect favorable
updates to amortization of DAC from lower lapse assumptions.
•For the Group Retirement segment, the impacts primarily reflect a favorable
update to maintenance expenses.
•For the Protection Solutions segment, the results primarily reflect unfavorable updates to mortality and economic assumptions, partially offset by a favorable update to maintenance expenses. Non-GAAP Operating Earnings excludes items related to variable annuity product features, such as changes in the fair value of the embedded derivatives associated with the GMIBNLG liability and the effect of benefit ratio unlock adjustments. The net impact of assumption changes on Non-GAAP Operating Earnings in the third quarter of 2019 increased policy charges and fee income by$3 million , decreased policyholder' benefits by$15 million , decreased interest credited to policyholders' account balances by$13 million and decreased amortization of DAC by$46 million .
Impact of the First Quarter 2020 Assumption Update, and COVID-19 Impacts on
Pre-tax Non-GAAP Operating Earnings Adjustments
The unprecedented and rapid spread of COVID-19 and the related restrictions and
social distancing measures implemented throughout the world caused severe,
lasting turmoil in the financial markets during the first six months of 2020.
The Company's accounting policy governing its Non-GAAP Operating Earnings
measure permits adjustments to Non-GAAP Operating Earnings if certain criteria
are met, which include if the proposed adjustment relates to a non-recurring
event or transaction. Management concluded that all impacts on the Company from
the COVID-19 pandemic and its effects on the economy meet the indicators of a
non-recurring event. Therefore, management has determined that the items set
forth in the table below should be included as adjustments to the Non-GAAP
Operating Earnings measure so that investors can more clearly see the
delineation between the operating results of the Company's core operations and
the impact of the items specific to the current COVID-19 pandemic crisis.
The table below presents the COVID-19 pandemic related impacts on income (loss)
from continuing operations, before income taxes by segment and Corporate and
Other, and the COVID-19 pandemic related adjustments included in the
reconciliation of Net Income (loss) attributable to Holdings to Non-GAAP
Operating Earnings:
Year Ended December 31, 2020
COVID-19 Impacts
Impacts other
than Interest
Interest Rate Rate
Assumption Assumption
Update Update (1) Total
(in millions)
Net income (loss) from continuing operations, before
income taxes by Segment and Corporate and Other:
Individual Retirement $ (1,417) $ (43) $ (1,460)
Group Retirement (51) - (51)
Protection Solutions (1,016) (75) (1,091)
Corporate and Other (33) (3) (36)
Net income (loss) from continuing operations, before
income taxes
$ (2,517)
COVID-19-related adjustments included in Reconciliation
of Net income (loss) attributable to Holdings to Non-GAAP
Operating Earnings:
Variable annuities product features
$ (1,468) $ (35) $ (1,503) Other adjustments (1,049) (86) (1,135) Net income (loss) from continuing operations, before income taxes$ (2,517) $ (121) $ (2,638) 78
-------------------------------------------------------------------------------- Table of Contents _______________ (1)Includes adjustments to Non-GAAP Operating Earnings primarily due to non-variable annuity hedging impacts resulting from unprecedented volatility in equity markets and accelerated amortization of DAC due to loss recognition in the first half of 2020 resulting from first quarter 2020 interest rate assumption update. Adjustments related to the Individual Retirement and Group Retirement segments are primarily included in the "Variable annuities product features" in the reconciliation of Net income (loss) attributable to Holdings to Non-GAAP Operating Earnings. All other adjustments are included in "Other". This impact has been more than offset by hedging gains.
Macroeconomic and Industry Trends
Our business and consolidated results of operations are significantly affected by economic conditions and consumer confidence, conditions in the global capital markets and the interest rate environment.
Financial and Economic Environment
A wide variety of factors continue to impact global financial and economic
conditions, including, among others, the COVID-19 pandemic, volatility in
financial markets, rising inflation rates, continued low interest rates, changes
in fiscal or monetary policy and supply chain disruptions.
Stressed conditions, volatility and disruptions in the capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities and derivatives are sensitive to changing market factors, including changes in interest rates, which are anticipated to occur in 2022 based on statements of members of theBoard of Governors of theFederal Reserve System . An increase in market volatility could continue to affect our business, including through effects on the yields we earn on invested assets, changes in required reserves and capital and fluctuations in the value of our AUM, AV or AUA from which we derive our fee income. These effects could be exacerbated by uncertainty about future fiscal policy, changes in tax policy, the scope of potential deregulation and levels of global trade. The potential for increased volatility, coupled with prevailing interest rates falling and/or remaining below historical averages, could pressure sales and reduce demand for our products as consumers consider purchasing alternative products to meet their objectives. In addition, this environment could make it difficult to consistently develop products that are attractive to customers. Financial performance can be adversely affected by market volatility and equity market declines as fees driven by AV and AUM fluctuate, hedging costs increase and revenues decline due to reduced sales and increased outflows. We monitor the behavior of our customers and other factors, including mortality rates, morbidity rates, annuitization rates and lapse and surrender rates, which change in response to changes in capital market conditions, to ensure that our products and solutions remain attractive and profitable. For additional information on our sensitivity to interest rates and capital market prices, see "Quantitative and Qualitative Disclosures About Market Risk."
Interest Rate Environment
We believe the interest rate environment will continue to impact our business
and financial performance in the future for several reasons, including the
following:
•Certain of our variable annuity and life insurance products pay guaranteed
minimum interest crediting rates. We are required to pay these guaranteed
minimum rates even if earnings on our investment portfolio decline, with the
resulting investment margin compression negatively impacting earnings. In
addition, we expect more policyholders to hold policies with comparatively high
guaranteed rates longer (lower lapse rates) in a low interest rate environment.
Conversely, a rise in average yield on our investment portfolio should
positively impact earnings. Similarly, we expect policyholders would be less
likely to hold policies with existing guaranteed rates (higher lapse rates) as
interest rates rise.
•A prolonged low interest rate environment also may subject us to increased
hedging costs or an increase in the amount of statutory reserves that our
insurance subsidiaries are required to hold for GMxB features, lowering their
statutory surplus, which would adversely affect their ability to pay dividends
to us. In addition, it may also increase the perceived value of GMxB features to
our policyholders, which in turn may lead to a higher rate of annuitization and
higher persistency of those products over time. Finally, low interest rates may
continue to cause an acceleration of DAC amortization or reserve increase due to
loss recognition for interest sensitive products, primarily for our Protection
Solutions segment.
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For a discussion on derivatives we used to hedge interest rates, see Note 4 of
the Notes to these Consolidated Financial Statements in this Form 10-K.
Regulatory Developments
Our life insurance subsidiaries are regulated primarily at the state level, with some policies and products also subject to federal regulation. In addition, Holdings and its insurance subsidiaries are subject to regulation under the insurance holding company laws of variousU.S. jurisdictions. Furthermore, on an ongoing basis, regulators refine capital requirements and introduce new reserving standards. Regulations recently adopted or currently under review can potentially impact our statutory reserve, capital requirements and profitability of the industry and result in increased regulation and oversight for the industry. For additional information on regulatory developments and the risks we face, see "Business-Regulation" and "Risk Factors-Legal and Regulatory Risks."
Separation Costs
In connection with our separation from AXA, we have incurred expenses of$722 million of which$82 million ,$108 million , and$222 million was incurred in 2021, 2020 and 2019, respectively. These expenses primarily relate to information technology, compliance, internal audit, finance, risk management, procurement, client service, human resources, rebranding and other support services. We have successfully completed our separation from AXA and do not expect to incur any additional expense related to the separation from AXA.
Productivity Strategies
Retirement and Protection Businesses
As part of our continuing efforts to drive productivity improvements, onJanuary 2021 , we began a new program expected to achieve$80 million of targeted run-rate expense savings by 2023, of which$31 million was achieved in 2021. We expect to achieve these saving by shifting our workforce into an agile working model, leveraging technology-enabled capabilities, optimizing our real estate footprint, and continuing to realize a portion of COVID-19 related savings.
Investment Management and Research Business
As previously announced, AB has established its corporate headquarters inNashville, Tennessee and relocated approximately 1,250 jobs from theNew York metro area. Beginning in 2025, AB estimates ongoing annual expense savings of approximately$75 million to$80 million , which will result from a combination of occupancy and compensation-related savings. 80
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Key Operating Measures
In addition to our results presented in accordance withU.S. GAAP, we report Non-GAAP Operating Earnings, Non-GAAP Operating ROE, Non-GAAP Operating ROC by segment for our Individual Retirement, Group Retirement and Protection Solutions segments, and Non-GAAP operating common EPS, each of which is a measure that is not determined in accordance withU.S. GAAP. Management principally uses these non-GAAP financial measures in evaluating performance because they present a clearer picture of our operating performance and they allow management to allocate resources. Similarly, management believes that the use of these Non-GAAP financial measures, together with relevantU.S. GAAP measures, provide investors with a better understanding of our results of operations and the underlying profitability drivers and trends of our business. These non-GAAP financial measures are intended to remove from our results of operations the impact of market changes (where there is mismatch in the valuation of assets and liabilities) as well as certain other expenses which are not part of our underlying profitability drivers or likely to re-occur in the foreseeable future, as such items fluctuate from period-to-period in a manner inconsistent with these drivers. These measures should be considered supplementary to our results that are presented in accordance withU.S. GAAP and should not be viewed as a substitute for theU.S. GAAP measures. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Consequently, our non-GAAP financial measures may not be comparable to similar measures used by other companies. We also discuss certain operating measures, including AUM, AUA, AV, Protection Solutions Reserves and certain other operating measures, which management believes provide useful information about our businesses and the operational factors underlying our financial performance.
Non-GAAP Operating Earnings
Non-GAAP Operating Earnings is an after-tax non-GAAP financial measure used to evaluate our financial performance on a consolidated basis that is determined by making certain adjustments to our consolidated after-tax net income attributable to Holdings. The most significant of such adjustments relates to our derivative positions, which protect economic value and statutory capital, and are more sensitive to changes in market conditions than the variable annuity product liabilities as valued underU.S. GAAP. This is a large source of volatility in net income.
Non-GAAP Operating Earnings equals our consolidated after-tax net income
attributable to Holdings adjusted to eliminate the impact of the following
items:
•Items related to variable annuity product features, which include: (i) certain changes in the fair value of the derivatives and other securities we use to hedge these features; (ii) the effect of benefit ratio unlock adjustments, including extraordinary economic conditions or events such as COVID-19; and (iii) changes in the fair value of the embedded derivatives reflected within variable annuity products' net derivative results and the impact of these items on DAC amortization on our SCS product;
•Investment (gains) losses, which includes credit loss impairments of
securities/investments, sales or disposals of securities/investments, realized
capital gains/losses and valuation allowances;
•Net actuarial (gains) losses, which includes actuarial gains and losses as a
result of differences between actual and expected experience on pension plan
assets or projected benefit obligation during a given period related to pension,
other postretirement benefit obligations, and the one-time impact of the
settlement of the defined benefit obligation;
•Other adjustments, which primarily include restructuring costs related to
severance and separation, COVID-19 related impacts, net derivative gains
(losses) on certain Non-GMxB derivatives, net investment income from certain
items including consolidated VIE investments, seed capital mark-to-market
adjustments, unrealized gain/losses associated with equity securities and
certain legal accruals; and
•Income tax expense (benefit) related to the above items and non-recurring tax
items, which includes the effect of uncertain tax positions for a given audit
period.
Because Non-GAAP Operating Earnings excludes the foregoing items that can be
distortive or unpredictable, management believes that this measure enhances the
understanding of the Company's underlying drivers of profitability and trends in
our business, thereby allowing management to make decisions that will positively
impact our business.
We use the prevailing corporate federal income tax rate of 21% while taking into
account any non-recurring differences for events recognized differently in our
financial statements and federal income tax returns as well as partnership
income taxed at lower rates when reconciling Net income (loss) attributable to
Holdings to Non-GAAP Operating Earnings.
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The table below presents a reconciliation of net income (loss) attributable to
Holdings to Non-GAAP Operating Earnings for the years ended December 31, 2021 ,
2020 and 2019:
Year Ended December 31,
2021 2020 2019
(in millions)
Net income (loss) attributable to Holdings
(648)$ (1,764) Adjustments related to: Variable annuity product features (1) 4,145 3,912 4,863 Investment (gains) losses (867) (744) (73)
Net actuarial (gains) losses related to pension and
other postretirement benefit obligations
120 109 99 Other adjustments (2) (3) (4) (5) 717 952 395 Income tax expense (benefit) related to above adjustments (6) (864) (888) (1,097) Non-recurring tax items (7) 13 (391) (66) Non-GAAP Operating Earnings$ 2,825 $
2,302
___________
(1)Includes COVID-19 impact on Variable annuity product features due to a first quarter 2020 assumption update of$1.5 billion and other COVID-19 related impacts of$35 million for the year endedDecember 31, 2020 . (2)Includes COVID-19 impact on Other adjustments due to a first quarter 2020 assumption update of$1.0 billion and other COVID-19 related impacts of$86 million for the year endedDecember 31, 2020 . (3)Other adjustments includes separation costs of$82 million ,$108 million , and$222 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. (4)Includes Non-GMxB related derivative hedge losses of$65 million ,($404) million and$36 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. (5)Includes certain legal accruals related to the cost of insurance litigation of$207 million for the year endedDecember 31, 2021 . (6)Includes income taxes of($554) million for the above related COVID-19 items for the year endedDecember 31, 2020 . (7)Includes a reduction in the reserve for uncertain tax positions resulting from the completion of anIRS examination in the year endedDecember 31, 2020 .
Non-GAAP Operating ROE and Non-GAAP Operating ROC by Segment
We report Non-GAAP Operating ROE and Non-GAAP Operating ROC by segment for our Individual Retirement, Group Retirement and Protection Solutions segments, each of which is a Non-GAAP financial measure used to evaluate our profitability on a consolidated basis and by segment, respectively. We calculate Non-GAAP Operating ROE by dividing Non-GAAP operating earnings for the previous twelve calendar months by consolidated average equity attributable to Holdings' common shareholders, excluding AOCI. We calculate Non-GAAP Operating ROC by segment by dividing Operating earnings (loss) on a segment basis for the previous twelve calendar months by average capital on a segment basis, excluding AOCI, as described below. AOCI fluctuates period-to-period in a manner inconsistent with our underlying profitability drivers as the majority of such fluctuation is related to the market volatility of the unrealized gains and losses associated with our AFS securities. Therefore, we believe excluding AOCI is more effective for analyzing the trends of our operations. We do not calculate Non-GAAP Operating ROC by segment for our Investment Management and Research segment because we do not manage that segment from a return of capital perspective. Instead, we use metrics more directly applicable to an asset management business, such as AUM, to evaluate and manage that segment. For Non-GAAP Operating ROC by segment, capital components pertaining directly to specific segments such as DAC along with targeted capital are directly attributed to these segments. Targeted capital for each segment is established using assumptions supporting statutory capital adequacy levels, reflecting the NAIC RBC framework adopted as of year-end 2019. To enhance the ability to analyze these measures across periods, interim periods are annualized. Non-GAAP Operating ROE and Non-GAAP Operating ROC by segment should not be used as substitutes for ROE.
The following table presents return on average equity attributable to Holdings'
common shareholders, excluding AOCI and Non-GAAP Operating ROE for the year
ended
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Year Ended December 31,
2021
(in millions)
Net income (loss) available to Holdings' common shareholders $ (518)
Average equity attributable to Holdings' common shareholders, excluding
AOCI
$ 8,193
Return on average equity attributable to Holdings' common shareholders,
excluding AOCI
(6.3) %
Non-GAAP Operating Earnings available to Holdings' common shareholders $
2,746 Average equity attributable to Holdings' common shareholders, excluding AOCI $ 8,193 Non-GAAP Operating ROE 33.5 %
The following table presents Non-GAAP Operating ROC by segment for our
Individual Retirement, Group Retirement and Protection Solutions segments for
the years ended
Individual Protection
Retirement Group Retirement Solutions
(in millions)
Year Ended December 31, 2021
Operating earnings $ 1,444 $ 631 $ 317
Average capital (1) $ 6,350 $ 1,154 $ 2,154
Non-GAAP Operating ROC 22.8 % 54.6 % 14.7 %
Year Ended December 31, 2020
Operating earnings $ 1,536 $ 491 $ 146
Average capital (1) $ 6,352 $ 1,073 $ 2,170
Non-GAAP Operating ROC 24.2 % 45.8 % 6.7 %
Year Ended December 31, 2019
Operating earnings $ 1,598 $ 390 $ 336
Average capital (1) $ 7,357 $ 1,333 $ 2,998
Non-GAAP Operating ROC 21.7 % 29.3 % 11.2 %
_____________
(1)For average capital amounts by segment, capital components pertaining
directly to specific segments such as DAC along with targeted capital are
directly attributed to these segments. Targeted capital for each segment is
established using assumptions supporting statutory capital adequacy levels
(including CTE98).
Non-GAAP Operating Common EPS
Non-GAAP operating common EPS is calculated by dividing Non-GAAP Operating Earnings by diluted common shares outstanding. The following table sets forth Non-GAAP operating common EPS for the years endedDecember 31, 2021 , 2020 and 2019. 83
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Year Ended December 31,
2021 2020 2019
(per share amounts)
Net income (loss) attributable to Holdings (1) (1.05) (1.44) (3.57)
Less: Preferred stock dividends 0.19 0.12 -
Net income (loss) available to Holdings' common
shareholders (1.24) (1.56) (3.57)
Adjustments related to:
Variable annuity product features (2) 9.93 8.68 9.85
Investment (gains) losses (2.08) (1.65) (0.15)
Net actuarial (gains) losses related to pension and
other postretirement benefit obligations
0.29 0.24 0.20 Other adjustments (3) (4) (5) (6) 1.72 2.12 0.80 Income tax expense (benefit) related to above adjustments (7) (2.07) (1.97) (2.22) Non-recurring tax items (8) 0.03 (0.87) (0.13) Non-GAAP operating earnings$ 6.58
______________
(1)For periods presented with a net loss, basic shares was used for the years endedDecember 31, 2021 , 2020 and 2019. (2)Includes COVID-19 impact on Variable annuity product features due to a first quarter 2020 assumption update of$3.26 and other COVID-19 related impacts of$0.08 for the year endedDecember 31, 2020 . (3)Includes COVID-19 impact on Other adjustments due to a first quarter 2020 assumption update of$2.33 for the year endedDecember 31, 2020 and other COVID-19 related impacts of$0.19 for the year endedDecember 31, 2020 . (4)Includes separation costs of$0.20 ,$0.24 and$0.45 for the years endedDecember 31, 2021 , 2020 and 2019, respectively. (5)Includes Non-GMxB related derivative hedge losses of$0.14 ,($0.90 ), and$0.08 for the years endedDecember 31, 2021 , 2020 and 2019, respectively. (6)Includes certain legal accruals related to the cost of insurance litigation of$0.50 for the year endedDecember 31, 2021 . No adjustments were made to prior period non-GAAP operating EPS as the impact was immaterial. (7)Includes income taxes of$(1.23) for the above related COVID-19 items for the year endedDecember 31, 2020 . (8)Includes a reduction in the reserve for uncertain tax positions resulting from the completion of anIRS examination in the year endedDecember 31, 2020 .
Assets Under Management
AUM means investment assets that are managed by one of our subsidiaries and
includes: (i) assets managed by AB; (ii) the assets in our General Account
investment portfolio; and (iii) the Separate Accounts assets of our Individual
Retirement, Group Retirement and Protection Solutions businesses. Total AUM
reflects exclusions between segments to avoid double counting.
AUA includes non-insurance client assets that are invested in our savings and investment products or serviced by ourEquitable Advisors platform. We provide administrative services for these assets and generally record the revenues received as distribution fees.
Account Value
AV generally equals the aggregate policy account value of our retirement
products. General Account AV refers to account balances in investment options
that are backed by the General Account while Separate Accounts AV refers to
Separate Accounts investment assets
Protection Solutions Reserves
Protection Solutions reserves equals the aggregate value of policyholders'
account balances and future policy benefits for policies in our Protection
Solutions segment.
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Consolidated Results of Operations
Our consolidated results of operations are significantly affected by conditions in the capital markets and the economy because we offer market sensitive products. These products have been a significant driver of our results of operations. Because the future claims exposure on these products is sensitive to movements in the equity markets and interest rates, we have in place various hedging and reinsurance programs that are designed to mitigate the economic risk of movements in the equity markets and interest rates. The volatility in net income attributable to Holdings for the periods presented below results from the mismatch between: (i) the change in carrying value of the reserves for GMDB and certain GMIB features that do not fully and immediately reflect the impact of equity and interest market fluctuations; (ii) the change in fair value of products with the GMIB feature that have a no-lapse guarantee; and (iii) our hedging and reinsurance programs.
Ownership and Consolidation of AllianceBernstein
Our indirect, wholly-owned subsidiary,
General Partner of AB.
consolidated financial statements.
Our economic interest in AB was approximately 65% during the years ended
Consolidated Results of Operations
The following table summarizes our consolidated statements of income (loss) for
the years ended
Consolidated Statement of Income (Loss)
Year Ended December 31,
2021 2020 2019
(in millions, except per share data)
REVENUES
Policy charges and fee income $ 3,637 $ 3,735 $ 3,778
Premiums 960 997 1,147
Net derivative gains (losses) (4,465) (1,722) (4,012)
Net investment income (loss) 3,846 3,477 3,699
Investment gains (losses), net:
Credit losses on available-for-sale debt securities and loans 2 (58) -
Other investment gains (losses), net 866 802 73
Total investment gains (losses), net 868 744 73
Investment management and service fees 5,395 4,608 4,380
Other income 795 576 554
Total revenues 11,036 12,415 9,619
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Year Ended December 31,
2021 2020 2019
(in millions, except per share data)
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits 3,218 5,326 4,385
Interest credited to policyholders' account balances 1,219 1,222 1,263
Compensation and benefits 2,360 2,096 2,081
Commissions and distribution-related payments 1,662 1,351 1,242
Interest expense 244 200 221
Amortization of deferred policy acquisition costs 393 1,613 597
Other operating costs and expenses 2,109 1,700 1,890
Total benefits and other deductions 11,205 13,508 11,679
Income (loss) from continuing operations, before income
taxes
(169) (1,093) (2,060) Income tax (expense) benefit 145 744 593 Net income (loss) (24) (349) (1,467)
Less: Net income (loss) attributable to the noncontrolling
interest
415 299 297 Net income (loss) attributable to Holdings (439) (648)$ (1,764) Less: Preferred stock dividends 79 53 - Net income (loss) available to Holdings' common shareholders $
(518)
EARNINGS PER COMMON SHARE Net income (loss) applicable to Holdings' common shareholders per common share: Basic$ (1.24) $ (1.56) $ (3.57) Diluted$ (1.24) $ (1.56) $ (3.57) Weighted average common shares outstanding (in millions): Basic 417.4 450.4 493.6 Diluted 417.4 450.4 493.6 Year Ended December 31, 2021 2020 2019 (in millions) Non-GAAP Operating Earnings$ 2,825 $ 2,302 $ 2,357
The following table summarizes our Non-GAAP Operating Earnings per common share
for the years ended
Year Ended December 31,
2021 2020 2019
Non-GAAP operating earnings per common share:
Basic $ 6.58 $ 4.99 $ 4.78
Diluted $ 6.58 $ 4.99 $ 4.78
Year Ended
Net Income Attributable to Holdings
Net loss attributable to Holdings decreased by$209 million to a net loss of$439 million for the year endedDecember 31, 2021 from a net loss of$648 million for the year endedDecember 31, 2020 . The following notable items were the primary drivers for the change in net income (loss):
Favorable items included:
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•Policyholders' benefits decreased by$2.1 billion mainly due to the non-recurrence of the interest rate assumption update in the first quarter of 2020 and equity markets appreciation in the year endedDecember 31, 2021 . This was partially offset by an increase in death claims. •Amortization of DAC decreased by$1.2 billion mainly due to the interest rate assumption update in the first quarter of 2020 as a result of the extraordinary economic conditions driven by COVID-19. As a result of the lower interest rate assumption, Protection Solutions segment entered into loss recognition resulting in an acceleration of DAC amortization in 2020. •Fee revenue increased by$871 million mainly driven by higher base fees, performance fees and distribution revenues in our Investment Management & Research segment as a result of higher average AUM revenues and higher fees in our Group Retirement segment as a result of higher average Separate Accounts AV and higher broker-dealer related revenues.
•Investment gains increased by
Venerable assets and the rebalancing program to extend duration.
•Net investment income increased by
from our alternative investment portfolio and higher prepayments, partially
offset by lower assets related to the Venerable Transaction.
These were partially offset by the following unfavorable items:
•Net derivative gains decreased by$2.7 billion driven by an increase in interest rates during 2021 compared to a decrease in interest rates during 2020 and greater equity market appreciation in 2021, partially offset by widening non-performance risk spreads during 2021 compared to contracting spreads in 2020. •Compensation, benefits and other operating expenses increased by$673 million mainly due to higher litigation reserve accruals, including the COI litigation. In addition, we experienced higher employee compensation expenses in our Investment Management and Research segment due to higher revenues. •Commissions and distribution-related payments increased by$311 million mainly due to higher distribution-related payments in our Investment Management and Research and Individual Retirement segments based on higher average AUM and Separate Account AV balances, as well as the growth in broker dealer sales.
•Net income attributable to noncontrolling interest increased by
mainly due to higher AB pre-tax income and higher consolidated VIE income.
•Income tax benefit decreased by
close and a decrease in pre-tax loss in the year ended
compared to the year ended
See "-Significant Factors Impacting Our Results-Assumption Updates and Model
Changes" for more information regarding assumption updates.
Non-GAAP Operating Earnings
Non-GAAP Operating Earnings increased by$523 million to$2.8 billion for the year endedDecember 31, 2021 from$2.3 billion in the year endedDecember 31, 2020 . The following notable items were the primary drivers for the change in Non-GAAP Operating Earnings.
Favorable items included:
•Fee-type revenue increased by$914 million mainly due to higher base fees, performance-based fees and distribution revenues in our Investment Management & Research segment as a result of higher average AUM revenues, and higher fees in our Group Retirement segment as a result of higher average Separate Accounts AV and higher broker-dealer related revenues.
•Net investment income increased by
from our alternative investment portfolio and higher prepayments, partially
offset by lower assets related to the Venerable Transaction.
•Policyholders' benefits decreased by
appreciation (offset in Net Derivative gains), partially offset by higher
ongoing reserves resulting from assumption updates in 2020 and higher death
claims in 2021.
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•Amortization of DAC decreased by$9 million mainly due to favorable assumption updates in 2021 compared to 2020, partially offset by higher amortization due to growth of SCS.
These were partially offset by the following unfavorable items:
•Net derivative gains decreased by$485 million mainly due to equity market appreciation in 2021, which was offset in Policyholder's benefits, and inflation related hedging losses on TIPS in the General Account. •Compensation, benefits and other operating costs and expenses increased by$424 million mainly due to higher employee compensation in our Investment Management and Research segment due to higher revenues and increased expenses in Corporate and Other related to unfavorable COLI death claims and general incremental compensation increases. •Commissions and distribution-related payments increased by$311 million mainly due to higher distribution-related payments in our Investment Management and Research and Individual Retirement segments based on higher average AUM and Separate Account AV balances, as well as the growth in broker dealer sales.
•Earnings attributable to the noncontrolling interest increased by
mainly due to higher AB Operating earnings in our Investment Management and
Research segment.
•Income tax expense increased by
earnings.
Year Ended
Net Income Attributable to Holdings
For discussion that compares results for the year endedDecember 31, 2020 to the year endedDecember 31, 2019 refer to the MD&A section in our Annual Report on Form 10-K for the year endedDecember 31, 2020 ("2020 Form 10-K").
Non-GAAP Operating Earnings
For discussion that compares results for the year ended
year ended
Results of Operations by Segment
We manage our business through the following four segments: Individual Retirement, Group Retirement, Investment Management and Research, and Protection Solutions. We report certain activities and items that are not included in our four segments in Corporate and Other. The following section presents our discussion of operating earnings (loss) by segment and AUM, AV and Protection Solutions Reserves by segment, as applicable. Consistent withU.S. GAAP guidance for segment reporting, operating earnings (loss) is ourU.S. GAAP measure of segment performance. See Note 19 of the Notes to these Consolidated Financial Statements for further information on our segments.
The following table summarizes operating earnings (loss) on our segments and
Corporate and Other for the years ended
Year Ended December 31,
2021 2020 2019
(in millions)
Operating earnings (loss) by segment:
Individual Retirement $ 1,444 $ 1,536 $ 1,598
Group Retirement 631 491 390
Investment Management and Research 564 432 381
Protection Solutions 317 146 336
Corporate and Other (131) (303) (348)
Non-GAAP Operating Earnings $ 2,825 $ 2,302 $ 2,357
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Effective Tax Rates by Segment
For 2021, 2020 and 2019 Income tax expense was allocated to the Company's
business segments using a 17%, 16% and 17% effective tax rate ("ETR"),
respectively, for our retirement and protection businesses (Individual
Retirement, Group Retirement, and Protection Solutions) and a 27%, 27% and 28%
ETR for Investment Management and Research.
Individual Retirement
The Individual Retirement segment includes our variable annuity products which
primarily meet the needs of individuals saving for retirement or seeking
retirement income.
The following table summarizes operating earnings of our Individual Retirement
segment for the periods presented:
Year Ended December 31,
2021 2020 2019
(in millions)
Operating earnings $ 1,444 $ 1,536 $ 1,598
Key components of operating earnings are:
Year Ended December 31,
2021 2020 2019
(in millions)
REVENUES
Policy charges, fee income and premiums$ 1,867 $ 2,034 $ 2,085 Net investment income 1,287 1,246 1,148 Net derivative gains (losses) (128) 331 362 Investment management, service fees and other income 759 700 730 Segment revenues
BENEFITS AND OTHER DEDUCTIONS Policyholders' benefits$ 720 $ 1,207 $ 1,184 Interest credited to policyholders' account balances 276 312 310 Commissions and distribution-related payments 328 281 281 Amortization of deferred policy acquisition costs 303 299 181 Compensation, benefits and other operating costs and expenses 411 382 435 Interest expense - - - Segment benefits and other deductions
The following table summarizes AV for our Individual Retirement segment as of
the dates indicated:
December 31,
2021 2020
(in millions)
AV (1)
General Account $ 37,698 $ 30,783
Separate Accounts 74,206 86,607
Total AV $ 111,904 $ 117,390
(1) AV presented are net of reinsurance
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The following table summarizes a roll-forward of AV for our Individual
Retirement segment for the periods presented:
Year Ended December 31,
2021 2020 2019
(in millions)
Balance as of beginning of period $ 117,390 $ 108,922 $ 94,589
Gross premiums 11,249 7,493 8,572
Surrenders, withdrawals and benefits (12,143) (8,622) (9,071)
Net flows (1) (894) (1,129) (499)
Investment performance, interest credited and policy
charges (3)
12,316 9,606 15,290 Ceded to Venerable (2) (16,927) - - Reclassified to Liabilities held for sale - (3) - Other (3) (4) (5) (6) 19 (6) (458) Balance as of end of period$ 111,904 $ 117,390 $ -$ 108,922 ______________ (1) For the year endedDecember 31, 2021 , net flows of$(830) million and investment performance, interest credited and policy charges of$589 million , respectively, are excluded as these amounts are related to ceded AV to Venerable. (2) EffectiveJune 1, 2021 , AV excludes activity related to ceded AV to Venerable. In addition, the roll-forward reflects the AV ceded to Venerable as of the transaction date. For additional information on the Venerable Transaction see Note 1 of the Notes to these Consolidated Financial Statements. (3) For the year endedDecember 31, 2021 , amounts reflect$(38) million transfer of policyholders account balances to future policyholder benefits and other policyholders liabilities related to structured settlement contracts. (4) For the year endedDecember 31, 2021 amounts reflect$57 million of AV transfer of a closed block of GMxB business from GR to IR. (5) For the year endedDecember 31, 2020 , amounts are primarily related to our fixed income annuity ("FIA") contracts which were previously reported as Policyholders' account balances in the consolidated balance sheets and therefore included in our definition of "Account Value". EffectiveJanuary 1, 2020 , FIAs are reported as future policy benefits and other policyholders' liabilities in the consolidated balance sheets and accordingly were excluded from Account Value. (6) Transfer to Corporate and Other represents the placement of an Individual Retirement product in run-off effective for the second quarter of 2019.
Year Ended
the Individual Retirement Segment
Operating earnings
Operating earnings decreased$92 million to$1.4 billion during the year endedDecember 31, 2021 from$1.5 billion in the year endedDecember 31, 2020 . The following notable items were the primary drivers of the change in operating earnings:
Unfavorable items included:
•Net GMxB results decreased by$86 million primarily due to ongoing higher reserve accruals resulting from assumption updates in 2020 and higher claims, partially offset by higher fees and the impact of the Venerable Transaction. •Commissions and distribution-related payments increased by$47 million mainly due to higher average asset balances, gross of Venerable, offset by an increase in commission reimbursements in Fee-type revenue.
•Compensation, benefits and other operating costs and expenses increased by
million
investment management sub-advisory fees, partially off set by higher SA fees.
These were partially offset by the following favorable items:
•Net investment income increased by$41 million mainly due to higher income from our alternative investment portfolio, higher average asset balances, prepayments and General Account portfolio optimization. 90
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•Interest credited to policyholders' account balances decreased by
mainly due to the impact of equity market appreciation on our SCS product
features.
•Fee-type revenue increased by$19 million mainly due to higher average Separate Accounts AV as a result of equity market appreciation in 2021 from market lows in 2020, and inflows from our current product offering. The increase in Fee-type revenue was partially offset by the impacts of fee-income ceded to Venerable, partially offset by commission reimbursements in Commissions and distributions-related payments.
Net Flows and AV
•The decline in AV of$5.5 billion in the year endedDecember 31, 2021 was driven by$16.9 billion of AV ceded to Venerable and net outflows of$894 million partially offset by an increase in investments performance and interest credited to account balances, net of policy charges of$12.3 billion as a result of equity market appreciation in 2021. •Net outflows of$894 million were$235 million higher than in the year endedDecember 31, 2020 , mainly driven by$3.5 billion of outflows on our older fixed-rate GMxB block, partially offset by$2.6 billion of inflows on our newer, less capital-intensive products.
Year Ended
the Individual Retirement Segment
Operating earnings
For discussion that compares results for the year ended
year ended
Net Flows and AV
For discussion on net flows and AV comparative results for the year ended
in our 2020 Form 10-K.
Group Retirement
The Group Retirement segment offers tax-deferred investment and retirement
services or products to plans sponsored by educational entities, municipalities
and not-for-profit entities, as well as small and medium-sized businesses.
The following table summarizes operating earnings of our Group Retirement
segment for the periods presented:
Year Ended December 31,
2021 2020 2019
(in millions)
Operating earnings $ 631 $ 491 $ 390
Key components of operating earnings are:
Year Ended December 31,
2021 2020 2019
(in millions)
REVENUES
Policy charges, fee income and premiums $ 371 $ 295 $ 279
Net investment income 752 641 590
Net derivative gains (losses) (19) 1 4
Investment management, service fees and other income 268 211 204
Segment revenues $ 1,372 $ 1,148 $ 1,077
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Year Ended December 31,
2021 2020 2019
(in millions)
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits $ - $ 2 $ 2
Interest credited to policyholders' account balances 303 303 302
Commissions and distribution-related payments 56 45 42
Amortization of deferred policy acquisition costs - 21 35
Compensation, benefits and other operating costs and
expenses
248 192 224 Interest expense - - - Segment benefits and other deductions $
607
The following table summarizes AV for our Group Retirement segment as of the
dates indicated:
December 31,
2021 2020
(in millions)
AV
General Account $ 13,046 $ 12,826
Separate Accounts 34,307 29,633
Total AV $ 47,353 $ 42,459
The following table summarizes a roll-forward of AV for our Group Retirement
segment for the periods indicated:
Year Ended December 31,
2021 2020 2019
(in millions)
Balance as of beginning of period $ 42,459 $ 37,880 $ 32,401
Gross premiums 3,623 3,343 3,533
Surrenders, withdrawals and benefits (3,929) (3,047) (3,266)
Net flows (306) 296 267
Investment performance, interest credited and policy
charges 5,257 4,283 5,212
Other (1) (57) - -
Balance as of end of period $ 47,353 $ 42,459 $ 37,880
____________
(1)For the year ended
closed block business from GR to IR.
Year Ended
the Group Retirement Segment
Operating earnings Operating earnings increased by$140 million to$631 million during the year endedDecember 31, 2021 from$491 million during the year endedDecember 31, 2020 . The following notable items were the primary drivers of the change in operating earnings:
Favorable items included:
•Fee-type revenue increased by
Accounts AV, driven by equity market appreciation.
•Net investment income increased by$111 million due to higher income from our alternative investment portfolio, higher average assets balances, prepayments and General Account portfolio optimization. 92
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•Amortization of DAC decreased by
of assumption updates in 2021, partially offset by higher amortization from
higher revenue.
These were partially offset by the following unfavorable items:
•Compensation, benefits and other operating costs and expenses increased by
million
•Net derivative gains decreased by
loss offset on TIPS in the General Account.
•Commissions and distribution-related payments increased by
due to a higher asset base.
•Income tax expense increased by
earnings.
Net Flows and AV •The increase in AV of$4.9 billion in the year endedDecember 31, 2021 was primarily due to strong equity markets partially offset by net outflows of$306 million .
•Net inflows decreased
surrender from higher AV, partially offset by higher sales and renewals.
Year Ended
the Group Retirement Segment
Operating earnings
For discussion that compares results for the year ended
year ended
Net Flows and AV
For discussion on net flows and AV comparative results for the year ended
in our 2020 Form 10-K.
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Investment Management and Research
The Investment Management and Research segment provides diversified investment management, research and related services to a broad range of clients around the world. Operating earnings (loss), net of tax, presented here represents our economic interest in AB of approximately 65% during the years endedDecember 31, 2021 , 2020 and 2019. Year Ended December 31, 2021 2020 2019 (in millions) Operating earnings$ 564 $ 432 $ 381
Key components of operating earnings are:
Year Ended December 31,
2021 2020 2019
(in millions)
REVENUES
Net investment income $ 13 $ 31 $ 57
Net derivative gains (losses) (13) (36) (38)
Investment management, service fees and other income 4,430 3,708 3,460
Segment revenues $ 4,430
BENEFITS AND OTHER DEDUCTIONS
Commissions and distribution related payments$ 708
Compensation, benefits and other operating costs and
expenses
2,507 2,211 2,174 Interest expense 5 6 10 Segment benefits and other deductions$ 3,220
Changes in AUM in the Investment Management and Research segment for the periods
presented were as follows:
Year Ended December 31,
2021 2020 2019
(in billions)
Balance as of beginning of period $ 685.9 $ 622.9 $ 516.4
Long-term flows
Sales/new accounts 150.0 124.1 103.7
Redemptions/terminations (103.8) (109.3) (68.4)
Cash flow/unreinvested dividends (20.1) (17.4) (10.1)
Net long-term inflows (outflows) (1) 26.1 (2.6) 25.2
Acquisition - 0.2 -
AUM adjustment (2) - - (0.9)
Market appreciation (depreciation) 66.6 65.4 82.2
Net change 92.7 63.0 106.5
Balance as of end of period $ 778.6 $ 685.9 $ 622.9
______________
(1) Institutional net flows include$1.3 billion and$11.8 billion of AXA redemptions of certain low-fee fixed income mandates for 2021 and 2020, respectively. (2)Approximately$900 million of non-investment management fee earning taxable and tax-exempt money market assets were removed from assets under management during the second quarter of 2019. 94 -------------------------------------------------------------------------------- Table of Contents Average AUM in the Investment Management and Research segment for the periods presented by distribution channel and investment services were as follows: Year Ended December 31, 2021 2020 2019 (in billions) Distribution Channel: Institutions$ 325.7 $ 285.9 $ 265.4 Retail 291.0 236.5 212.3 Private Wealth Management 114.1 97.1 96.5 Total$ 730.8 $ 619.5 $ 574.2 Investment Service: Equity Actively Managed$ 252.2 $ 179.8 $ 158.4 Equity Passively Managed (1) 68.7 57.1 56.4 Fixed Income Actively Managed - Taxable 253.1 254.4 239.7 Fixed Income Actively Managed - Tax-exempt 53.8 47.9 44.6 Fixed Income Passively Managed (1) 9.6 9.4 9.4 Alternatives/Multi-Asset Solutions (2) 93.4 70.9 65.7 Total$ 730.8 $ 619.5 $ 574.2 ____________ (1)Includes index and enhanced index services. (2)Includes multi-asset solutions and services not included in equity or fixed income services. Prior toDecember 31, 2020 , this investment service line was disclosed as "Other." In order to reflect the increasing significance of our Alternatives and Multi-Asset Solutions services, we updated the investment service line to "Alternatives and Multi-Asset Solutions." 95
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Year Ended
the Investment Management and Research Segment
Operating earnings
Operating earnings increased$132 million to$564 million during the year endedDecember 31, 2021 from$432 million in the year endedDecember 31, 2020 . The following notable items were the primary drivers of the change in operating earnings:
Favorable items included:
•Fee-type revenue increased by$722 million primarily due to higher investment advisory base fees, performance based fees and distribution revenues, driven by higher average AUM due to market appreciation and net inflows. This is partially offset by lower Bernstein Research Services revenues due to lower trading activity driven by lower global market volatility as compared to the COVID-19 related volatility in the year endedDecember 31, 2020 . •Net investment income, net of derivative gains, was favorable by$5 million . Net investment income decreased by$18 million mainly due to lower gains on the seed capital investments subject to market risk, offset by an increase in Net derivative gains of$23 million mainly due to lower losses from economically hedging the seed capital investments.
These were partially offset by the following unfavorable items:
•Compensation, benefits, interest expense and other operating costs increased by$295 million mainly due to higher employee compensation attributed to higher revenues. •Commissions and distribution-related payments increased by$139 million mainly due to higher payments to financial intermediaries for the distribution of AB mutual funds, primarily resulting from increased average AUM of these mutual funds.
•Earnings attributable to noncontrolling interest increased by
to higher pre-tax earnings.
•Income tax expense increased by
Long-Term Net Flows and AUM
•Total AUM as ofDecember 31, 2021 was$778.6 billion up$92.7 billion , or 13.5%, compared toDecember 31, 2020 . The increase was driven primarily by market appreciation of$66.6 billion and net inflows of$26.1 billion (reflecting Retail net inflows of$20.8 billion ,Private Wealth Management net inflows of$3.0 billion and Institutional net inflows of$2.3 billion ). •Excluding AXA's redemption of low-fee fixed income mandates of$1.3 billion and$11.8 billion , AB generated net inflows of$27.4 billion and$9.2 billion during the twelve months endedDecember 31, 2021 and 2020, respectively. As previously disclosed, AB expects additional redemptions by AXA of low-fee retail AUM in the first half of 2022 of approximately$5 billion .
Year Ended
the Investment Management and Research Segment
Operating earnings
For discussion that compares results for the year ended
year ended
Net Flows and AUM
For discussion that compares results for the year ended
year ended
Protection Solutions
The Protection Solutions segment includes our life insurance and employee
benefits businesses. We provide a targeted range of products aimed at serving
the financial needs of our clients throughout their lives, including VUL, IUL
and term life products. In 2015, we entered the employee benefits market and
currently offer a suite of dental, vision, life, as well as short- and long-term
disability insurance products to small and medium-size businesses.
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In recent years, we have refocused our product offering and distribution towards
less capital intensive, higher return accumulation and protection products. For
example, in January 2021 , we discontinued offering our most interest sensitive
IUL product ("IUL Protect"). We plan to improve our operating earnings over time
through earnings generated from sales of our repositioned product portfolio and
by proactively managing and optimizing our in-force book.
The following table summarizes operating earnings (loss) of our Protection
Solutions segment for the periods presented:
Year Ended December 31,
2021 2020 2019
(in millions)
Operating earnings (loss) $ 317 $ 146 $ 336
Key components of operating earnings (loss) are:
Year Ended December 31,
2021 2020 2019
(in millions)
REVENUES
Policy charges, fee income and premiums $ 2,016 $ 1,970 $ 2,148
Net investment income 1,102 944 967
Net derivative gains (losses) (20) 5 10
Investment management, service fees and other income 260 225 241
Segment revenues $ 3,358
BENEFITS AND OTHER DEDUCTIONS Policyholders' benefits$ 1,850 $ 1,875 $ 1,655 Interest credited to policyholders' account balances 516 514 520 Commissions and distribution related payments 170 160 166 Amortization of deferred policy acquisition costs 93 84 275
Compensation, benefits and other operating costs and
expenses
345 337 347 Interest expense - - - Segment benefits and other deductions$ 2,974
The following table summarizes Protection Solutions Reserves for our Protection
Solutions segment as of the dates presented:
December 31,
2021 2020
(in millions)
Protection Solutions Reserves (1)
General Account $ 18,625 $ 18,905
Separate Accounts 17,012 14,771
Total Protection Solutions Reserves
_______________
(1)Does not include Protection Solutions Reserves for our employee benefits
business as it is a start-up business and therefore has immaterial in-force
policies.
The following table presents our in-force face amounts for the periods
indicated, respectively, for our individual life insurance products:
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December 31,
2021 2020
(in billions)
In-force face amount by product: (1)
Universal Life (2) $ 45.9 $ 48.7
Indexed Universal Life 27.9 27.7
Variable Universal Life (3) 132.8 127.7
Term 215.4 215.2
Whole Life 1.2 1.3
Total in-force face amount $ 423.2 $ 420.6
_______________
(1)Includes individual life insurance and does not include employee benefits as
it is a start-up business and therefore has immaterial in-force policies.
(2)UL includes GUL.
(3)VUL includes VL and COLI.
Year Ended
the Protection Solutions Segment
Operating earnings
Operating earnings increased$171 million to$317 million during the year endedDecember 31, 2021 from$146 million in the year endedDecember 31, 2020 . The following notable items were the primary drivers of the change in operating earnings:
Favorable items included:
•Net investment income increased by
from our alternative investment portfolio, higher average assets balances,
prepayments and General Account portfolio optimization.
•Fee-type revenue increased by
to growth in Employee Benefits and higher investment management and service
fees.
•Policyholders' benefits decreased by$25 million mainly due to a favorable assumption update, and lower claims on traditional products due to the sale of the USFL and MLICA blocks inApril 2020 , offset by unfavorable mortality driven by COVID-19 claims and older block claims. Employee Benefits' reserves continue to grow in line with the block size.
These were partially offset by the following unfavorable items:
•Net derivative gains decreased by
hedging loss offset on TIPS in the General Account.
•Commissions and distribution-related payments increased by
due to higher sales.
•Amortization of DAC increased by$9 million mainly due to more favorable model & assumption updates in 2020 vs 2021, offset by lower VISL baseline amortization following the DAC write-off in first half of 2020.
•Income tax expense increased by
earnings.
Year Ended
the Protection Solutions Segment
For discussion that compares results for the year ended
year ended
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Corporate and Other
Corporate and Other includes some of our financing and investment expenses. It also includes:Equitable Advisors broker-dealer business, the Closed Block, run-off variable annuity reinsurance business, run-off group pension business, run-off health business, benefit plans for our employees, certain strategic investments and certain unallocated items, including capital and related investments, interest expense and financing fees and corporate expense. AB's results of operations are reflected in the Investment Management and Research segment. Accordingly, Corporate and Other does not include any items applicable to AB. The following table summarizes operating earnings (loss) of Corporate and Other for the periods presented: Year Ended December 31, 2021 2020 2019 (in millions) Operating earnings (loss)$ (131) $ (303) $ (348)
General Account Investment Portfolio
The General Account investment portfolio supports the insurance and annuity liabilities of our Individual Retirement, Group Retirement and Protection Solutions businesses. Our General Account investment portfolio investment strategy seeks to achieve sustainable risk-adjusted returns by focusing on principal preservation, investment return, duration and liquidity requirements by product class and the diversification of risks. Investment activities are undertaken according to investment policy statements that contain internally established guidelines and are required to comply with applicable laws and insurance regulations. Risk tolerances are established for credit risk, market risk, liquidity risk and concentration risk across types of issuers and asset classes that seek to mitigate the impact of cash flow variability arising from these risks. The impact of COVID-19 continues to be assessed for potential negative impacts to the performance of mortgage loans and fixed maturities. The General Account investment portfolio consists largely of investment grade fixed maturities, short-term investments, commercial and agricultural mortgage loans, alternative investments and other financial instruments. Fixed maturities include publicly issued corporate bonds, government bonds, privately placed notes and bonds, bonds issued by states and municipalities, mortgage-backed securities and asset-backed securities. The General Account investment portfolio also includes credit derivatives to replicate exposure to individual securities or pools of securities as a means of achieving credit exposure similar to bonds of the underlying issuer(s) more efficiently. In addition, from time to time we use derivatives for hedging purposes to reduce our exposure to equity markets, interest rates and credit spreads. As part of a yield enhancement strategy, the General Account has diversified into more asset and sub-asset classes including higher yielding commercial mortgage investments. As part of our asset and liability management strategies, we maintain a weighted average duration for our General Account investment portfolio that is within an acceptable range of the estimated duration of our liabilities given our risk appetite and hedging programs.
Investment portfolios are primarily managed by legal entity with dedicated
portfolios for certain blocks of business. For portfolios that back multiple
product groups, investment results are allocated to business segments.
Our investment philosophy is driven by our long-term commitments to clients, robust risk management and strategic asset allocation. In executing the activities of our General Account investment portfolio, we incorporate ESG factors into the investment processes for a significant portion of our portfolio. As investors with a long-term horizon, we believe that companies with sustainable practices are better positioned to deliver value to stakeholders over an extended period, thereby enhancing the quality of our portfolio. These companies are more likely to increase sales through sustainable products, reduce energy costs and attract and retain talent. This belief underpins our approach to sustainable investing, where we seek to enhance the sustainability of our investment portfolio by integrating ESG factors into our investment decision process. The General Account investment portfolio reflects certain differences from the presentation of theU.S. GAAP Consolidated Financial Statements. This presentation is consistent with how we manage the General Account investment portfolio. For further investment information, please refer to Note 3 and Note 4 of the Notes to these Consolidated Financial Statements. 99
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Investment Results of the General Account Investment Portfolio
The following table summarizes the General Account investment portfolio results
with Non-GAAP Operating Earnings adjustments by asset category for the periods
indicated. This presentation is consistent with how we measure investment
performance for management purposes.
Year Ended December 31,
2021 2020 2019
Yield Amount (2) Yield Amount (2) Yield Amount (2)
(Dollars in millions)
Fixed Maturities: Income (loss) 3.40 %$ 2,429 3.46 %$ 2,318 3.68 %$ 2,019 Ending assets 72,545 71,738 62,687 Mortgages: Income (loss) 4.08 % 547 4.13 % 517 4.47 % 541 Ending assets 14,033 13,159 12,107 Other Equity Investments: (1) (4) Income (loss) 20.45 % 534 6.14 % 95 5.96 % 86 Ending assets 2,901 1,621 1,507 Policy Loans: Income (loss) 5.01 % 203 5.28 % 204 5.59 % 210 Ending assets 4,024 4,118 3,735 Cash and Short-term Investments: Income (loss) (0.13) % (2) 0.03 % 1 (0.15) % (4) Ending assets 1,662 2,095 1,856 Funding agreements: Interest expense and other (56) (75) (110) Ending assets (liabilities) (6,647) (6,897) (6,909) Total Invested Assets: Income (loss) 4.28 % 3,655 3.72 % 3,060 3.92 % 2,742 Ending Assets 88,518 85,834 74,983 Short Duration Fixed Maturities: Income (loss) 4.48 % 78 3.39 % 184 3.15 % 312 Ending assets 142 4,704 6,173 Total: Investment income (loss) 4.28 % 3,733 3.70 % 3,244 3.83 % 3,054 Less: investment fees (3) (0.14) % (118) (0.12) % (107) (0.13) % (103) Investment Income, Net 4.15 % 3,615 3.57 % 3,137 3.70 % 2,951 Ending Net Assets$ 88,660 $ 90,538 $ 81,156 _____________ (1)Includes, as ofDecember 31, 2021 ,December 31, 2020 andDecember 31, 2019 respectively,$319 million ,$333 million and$365 million of other invested assets. (2)Amount for fixed maturities and mortgages represents original cost, reduced by repayments, write-downs, adjusted amortization of premiums, accretion of discount and allowances. Cost for equity securities represents original cost reduced by write-downs; cost for other limited partnership interests represents original cost adjusted for equity in earnings and reduced by distributions. (3)Investment fees are inclusive of investment management fees paid to AB. (4)EffectiveJanuary 1, 2021 , certain preferred stock have been reclassified to other equity investments (see Note 2 of the Notes to these Consolidated Financial Statements- Investments). 100
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Fixed Maturities
The fixed maturity portfolio consists largely of investment grade corporate debt securities and includes significant amounts ofU.S. government and agency obligations. The limited below investment grade securities in the General Account investment portfolio consist of "fallen angels," originally purchased as investment grade, as well as short duration public high yield securities and loans to middle market companies.
Fixed Maturities by Industry
The following table sets forth these fixed maturities by industry category as of
the dates indicated along with their associated gross unrealized gains and
losses.
Fixed Maturities by Industry (1)
Amortized Allowance for Gross Unrealized Gross Unrealized Percentage of
Cost Credit Losses Gains Losses Fair Value Total (%)
(in millions)
As of December 31, 2021
Corporate Securities :
Finance $ 12,954 $ - $ 545 $ 59 $ 13,440 17 %
Manufacturing 12,212 1 775 39 12,947 17 %
Utilities 6,446 - 351 36 6,761 9 %
Services 8,191 21 380 50 8,500 11 %
Energy 3,854 - 174 17 4,011 5 %
Retail and wholesale 3,390 - 218 18 3,590 5 %
Transportation 2,181 - 156 10 2,327 3 %
Other 60 - 2 - 62 - %
Total corporate securities 49,288 22 2,601 229 51,638 67 %
U.S. government 13,056 - 2,344 15 15,385 20 %
Residential mortgage-backed (2) 90 - 8 - 98 - %
Preferred stock (4) 41 - 12 - 53 - %
State & political 586 - 78 3 661 1 %
Foreign governments 1,124 - 42 14 1,152 1 %
Commercial mortgage-backed 2,427 - 19 25 2,421 3 %
Asset-backed securities 5,933 - 21 20 5,934 8 %
Total $ 72,545 $ 22 $ 5,125 $ 306 $ 77,342 100 %
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Table of Contents As ofDecember 31, 2020 : (3)Corporate Securities : Finance$ 14,411 $ -$ 1,112 $ 9 $ 15,514 19 % Manufacturing 13,040 - 1,520 18 14,542 18 % Utilities 6,352 - 681 6 7,027 9 % Services 7,830 13 680 27 8,470 11 % Energy 4,084 - 364 23 4,425 6 % Retail and wholesale 3,747 - 435 3 4,179 5 % Transportation 2,424 - 301 4 2,721 3 % Other 157 - 7 2 162 - % Total corporate securities 52,045 13 5,100 92 57,040 71 % U.S. government 12,660 - 3,448 5 16,103 20 % Residential mortgage-backed (2) 130 - 13 - 143 - % Preferred stock 621 - 48 3 666 1 % State & political 536 - 100 - 636 1 % Foreign governments 1,011 - 98 6 1,103 1 % Commercial mortgage-backed 1,148 - 55 - 1,203 2 % Asset-backed securities 3,587 - 29 5 3,611 4 % Total$ 71,738 $ 13 $ 8,891 $ 111 $ 80,505 100 % ______________ (1)Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings. (2)Includes publicly traded agency pass-through securities and collateralized obligations. (3)Excludes amounts reclassified as HFS. (4)EffectiveJanuary 1, 2021 , certain preferred stock have been reclassified to other equity investments (see Note 2 of the Notes to these Consolidated Financial Statements- Investments).
Fixed Maturities Credit Quality
The SVO of the NAIC evaluates the investments of insurers for regulatory
reporting purposes and assigns fixed maturities to one of six categories ("NAIC
Designations"). NAIC Designations of "1" or "2" include fixed maturities
considered investment grade, which include securities rated Baa3 or higher by
Moody's or BBB- or higher by Standard & Poor's . NAIC Designations of "3" through
"6" are referred to as below investment grade, which include securities rated
Ba1 or lower by Moody's and BB+ or lower by Standard & Poor's . As a result of
time lags between the funding of investments and the completion of the SVO
filing process, the fixed maturity portfolio typically includes securities that
have not yet been rated by the SVO as of each balance sheet date. Pending
receipt of SVO ratings, the categorization of these securities by NAIC
designation is based on the expected ratings indicated by internal analysis.
The following table sets forth the General Account's fixed maturities portfolio
by NAIC rating at the dates indicated.
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Fixed Maturities
Gross Gross
Amortized Allowance for Unrealized Unrealized
NAIC Designation Rating Agency
Equivalent Cost Credit Losses Gains Losses Fair Value
(in millions)
As of December 31, 2021
1................................ Aaa, Aa, A$ 44,653 $ -$ 3,734 $ 158 $ 48,229 2................................ Baa 25,141 - 1,357 127 26,371 Investment grade 69,794 - 5,091 285 74,600 3................................ Ba 1,601 1 22 14 1,608 4................................ B 992 19 8 5 976 5................................ Caa 130 2 4 1 131 6................................ Ca, C 28 - - 1 27 Below investment grade 2,751 22 34 21 2,742 Total Fixed Maturities$ 72,545 $ 22$ 5,125 $ 306 $ 77,342
As of
1................................ Aaa, Aa, A$ 44,146 $ -$ 6,227 $ 32 $ 50,341 2................................ Baa 25,285 - 2,621 26 27,880 Investment grade 69,431 - 8,848 58 78,221 3................................ Ba 1,436 - 33 19 1,450 4................................ B 769 13 7 28 735 5................................ Caa 92 - 3 5 90 6................................ Ca, C 10 - - 1 9 Below investment grade 2,307 13 43 53 2,284 Total Fixed Maturities$ 71,738 $ 13$ 8,891 $ 111 $ 80,505 ______________
(1)Excludes amounts reclassified as HFS.
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Mortgage Loans
The mortgage portfolio primarily consists of commercial and agricultural
mortgage loans. The investment strategy for the mortgage loan portfolio
emphasizes diversification by property type and geographic location with a
primary focus on asset quality. The tables below show the breakdown of the
amortized cost of the General Account's investments in mortgage loans by
geographic region and property type as of the dates indicated.
Mortgage Loans by Region and Property Type
December 31, 2021 December 31, 2020
Amortized Amortized
Cost % of Total Cost % of Total
(in millions)
By Region :
U.S. Regions:
Pacific $ 4,297 30 % $ 3,912 30 %
Middle Atlantic 3,441 24 3,662 28
South Atlantic 1,982 14 1,290 10
East North Central 1,103 8 1,122 8
Mountain 978 7 1,026 8
West North Central 834 6 875 7
West South Central 609 5 690 5
New England 579 4 511 3
East South Central 146 1 152 1
Total U.S. $ 13,969 99 % $ 13,240 100 %
Other Regions:
Europe $ 126 1 % $ - - %
Total Other $ 126 1 $ - -
Total Mortgage Loans $ 14,095 100 % $ 13,240 100 %
By Property Type:
Office $ 3,944 28 % $ 4,131 31 %
Multifamily 4,694 33 4,027 30
Agricultural loans 2,644 19 2,732 21
Retail 728 5 742 6
Industrial 1,204 9 787 6
Hospitality 410 3 477 4
Other 471 3 344 2
Total Mortgage Loans $ 14,095 100 % $ 13,240 100 %
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Liquidity and Capital Resources
Liquidity refers to our ability to generate adequate amounts of cash from our operating, investment and financing activities to meet our cash requirements with a prudent margin of safety. Capital refers to our long-term financial resources available to support business operations and future growth. Our ability to generate and maintain sufficient liquidity and capital is dependent on the profitability of our businesses, timing of cash flows related to our investments and products, our ability to access the capital markets, general economic conditions and the alternative sources of liquidity and capital described herein. When considering our liquidity and cash flows, we distinguish between the needs of Holdings and the needs of our insurance and non-insurance subsidiaries. We also distinguish and separately manage the liquidity and capital resources of our retirement and protection businesses (our Individual Retirement, Group Retirement and Protection Solutions segments) and our Investment Management and Research segment.
Sources and Uses of Liquidity
The Company has sufficient cash flows from operations to satisfy liquidity
requirements in 2022.
Cash Flows of Holdings
As a holding company with no business operations of its own, Holdings primarily derives cash flows from dividends from its subsidiaries and distributions related to its economic interest in AB, nearly all of which is currently held outside our insurance company subsidiaries. These principal sources of liquidity are augmented by cash and short-term investments held by Holdings and access to bank lines of credit and the capital markets. The main uses of liquidity for Holdings are interest payments and debt repayment, payment of dividends and other distributions to stockholders (which may include stock repurchases) loans and capital contributions, if needed, to our insurance subsidiaries. Our principal sources of liquidity and our capital position are described in the following paragraphs.
Sources and Uses of Holding Company Highly Liquid Assets
The following table sets forth Holdings' principal sources and uses of highly
liquid assets for the periods indicated.
Year Ended December 31,
2021 2020
(in millions)
Highly Liquid Assets, beginning of period $ 3,088 $ 1,589
Dividends from subsidiaries 792 2,877
Capital contributions to subsidiaries (815) (350)
M&A Activity 215 -
Income taxes payable - -
Total Business Capital Activity 192 2,527
Purchase of treasury shares (1,637) (430)
Shareholder dividends paid (296) (297)
Total Share Repurchases, Dividends and Acquisition Activity (1,933) (727)
Issuance of preferred stock 293 494
Preferred stock dividend (79) (53)
Total Preferred Stock Activity 214 441
Issuance of long-term debt - -
Repayment of long-term debt (280) -
Total External Debt Activity (280) -
Repayments of loans from affiliates - (300)
Proceeds from loans from affiliates 1,000 -
Repayment of loans to affiliates - -
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Year Ended December 31,
2021 2020
(in millions)
Issuance of loans to affiliates -
-
Net decrease (increase) in loans to affiliates (80)
(115)
Total Affiliated Debt Activity 920
(415)
Interest paid on external debt and P-Caps (233) (220) Others, net (226) (107) Total Other Activity (459) (327) Net increase (decrease) in highly liquid assets (1,346)
1,499
Highly Liquid Assets, end of period$ 1,742
Capital Contribution to Our Subsidiaries
In
facilitate a corporate restructuring involving administrative services for
Equitable Financial's Separate Accounts.
Loans from Our Subsidiaries
In
Holdings for generic liquidity management purpose. The loan has an interest rate
of 3.23% and matures in
Cash Distributions from Our Subsidiaries
In 2021, Holdings and certain of its subsidiaries received pretax cash
distributions from AB of
dividends from
Distributions from Insurance Subsidiaries
Our insurance companies are subject to limitations on the payment of dividends and other transfers of funds to Holdings and other affiliates under applicable insurance law and regulation. Also, more generally, the ability of our insurance subsidiaries to pay dividends can be affected by market conditions and other factors beyond our control. UnderNew York insurance law applicable to Equitable Financial, a domestic stock life insurer may not, without prior approval of the NYDFS, pay an Ordinary Dividend. Extraordinary Dividends require the insurer to file a notice of its intent to declare the dividends with the NYDFS and prior approval or non-disapproval from the NYDFS. Due to a permitted statutory accounting practice agreed to with the NYDFS, Equitable Financial will need the prior approval of the NYDFS to pay a Permitted Practice Ordinary Dividend. Applying the formulas above, Equitable Financial could pay an Ordinary Dividend of up to approximately$865 million in 2022.
Distributions from AllianceBernstein
ABLP is required to distribute all of its Available Cash Flow, as defined in the
Amended and Restated Partnership Agreement of ABLP, to the holders of AB Units
and to the General Partner. Available Cash Flow is defined as the cash flow
received by ABLP from operations minus such amounts as the General Partner
determines, in its sole discretion, should be retained by ABLP for use in its
business, or plus such amounts as the General Partner determines, in its sole
discretion, should be released from previously retained cash flow. Distributions
by ABLP are made 1% to the General Partner and 99% among the limited partners.
Typically, Available Cash Flow has been the adjusted diluted net income per unit
for the quarter multiplied by the number of general and limited partnership
interests at the end of the quarter. In future periods, management of AB
anticipates that Available Cash Flow will be based on adjusted diluted net
income per unit, unless management of AB determines, with the concurrence of the
Board of Directors of AB, that one or more adjustments that are made for
adjusted net income should not be made with respect to the Available Cash Flow
calculation.
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AB Holding is required to distribute all of its Available Cash Flow, as defined
in the Amended and Restated Agreement of Limited Partnership of AB Holding , to
holders of AB Holding Units pro rata in accordance with their percentage
interest in AB Holding . Available Cash Flow is defined as the cash distributions
AB Holding receives from ABLP minus such amounts as the General Partner
determines, in its sole discretion, should be retained by AB Holding for use in
its business (such as the payment of taxes) or plus such amounts as the General
Partner determines, in its sole discretion, should be released from previously
retained cash flow. AB Holding is dependent on the quarterly cash distributions
it receives from ABLP, which is subject to the performance of capital markets
and other factors beyond our control. Distributions from AB Holding are made pro
rata based on the holder's percentage ownership interest in AB Holding .
As of December 31, 2021 , Holdings and its non-insurance company subsidiaries
hold approximately 170.1 million AB Units, 4.1 million AB Holding Units and the
1% General Partnership interest in ABLP.
As of
outstanding as well as the general partner's 1% interest, was as follows:
Owner Percentage Ownership EQH and its subsidiaries 63.0 %AB Holding 36.2 % Unaffiliated holders 0.8 % Total 100.0 % Including both the general partnership and limited partnership interests inAB Holding and ABLP, Holdings and its subsidiaries had an approximate 65% economic interest in AB as ofDecember 31, 2021 .
Holdings Credit Facilities
OnJune 24, 2021 , Holdings entered into the Amended and Restated Revolving Credit Agreement with respect to a five-year senior unsecured revolving credit facility (the "Credit Facility"), which lowered the facility amount to$1.5 billion and extended the maturity date toJune 24, 2026 , among other changes. The Amended and Restated Revolving Credit Agreement amends the Revolving Credit Agreement entered into by Holdings onFebruary 16, 2018 , as amended onMarch 22, 2021 . The Credit Facility may provide significant support to our liquidity position when alternative sources of credit are limited. In addition to the Credit Facility, we have letter of credit facilities with an aggregate principal amount of approximately$1.9 billion (the "LOC Facilities"), primarily to be used to support our life insurance business reinsured to EQ AZ Life Re inApril 2018 . InJune 2021 , Holdings entered into amendments with each of the issuers of its bilateral letter of credit facilities to effect changes similar to those effected in the amended and restated revolving credit agreement. The respective facility limits of the bilateral letter of credit facilities remained unchanged. The Credit Facility and LOC Facilities contain certain administrative, reporting, legal and financial covenants, including requirements to maintain a specified minimum consolidated net worth and to maintain a ratio of indebtedness to total capitalization not in excess of a specified percentage, and limitations on the dollar amount of indebtedness that may be incurred by our subsidiaries and the dollar amount of secured indebtedness that may be incurred by us, which could restrict our operations and use of funds. The right to borrow funds under the Credit Facility and LOC Facilities is subject to the fulfillment of certain conditions, including compliance with all covenants, and the ability to borrow thereunder is also subject to the continued ability of the lenders that are or will be parties to the facilities to provide funds. As ofDecember 31, 2021 , we were in compliance with these covenants".
Contingent Funding Arrangements
For information regarding activity pertaining to our contingent funding
arrangements and other off-balance sheet commitments, see "Commitments and
Contingent Liabilities in " Note 17 of the Notes to these Consolidated Financial
Statements in this Form 10-K.
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
For information pertaining to our Series A, Series B and Series C Preferred
Stock see Note 20 of the Notes to these Consolidated Financial Statements.
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Capital Position of Holdings
We manage our capital position to maintain financial strength and credit ratings that facilitate the distribution of our products and provide our desired level of access to the bank and capital markets. Our capital position is supported by the ability of our subsidiaries to generate cash flows and distribute cash to us and our ability to effectively manage the risk of our businesses and to borrow funds and raise capital to meet our operating and growth needs. Our Board and senior management are directly involved in the development of our capital management policies. Accordingly, capital actions, including proposed changes to the annual capital plan, capital targets and capital policies, are approved by the Board.
Dividends Declared and Paid
The declaration and payment of future dividends is subject to the discretion of our Board of Directors and depends on our financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on the payment of dividends by Holdings' insurance subsidiaries and other factors deemed relevant by the Board. The payment of dividends will be substantially restricted in the event that we do not declare and pay (or set aside) dividends on the Series A, Series B and Series C Preferred Stock for the last proceeding dividend period. For additional information on our preferred stock, see "-Series A, Series B and Series C Preferred Stock".
For information regarding activity pertaining to common and preferred dividends
declared and paid, see Note 20 of the Notes to these Consolidated Financial
Statements.
Share Repurchase Programs
For information regarding activity pertaining to share repurchase programs, see
Note 20 of the Notes to these Consolidated Financial Statements.
Sources and Uses of Liquidity of Our Insurance Subsidiaries
The principal sources of liquidity for our insurance subsidiaries are premiums, investment and fee income, deposits associated with our insurance and annuity operations, cash and invested assets, as well as internal borrowings. The principal uses of that liquidity include benefits, claims and dividends paid to policyholders and payments to policyholders in connection with surrenders and withdrawals. Other uses of liquidity include commissions, general and administrative expenses, purchases of investments, the payment of dividends to Holdings and hedging activity. Certain of our insurance subsidiaries' principal sources and uses of liquidity are described in the paragraphs that follow. We manage the liquidity of our insurance subsidiaries with the objective of ensuring that they can meet payment obligations linked to our Individual Retirement, Group Retirement and Protection Solutions businesses and to their outstanding debt and derivative positions, including in our hedging programs, without support from Holdings. We employ an asset/liability management approach specific to the requirements of each of our insurance businesses. We measure liquidity against internally-developed benchmarks that consider the characteristics of our asset portfolio and the liabilities that it supports in both the short-term (the next 12 months) and long-term (beyond the next 12 months). We consider attributes of the various categories of our liquid assets (for example, type of asset and credit quality) in calculating internal liquidity indicators for our insurance and reinsurance operations. Our liquidity benchmarks are established for various stress scenarios and durations, including company-specific and market-wide events. The scenarios we use to evaluate the liquidity of our subsidiaries are defined to allow operating entities to operate without support from Holdings.
Liquid Assets
The investment portfolios of our insurance subsidiaries are a significant component of our overall liquidity. Liquid assets include cash and cash equivalents, short-term investments,U.S. Treasury fixed maturities, fixed maturities that are not designated as HTM and public equity securities. We believe that our business operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios for each of our insurance subsidiaries. See "-General Account Investment Portfolio" and Note 3 and Note 4 of the Notes to these Consolidated Financial Statements for a description of our retirement and protection businesses' portfolio of liquid assets.
Hedging Activities
108 -------------------------------------------------------------------------------- Table of Contents Because the future claims exposure on our insurance products, and in particular our variable annuity products with GMxB features, is sensitive to movements in the equity markets and interest rates, we have in place various hedging and reinsurance programs that are designed to mitigate the economic risks of movements in the equity markets and interest rates. We use derivatives as part of our overall asset/liability risk management program primarily to reduce exposures to equity market and interest rate risks. In addition, we use credit derivatives to replicate exposure to individual securities or pools of securities as a means of achieving credit exposure similar to bonds of the underlying issuer(s) more efficiently. The derivative contracts are an integral part of our risk management program, especially for the management of our variable annuities program, and are collectively managed to reduce the economic impact of unfavorable movements in capital markets. These derivative transactions require liquidity to meet payment obligations such as payments for periodic settlements, purchases, maturities and terminations as well as liquid assets pledged as collateral related to any decline in the net estimated fair value. Collateral calls represent one of our biggest drivers for liquidity needs for our insurance subsidiaries. Our derivatives contracts reside primarily within Equitable Financial, which has a significantly large investment portfolio.
FHLB Membership
Equitable Financial and Equitable America are members of the FHLB, which
provides access to collateralized borrowings and other FHLB products.
See Note 17 of the Notes to these Consolidated Financial Statements for further
description of our FHLB program.
FABN
Under the FABN program, Equitable Financial may issue funding agreements in
dollar or other foreign currencies.
See Note 17 of the Notes to these Consolidated Financial Statements for further
description of our FABN program.
Sources and Uses of Liquidity of our Investment Management and Research Segment
The principal sources of liquidity for our Investment Management and Research business include investment management fees and borrowings under its credit facilities and commercial paper program. The principal uses of liquidity include general and administrative expenses, business financing and distributions to holders of AB Units and AB Holding Units plus interest and debt service. The primary liquidity risk for our fee-based Investment Management and Research business is its profitability, which is impacted by market conditions and our investment management performance.
For information regarding our Investment Management and Research credit
facilities and commercial paper program with external parties, see Note 12 of
the Notes to these Consolidated Financial Statements.
EQH Facility
AB has a$900 million committed, unsecured senior credit facility (the "EQH Facility"). The EQH Facility matures onNovember 4, 2024 and is available for AB's general business purposes. Borrowings under the EQH Facility generally bear interest at a rate per annum based on prevailing overnight commercial paper rates. The EQH Facility contains affirmative, negative and financial covenants which are substantially similar to those in AB's committed bank facilities. The EQH Facility also includes customary events of default substantially similar to those in AB's committed bank facilities, including provisions under which, upon the occurrence of an event of default, all outstanding loans may be accelerated and/or the lender's commitment may be terminated. Amounts under the EQH Facility may be borrowed, repaid and re-borrowed by AB from time to time until the maturity of the facility. AB or Holdings may reduce or terminate the commitment at any time without penalty upon proper notice. Holdings also may terminate the facility immediately upon a change of control of AB's general partner. As ofDecember 31, 2021 and 2020, AB had$755 million and$675 million outstanding under the EQH Facility, in each case with an interest rate of approximately 0.2%. Average daily borrowing of the EQH Facility during 2021 and 2020 were$405 million and$471 million , respectively, with a weighted average interest rate of approximately 0.2% and 0.5% respectively.
EQH Uncommitted Facility
109 -------------------------------------------------------------------------------- Table of Contents In addition to the EQH Facility, onSeptember 1, 2020 , AB established a new$300 million uncommitted, unsecured senior credit facility (the "EQH Uncommitted Facility") with EQH. The EQH Uncommitted Facility matures onSeptember 1, 2024 and is available for AB's general business purposes. Borrowings under the EQH Uncommitted Facility bear generally interest at a rate per annum based on prevailing overnight commercial paper rates. The EQH Uncommitted Facility contains affirmative, negative and financial covenants, which are substantially similar to those in the EQH Facility.
As of
Uncommitted Facility. During the periods ended
did not draw upon the EQH Uncommitted Facility.
Our capital management framework for our insurance subsidiaries is primarily based on statutory RBC standards and the CTE asset standard for our variable annuity business. RBC requirements are used as minimum capital requirements by the NAIC and the state insurance departments to evaluate the capital condition of regulated insurance companies. RBC is based on a formula calculated by applying factors to various asset, premium, claim, expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk, market risk and business risk and is calculated on a quarterly basis and made public on an annual basis. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. These rules apply to our insurance company subsidiaries and not to Holdings. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not meet or exceed certain RBC levels. At the date of the most recent annual statutory financial statements filed with insurance regulators, the total adjusted capital of each of these insurance company subsidiaries subject to these requirements was in excess of each of those RBC levels. Please see Note 20 of the Notes to these Consolidated Financial Statements for additional information relating to Permitted Statutory Accounting practices and its impact on our statutory surplus.
We use a captive reinsurance company to more effectively manage our reserves and capital on an economic basis and to enable the aggregation and transfer of risks. Our captive reinsurance company assumes business from affiliates only and is closed to new business. Our captive reinsurance company is a wholly-owned subsidiaries located inthe United States . In addition to state insurance regulation, our captive is subject to internal policies governing its activities. We continue to analyze the use of our existing captive reinsurance structure, as well as additional third-party reinsurance arrangements.
Borrowings
Our financial strategy going forward will remain subject to market conditions and other factors. For example, we may from time to time enter into additional bank or other financing arrangements, including public or private debt, structured facilities and contingent capital arrangements, under which we could incur additional indebtedness.
For information regarding activity pertaining to our total consolidated
borrowings, see Note 12 of the Notes to these Consolidated Financial Statements.
Ratings
Financial strength ratings (which are sometimes referred to as "claims-paying"
ratings) and credit ratings are important factors affecting public confidence in
an insurer and its competitive position in marketing products. Our credit
ratings are also important for our ability to raise capital through the issuance
of debt and for the cost of such financing.
Financial strength ratings represent the opinions of rating agencies regarding
the financial ability of an insurance company to meet its obligations under an
insurance policy. Credit ratings represent the opinions of rating agencies
regarding an entity's ability to repay its indebtedness. The following table
summarizes the ratings for Holdings and certain of its subsidiaries. AM Best and
S&P have a stable outlook while Moody's has a positive outlook.
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AM Best S&P Moody's
Last review date Jan '22 Nov '21 Aug '21
Financial Strength Ratings:
Equitable Financial Life Insurance Company A A+ A2
Equitable Financial Life Insurance Company of America A A+ A2
Credit Ratings:
Equitable Holdings, Inc. BBB+ Baa2
Last review date Sep '21 Dec '21
AllianceBernstein L.P. A A2
Material Cash Requirements
The table below summarizes the material short and long-term cash requirements
related to contractual and other obligations as of December 31, 2021 . Short-term
cash requirements are considered to requirements within the next 12 months and
long-term cash requirements are considered to be beyond the next 12 months. We
do not believe that our cash flow requirements can be adequately assessed based
solely upon an analysis of these obligations, as the table below does not
contemplate all aspects of our cash inflows, such as the level of cash flow
generated by certain of our investments, nor all aspects of our cash outflows.
Estimated Payments Due by Year
2027 and
Total 2022 2023-2024 2025-2026 thereafter
(in millions)
Material Cash Requirements:
Insurance liabilities (1) $ 107,485 $ 1,509
FHLB Funding Agreements
6,643 5,353 644 646 - Interest on FHLB Funding Agreements 100 29 48 23 - FABN Funding Agreements 6,759 - 2,500 2,100 2,159 Interest on FABN Funding Agreements 372 74 137 105 56 Operating leases, net of sublease commitments 1,106 153 234 149 570 Long-term debt 3,870 - 520 - 3,350 Interest on long-term debt 2,602 185 340 330 1,747 Interest on P-Caps 394 24 47 47 276 Employee benefits 3,498 211 451 383 2,453 Funding Commitments 2,118 520 832 766 -
Total Material Cash Requirements
______________
(1) Policyholders' liabilities represent estimated cash flows out of the General Account related to the payment of death and disability claims, policy surrenders and withdrawals, annuity payments, minimum guarantees on Separate Account funded contracts, matured endowments, benefits under accident and health contracts, policyholder dividends and future renewal premium-based and fund-based commissions offset by contractual future premiums and deposits on in-force contracts. These estimated cash flows are based on mortality, morbidity and lapse assumptions comparable with the Company's experience and assume market growth and interest crediting consistent with actuarial assumptions. These amounts are undiscounted and, therefore, exceed the policyholders' account balances and future policy benefits and other policyholder liabilities included in the consolidated balance sheet included elsewhere in this Annual Report on Form 10-K. They do not reflect projected recoveries from reinsurance agreements. Due to the use of assumptions, actual cash flows will differ from these estimates, see "- Summary of Critical Accounting Estimates - Liability for Future Policy Benefits." Separate Accounts liabilities have been excluded as they are legally insulated from General Account obligations and will be funded by cash flows from Separate Accounts assets. Unrecognized tax benefits of$323 million , including$3 million related to AB were not included in the above table because it is not possible to make reasonably reliable estimates of the occurrence or timing of cash settlements with the respective taxing authorities.
In addition, the below items are included as part of AB's aggregate contractual
obligations:
111 -------------------------------------------------------------------------------- Table of Contents •As ofDecember 31, 2021 , AB had a$354 million accrual for compensation and benefits, of which$9 million is expected to be paid in 2022,$15 million in 2023-2024,$18 million in 2025-2026 and$46 million in 2027 and thereafter.Further, AB expects to make contributions to its qualified profit-sharing plan of$16 million in each of the next four years. •During 2010, as general partner ofAllianceBernstein U.S. Real Estate L.P. ("Real Estate Fund "), AB committed to invest$25 million in theReal Estate Fund . As ofDecember 31, 2021 , AB funded$22 million of this commitment. During 2014, as general partner ofAllianceBernstein U.S. Real Estate II L.P. ("Real Estate Fund II"), AB committed to invest$27 million as amended in 2020, in the Real Estate Fund II. As ofDecember 31, 2021 , AB had funded$21 million of this commitment.
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity withU.S. GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in our consolidated financial statements included elsewhere herein. For a discussion of our significant accounting policies, see Note 2 of the Notes to these Consolidated Financial Statements. The most critical estimates include those used in determining:
•liabilities for future policy benefits;
•accounting for reinsurance;
•capitalization and amortization of DAC;
•estimated fair values of investments in the absence of quoted market values and
investment impairments;
•estimated fair values of freestanding derivatives and the recognition and
estimated fair value of embedded derivatives requiring bifurcation;
•goodwill and related impairment;
•measurement of income taxes and the valuation of deferred tax assets; and
•liabilities for litigation and regulatory matters.
In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries while others are specific to our business and operations. Actual results could differ from these estimates.
Liability for Future Policy Benefits
We establish reserves for future policy benefits to, or on behalf of, policyholders in the same period in which the policy is issued or acquired, using methodologies prescribed byU.S. GAAP. The assumptions used in establishing reserves are generally based on our experience, industry experience or other factors, as applicable. At least annually we review our actuarial assumptions, such as mortality, morbidity, retirement and policyholder behavior assumptions, and update assumptions when appropriate. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term. The reserving methodologies used include the following: •UL and investment-type contract policyholder account balances are equal to the policy AV. The policy AV represent an accumulation of gross premium payments plus credited interest less expense and mortality charges and withdrawals.
•Participating traditional life insurance future policy benefit liabilities are
calculated using a net level premium method on the basis of actuarial
assumptions equal to guaranteed mortality and dividend fund interest rates.
•Non-participating traditional life insurance future policy benefit liabilities
are estimated using a net level premium method on the basis of actuarial
assumptions as to mortality, persistency and interest.
For most long-duration contracts, we utilize best estimate assumptions as of the date the policy is issued or acquired with provisions for the risk of adverse deviation, as appropriate. After the liabilities are initially established, we perform premium deficiency tests using best estimate assumptions as of the testing date without provisions for adverse deviation. If the liabilities determined based on these best estimate assumptions are greater than the net reserves (i.e.,U.S. GAAP reserves net of any 112 -------------------------------------------------------------------------------- Table of Contents DAC or DSI), the existing net reserves are adjusted by first reducing the DAC or DSI by the amount of the deficiency or to zero through a charge to current period earnings. If the deficiency is more than these asset balances for insurance contracts, we then increase the net reserves by the excess, again through a charge to current period earnings. If a premium deficiency is recognized, the assumptions as of the premium deficiency test date are locked in and used in subsequent valuations and the net reserves continue to be subject to premium deficiency testing. For certain reserves, such as those related to GMDB and GMIB features, we use current best estimate assumptions in establishing reserves. The reserves are subject to adjustments based on periodic reviews of assumptions and quarterly adjustments for experience, including market performance, and the reserves may be adjusted through a benefit or charge to current period earnings. For certain GMxB features in our Individual Retirement segment, the benefits are accounted for as embedded derivatives, with fair values calculated as the present value of expected future benefit payments to contract holders less the present value of assessed rider fees attributable to the embedded derivative feature. UnderU.S. GAAP, the fair values of these benefit features are based on assumptions a market participant would use in valuing these embedded derivatives. Changes in the fair value of the embedded derivatives are recorded quarterly through a benefit or charge to current period earnings. The assumptions used in establishing reserves are generally based on our experience, industry experience and/or other factors, as applicable. We typically update our actuarial assumptions, such as mortality, morbidity, retirement and policyholder behavior assumptions, annually, unless a material change is observed in an interim period that we feel is indicative of a long-term trend. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term. In a sustained low interest rate environment, there is an increased likelihood that the reserves determined based on best estimate assumptions may be greater than the net liabilities.
See Note 2 of the Notes to these Consolidated Financial Statements for
additional information on our accounting policy relating to GMxB features and
liability for future policy benefits and Note 9 of the Notes to these
Consolidated Financial Statements for future policyholder benefit liabilities.
Sensitivity of Future Rate of Return Assumptions on GMDB/GMIB Reserves
The Separate Account future rate of return assumptions that are used in establishing reserves for GMxB features are set using a long term-view of expected average market returns by applying a reversion to the mean approach, consistent with that used for DAC amortization. For additional information regarding the future expected rate of return assumptions and the reversion to the mean approach, see, "-DAC and Policyholder Bonus Interest Credits." The GMDB/GMIB reserve balance before reinsurance ceded was$10.8 billion as ofDecember 31, 2021 . The following table provides the sensitivity of the reserves GMxB features related to variable annuity contracts relative to the future rate of return assumptions by quantifying the adjustments to these reserves that would be required assuming both a 1% increase and decrease in the future rate of return. This sensitivity considers only the direct effect of changes in the future rate of return on operating results due to the change in the reserve balance before reinsurance ceded and not changes in any other assumptions such as persistency, mortality, or expenses included in the evaluation of the reserves, or any changes on DAC or other balances including hedging derivatives and the GMIB reinsurance asset. GMDB/GMIB Reserves Sensitivity - Rate of Return December 31, 2021 Increase/(Decrease) in GMDB/GMIB Reserves (in millions) 1% decrease in future rate of return $ 1,363 1% increase in future rate of return $ (1,667)
Traditional Annuities
The reserves for future policy benefits for annuities include group pension and
payout annuities, and, during the accumulation period, are equal to accumulated
policyholders' fund balances and, after annuitization, are equal to the present
value of expected future payments based on assumptions as to mortality,
retirement, maintenance expense, and interest rates.
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Interest rates used in establishing such liabilities range from 1.5% to 5.4%
(weighted average of 3.5%). If reserves determined based on these assumptions
are greater than the existing reserves, the existing reserves are adjusted to
the greater amount.
Health
Individual health benefit liabilities for active lives are estimated using the
net level premium method and assumptions as to future morbidity, withdrawals and
interest. Benefit liabilities for disabled lives are estimated using the present
value of benefits method and experience assumptions as to claim terminations,
expenses and interest.
Reinsurance
Accounting for reinsurance requires extensive use of assumptions and estimates,
particularly related to the future performance of the underlying business and
the potential impact of counterparty credit risk with respect to reinsurance
receivables. We periodically review actual and anticipated experience compared
to the aforementioned assumptions used to establish assets and liabilities
relating to ceded and assumed reinsurance and evaluate the financial strength of
counterparties to our reinsurance agreements using criteria similar to those
evaluated in our security impairment process. See "-Estimated Fair Value of
Investments." Additionally, for each of our reinsurance agreements, we determine
whether the agreement provides indemnification against loss or liability
relating to insurance risk, in accordance with applicable accounting standards.
We review all contractual features, including those that may limit the amount of
insurance risk to which the reinsurer is subject or features that delay the
timely reimbursement of claims. If we determine that a reinsurance agreement
does not expose the reinsurer to a reasonable possibility of a significant loss
from insurance risk, we record the agreement using the deposit method of
accounting.
For reinsurance contracts other than those covering GMIB exposure, reinsurance
recoverable balances are calculated using methodologies and assumptions that are
consistent with those used to calculate the direct liabilities. GMIB reinsurance
contracts are used to cede affiliated and non-affiliated reinsurers a portion of
the exposure on variable annuity products that offer the GMIB feature. The GMIB
reinsurance contracts are accounted for as derivatives and are reported at fair
value. Gross reserves for GMIB, on the other hand, are calculated on the basis
of assumptions related to projected benefits and related contract charges over
the lives of the contracts, therefore, will not immediately reflect the
offsetting impact on future claims exposure resulting from the same capital
market and/or interest rate fluctuations that cause gains or losses on the fair
value of the GMIB reinsurance contracts.
See Note 11 of the Notes to these Consolidated Financial Statements for
additional information on our reinsurance.
DAC
We incur significant costs in connection with acquiring new and renewal insurance business. Costs that relate directly to the successful acquisition or renewal of insurance contracts, are deferred as DAC. In addition to commissions, certain direct-response advertising expenses and other direct costs, other deferrable costs include the portion of an employee's total compensation and benefits related to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed. We utilize various techniques to estimate the portion of an employee's time spent on qualifying acquisition activities that result in actual sales, including surveys, interviews, representative time studies and other methods. These estimates include assumptions that are reviewed and updated on a periodic basis or more frequently to reflect significant changes in processes or distribution methods. Amortization Methodologies
Participating Traditional Life Policies
For participating traditional life policies (substantially all of which are in the Closed Block), DAC is amortized over the expected total life of the contract group as a constant percentage based on the present value of the estimated gross margin amounts expected to be realized over the life of the contracts using the expected investment yield. As ofDecember 31, 2021 , the average investment yields assumed (excluding policy loans) were 4.5% grading to 4.3% in 2026. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of DAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date. Many of the factors that affect gross margins are included in 114 -------------------------------------------------------------------------------- Table of Contents the determination of the Company's dividends to these policyholders. DAC adjustments related to participating traditional life policies do not create significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in "Policyholders' dividends," for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization.
Non-participating Traditional Life Insurance Policies
DAC associated with non-participating traditional life policies is amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in earnings (loss) in the period such deviations occur. For these contracts, the amortization periods generally are for the total life of the policy.
Universal Life and Investment-type Contracts
DAC associated with certain variable annuity products is amortized based on estimated assessments, with the remainder of variable annuity products, UL and investment-type products amortized over the expected total life of the contract group as a constant percentage of estimated gross profits arising principally from investment results, Separate Account fees, mortality and expense margins and surrender charges based on historical and anticipated future experience, updated at the end of each accounting period. When estimated gross profits are expected to be negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated gross profits or assessments is reflected in net income (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date. Quarterly adjustments to the DAC balance are made for current period experience and market performance related adjustments, and the impact of reviews of estimated total gross profits. The quarterly adjustments for current period experience reflect the impact of differences between actual and previously estimated expected gross profits for a given period. Total estimated gross profits include both actual experience and estimates of gross profits for future periods. To the extent each period's actual experience differs from the previous estimate for that period, the assumed level of total gross profits may change. In these cases, cumulative adjustment to all previous periods' costs is recognized. During each accounting period, the DAC balances are evaluated and adjusted with a corresponding charge or credit to current period earnings for the effects of the Company's actual gross profits and changes in the assumptions regarding estimated future gross profits. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date. For the variable and UL policies a significant portion of the gross profits is derived from mortality margins and therefore, are significantly influenced by the mortality assumptions used. Mortality assumptions represent our expected claims experience over the life of these policies and are based on a long-term average of actual company experience. This assumption is updated periodically to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization.
Loss Recognition Testing
After the initial establishment of reserves, loss recognition tests are performed using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any DAC asset), loss recognition accounting is triggered and DAC is first written off, and thereafter a premium deficiency reserve is established by a charge to earnings. In 2020, we determined that certain of our variable interest-sensitive life insurance products triggered loss recognition accounting due to low interest rates and we reduced DAC by$945 million through accelerated amortization. We did not have a loss recognition event in 2021 or 2019. 115 -------------------------------------------------------------------------------- Table of Contents Additionally, policyholder liability balances for a particular line of business may not be deficient in the aggregate to trigger loss recognition accounting; however, the pattern of earnings may be such that annual profits are expected to be recognized in earlier years and then followed by losses in later years. This pattern of profits followed by losses is exhibited in our VISL business and has caused us to increase policyholder liability balances by an amount that accounts for losses in future years. This pattern is caused by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate even if there is insufficient policy account value to cover the monthly deductions and charges. We estimate the PFBL accrual using a dynamic approach that changes over time as the projection and timing of future losses change. In addition, we are required to analyze how net unrealized investment gains and losses on our AFS investment securities backing insurance liabilities affects product profitability,, as if those unrealized investment gains and losses were realized. This may result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses on AFS investment securities within the statements of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease DAC. Similar to a loss recognition event, if the DAC balance is reduced to zero, additional insurance liabilities are established. Unlike a loss recognition event, these adjustments may reverse from period to period.
Sensitivity of DAC to Changes in Future Mortality Assumptions
The following table demonstrates the sensitivity of the DAC balance relative to
future mortality assumptions by quantifying the adjustments that would be
required, assuming an increase and decrease in the future mortality rate by
1.0%. This information considers only the direct effect of changes in the
mortality assumptions on the DAC balance and not changes in any other
assumptions used in the measurement of the DAC balance and does not assume
changes in reserves.
DAC Sensitivity - Mortality
December 31, 2021
Increase/(Decrease)
in DAC
(in millions)
Decrease in future mortality by 1% $ 17
Increase in future mortality by 1% $ (16)
Sensitivity of DAC to Changes in Future Rate of Return Assumptions
A significant assumption in the amortization of DAC on variable annuity products and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future Separate Accounts performance. Management sets estimated future gross profit or assessment assumptions related to Separate Account performance using a long-term view of expected average market returns by applying a RTM approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected. In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. In second quarter 2015, based upon management's then-current expectations of interest rates and future fund growth, we updated our reversion to the mean assumption from 9.0% to 7.0%. The average gross long-term return measurement start date was also updated toDecember 31, 2014 . Management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. As ofDecember 31, 2021 , the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuity products was 7.0% (4.7% net of product weighted average Separate Accounts fees), and the gross maximum and minimum short-term annual rate of return limitations were 15.0% (12.7% net of product weighted average Separate Accounts fees and Investment Advisory fees) and 0.0% ((2.3%) net of product weighted average Separate Account fees and Investment Advisory fees), respectively. The maximum duration over which these rate limitations may be applied is five years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions. If actual market returns continue at levels that would result in assuming future market returns of 15.0% for more than five years in order to reach the average gross long-term return estimate, the application of the five-year maximum duration 116 -------------------------------------------------------------------------------- Table of Contents limitation would result in an acceleration of DAC amortization. Conversely, actual market returns resulting in assumed future market returns of 0.0% for more than five years would result in a required deceleration of DAC amortization. As ofDecember 31, 2021 , current projections of future returns assume a 0.0% annualized return for the next nine quarters grading to a reversion to the mean of 7.0% in nineteen quarters.
Other significant assumptions underlying gross profit estimates for UL and
investment type products relate to contract persistency and General Account
investment spread.
The following table provides an example of the sensitivity of the DAC balance of
variable annuity products and variable and interest-sensitive life insurance
relative to future return assumptions by quantifying the adjustments to the DAC
balance that would be required assuming both an increase and decrease in the
future rate of return by 1.0%. This information considers only the effect of
changes in the future Separate Accounts rate of return and not changes in any
other assumptions used in the measurement of the DAC balance.
DAC Sensitivity - Rate of Return
December 31, 2021
Increase/(Decrease)
in DAC
(in millions)
Decrease in future rate of return by 1% $ (115)
Increase in future rate of return by 1% $ 139
Estimated Fair Value of Investments
The Company's investment portfolio principally consists of public and private fixed maturities, mortgage loans, equity securities and derivative financial instruments, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, swaptions, variance swaps, as well as equity options used to manage various risks relating to its business operations.
Fair Value Measurements
Investments reported at fair value in the consolidated balance sheets of the
Company include fixed maturity securities classified as AFS, equity and trading
securities and certain other invested assets, such as freestanding derivatives.
In addition, reinsurance contracts covering GMIB exposure and the liabilities in
the SCS variable annuity products, SIO in the EQUI-VEST variable annuity product
series, MSO in the variable life insurance products, IUL insurance products and
the GMAB, GIB, GMWB and GWBL feature in certain variable annuity products issued
by the Company are considered embedded derivatives and reported at fair value.
When available, the estimated fair value of securities is based on quoted prices
in active markets that are readily and regularly obtainable; these generally are
the most liquid holdings and their valuation does not involve management
judgment. When quoted prices in active markets are not available, we estimate
fair value based on market standard valuation methodologies. These alternative
approaches include matrix or model pricing and use of independent pricing
services, each supported by reference to principal market trades or other
observable market assumptions for similar securities. More specifically, the
matrix pricing approach to fair value is a discounted cash flow methodology that
incorporates market interest rates commensurate with the credit quality and
duration of the investment. For securities with reasonable price transparency,
the significant inputs to these valuation methodologies either are observable in
the market or can be derived principally from or corroborated by observable
market data. When the volume or level of activity results in little or no price
transparency, significant inputs no longer can be supported by reference to
market observable data but instead must be based on management's estimation and
judgment. Substantially the same approach is used by us to measure the fair
values of freestanding and embedded derivatives with exception for consideration
of the effects of master netting agreements and collateral arrangements as well
as incremental value or risk ascribed to changes in own or counterparty credit
risk.
As required by the accounting guidance, we categorize our assets and liabilities
measured at fair value into a three-level hierarchy, based on the priority of
the inputs to the respective valuation technique, giving the highest priority to
quoted prices in active markets for identical assets and liabilities (Level 1)
and the lowest priority to unobservable inputs (Level 3). For additional
information regarding the key estimates and assumptions surrounding the
determinations of fair value measurements, see Note 8 of the Notes to these
Consolidated Financial Statements.
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Impairments and Valuation Allowances
The carrying values of fixed maturities classified as AFS are reported at fair value. Changes in fair value are reported in OCI, net of allowance for credit losses, policy related amounts and deferred income taxes. With the adoption of the Financial Instruments-Credit Losses standard, changes in credit losses are recognized in investment gains (losses), net. With the assistance of our investment advisors, we evaluate AFS debt securities that experience a decline in fair value below amortized cost for credit losses which are evaluated in accordance with the financial instruments credit losses guidance. The remainder of the unrealized loss related to other factors, if any, is recognized in OCI. Integral to this review is an assessment made each quarter, on a security-by-security basis, by our IUS Committee, of various indicators of credit deterioration to determine whether the investment security has experienced a credit loss. This assessment includes, but is not limited to, consideration of the severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, the financial strength, liquidity and continued viability of the issuer. We recognize an allowance for credit losses on AFS debt securities with a corresponding adjustment to earnings rather than a direct write down that reduces the cost basis of the investment, and credit losses are limited to the amount by which the security's amortized cost basis exceeds its fair value. Any improvements in estimated credit losses on AFS debt securities are recognized immediately in earnings. We do not use the length of time a security has been in an unrealized loss position as a factor, either by itself or in combination with other factors, to conclude that a credit loss does not exist, as was permitted to do prior toJanuary 1, 2020 . If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting allowance is recognized in income (loss) and the remainder of the fair value loss is recognized in OCI. The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by discounting management's best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the security. For mortgage and asset-backed securities, projected future cash flows also include assumptions regarding prepayments and underlying collateral value. Write-offs of AFS debt securities are recorded when all or a portion of a financial asset is deemed uncollectible. Full or partial write-offs are recorded as reductions to the amortized cost basis of the AFS debt security and deducted from the allowance in the period in which the financial assets are deemed uncollectible. We elected to reverse accrued interest deemed uncollectible as a reversal of interest income. In instances where we collect cash that has previously been written off, the recovery will be recognized through earnings or as a reduction of the amortized cost basis for interest and principal, respectively. Mortgage loans are stated at unpaid principal balances, net of unamortized discounts and valuation allowances. For collectively evaluated mortgages, the Company estimates the allowance for credit losses based on the amortized cost basis of its mortgages over their expected life using a PD / LGD model. For individually evaluated mortgages, the Company continues to recognize valuation allowances based on the present value of expected future cash flows discounted at the loan's original effective interest rate or on its collateral value if the loan is collateral dependent. For commercial and agricultural mortgage loans, an allowance for credit loss is typically recommended when management believes it is probable that principal and interest will not be collected according to the contractual terms. Factors that influence management's judgment in determining allowance for credit losses include the following: •LTV ratio-Derived from current loan balance divided by the fair market value of the property. An allowance for credit loss is typically recommended when the LTV ratio is in excess of 100%. In the case where the LTV is in excess of 100%, the allowance for credit loss is derived by taking the difference between the fair market value (less cost of sale) and the current loan balance.
•DSC ratio-Derived from actual operating earnings divided by annual debt
service. If the ratio is below 1.0x, then the income from the property does not
support the debt.
•Occupancy-Criteria vary by property type but low or below market occupancy is
an indicator of sub-par property performance.
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•Lease expirations-The percentage of leases expiring in the upcoming 12 to 36 months are monitored as a decline in rent and/or occupancy may negatively impact the debt service coverage ratio. In the case of single-tenant properties or properties with large tenant exposure, the lease expiration is a material risk factor. •Maturity-Mortgage loans that are not fully amortizing and have upcoming maturities within the next 12 to 24 months are monitored in conjunction with the capital markets to determine the borrower's ability to refinance the debt and/or pay off the balloon balance.
•Borrower/tenant related issues-Financial concerns, potential bankruptcy, or
words or actions that indicate imminent default or abandonment of property.
•Payment status - current vs. delinquent-A history of delinquent payments may be
a cause for concern.
•Property condition-Significant deferred maintenance observed during the lenders
annual site inspections.
•Other-Any other factors such as current economic conditions may call into
question the performance of the loan.
Mortgage loans that do not share similar risk characteristics with other loans
in the portfolio are individually evaluated quarterly by the IUS Committee for
impairment on a loan-by-loan basis, including an assessment of related
collateral value. Commercial mortgages 60 days or more past due and agricultural
mortgages 90 days or more past due, as well as all mortgages in the process of
foreclosure, are identified as problem mortgages. Based on its monthly
monitoring of mortgages, a class of potential problem mortgages also is
identified, consisting of mortgage loans not currently classified as problems
but for which management has doubts as to the ability of the borrower to comply
with the present loan payment terms and which may result in the loan becoming a
problem or being restructured. The decision whether to classify a performing
mortgage loan as a potential problem involves significant subjective judgments
by management as to likely future industry conditions and developments with
respect to the borrower or the individual mortgaged property.
For problem mortgage loans a valuation allowance is established to provide for
the risk of credit losses inherent in the lending process. The allowance
includes loan specific reserves for loans determined to be non-performing as a
result of the loan review process. A non-performing loan is defined as a loan
for which it is probable that amounts due according to the contractual terms of
the loan agreement will not be collected. The loan specific portion of the loss
allowance is based on our assessment as to ultimate collectability of loan
principal and interest. Valuation allowances for a non-performing loan are
recorded based on the present value of expected future cash flows discounted at
the loan's effective interest rate or based on the fair value of the collateral
if the loan is collateral dependent. The valuation allowance for mortgage loans
can increase or decrease from period to period based on such factors.
Impaired mortgage loans without provision for losses are mortgage loans where
the fair value of the collateral or the net present value of the expected future
cash flows related to the loan equals or exceeds the recorded investment.
Interest income earned on mortgage loans where the collateral value is used to
measure impairment is recorded on a cash basis. Interest income on mortgage
loans where the present value method is used to measure impairment is accrued on
the net carrying value amount of the loan at the interest rate used to discount
the cash flows. Changes in the present value attributable to changes in the
amount or timing of expected cash flows are reported as investment gains or
losses.
Mortgage loans are placed on nonaccrual status once management believes the
collection of accrued interest is doubtful. Once mortgage loans are classified
as nonaccrual mortgage loans, interest income is recognized under the cash basis
of accounting and the resumption of the interest accrual would commence only
after all past due interest has been collected or the mortgage loan on real
estate has been restructured to where the collection of interest is considered
likely.
See Notes 2 and 3 of the Notes to these Consolidated Financial Statements for
additional information relating to our determination of the amount of allowances
and impairments.
Derivatives
We use freestanding derivative instruments to hedge various capital market risks
in our products, including: (i) certain guarantees, some of which are reported
as embedded derivatives; (ii) current or future changes in the fair value of our
assets and liabilities; and (iii) current or future changes in cash flows. All
derivatives, whether freestanding or embedded, are required to be carried on the
balance sheet at fair value with changes reflected in either net income (loss)
or in OCI, depending on the type of hedge. Below is a summary of critical
accounting estimates by type of derivative.
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Freestanding Derivatives
The determination of the estimated fair value of freestanding derivatives, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models. See Note 8 of the Notes to these Consolidated Financial Statements for additional details on significant inputs into the OTC derivative pricing models and credit risk adjustment.
Embedded Derivatives
We issue variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in net derivative gains (losses). The estimated fair values of these embedded derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees attributable to the guarantee. The projections of future benefits and future fees require capital markets and actuarial assumptions, including expectations concerning policyholder behavior. A risk-neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and variations in actuarial assumptions, including policyholder behavior, mortality and risk margins related to non-capital market inputs, as well as changes in our nonperformance risk adjustment may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income. Changes to actuarial assumptions, principally related to contract holder behavior such as annuitization utilization and withdrawals associated with GMIB riders, can result in a change of expected future cash outflows of a guarantee between the accrual-based model for insurance liabilities and the fair-value based model for embedded derivatives. See Note 2 of the Notes to these Consolidated Financial Statements for additional information relating to the determination of the accounting model. Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties in certain actuarial assumptions. For direct liabilities, risk margins are applied to non-capital market risk assumptions, while for reinsurance asset risk margins are based on the cost of capital a theoretical market participant would require to assume the risks. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees.
With respect to assumptions regarding policyholder behavior, we have recorded
charges, and in some cases benefits, in prior years as a result of the
availability of sufficient and credible data at the conclusion of each review.
We ceded the risk associated with certain of the variable annuity products with GMxB features described in the preceding paragraphs. The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with that described previously for the guarantees directly written by us with the exception of the input for nonperformance risk that reflects the credit of the reinsurer. However, because certain of the reinsured guarantees do not meet the definition of an embedded derivative and, thus are not accounted for at fair value, significant fluctuations in net income may occur when the change in the fair value of the reinsurance recoverable is recorded in net income without a corresponding and offsetting change in fair value of the directly written guaranteed liability.
Nonperformance Risk Adjustment
The valuation of our embedded derivatives includes an adjustment for the risk
that we fail to satisfy our obligations, which we refer to as our nonperformance
risk. The nonperformance risk adjustment, which is captured as a spread over the
risk-free rate in determining the discount rate to discount the cash flows of
the liability, is determined by taking into consideration publicly available
information relating to spreads on corporate bonds in the secondary market
comparable to Holdings' financial strength rating.
The table below illustrates the impact that a range of reasonably likely
variances in credit spreads would have on our consolidated balance sheet,
excluding the effect of income tax, related to the embedded derivative valuation
on certain variable annuity products measured at estimated fair value. Even when
credit spreads do not change, the impact of the nonperformance risk adjustment
on fair value will change when the cash flows within the fair value measurement
change. The table only reflects the impact of changes in credit spreads on our
consolidated financial statements included elsewhere herein and not these other
potential changes. In determining the ranges, we have considered current market
conditions, as well as the market level of
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spreads that can reasonably be anticipated over the near term. The ranges do not
reflect extreme market conditions such as those experienced during the 2008-2009
financial crisis as we do not consider those to be reasonably likely events in
the near future.
Future policyholders'
benefits and other
policyholders' liabilities
(before reinsurance ceded)
(in billions)
100% increase in Holdings' credit spread $
7.2
As reported $
8.5
50% decrease in Holdings' credit spread $
9.4
See Note 4 of the Notes to the Consolidated Financial Statements for additional
information on our derivatives and hedging programs.
Goodwill represents the excess of purchase price over the estimated fair value of identifiable net assets acquired in a business combination. We test goodwill for recoverability each annual reporting period atDecember 31 and at interim periods if facts or circumstances are indicative of potential impairment. As ofDecember 31, 2021 , our goodwill of$4.6 billion results solely from our investment in AB and is attributed to the Investment Management and Research segment, also deemed a reporting unit for purpose of assessing the recoverability of that goodwill. Estimating the fair value of reporting units for the purpose of goodwill impairment testing is a subjective process that involves the use of significant judgements by management. Estimates of fair value are inherently uncertain and represent management's reasonable expectation regarding future developments, giving consideration to internal strategic plans and general market and economic forecasts. On an annual basis, or when circumstances warrant, goodwill is tested for impairment utilizing the market approach, where the fair value of the reporting unit is based on its adjusted market valuation assuming a control premium.
Litigation and Regulatory Contingencies
We are a party to a number of legal actions and are involved in a number of regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on our financial position, results of operations and cash flows. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. On a quarterly and annual basis, we review relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected in our consolidated financial statements included elsewhere herein. See Note 17 of the Notes to the Consolidated Financial Statements for information regarding our assessment of litigation contingencies.
Income Taxes
Income taxes represent the net amount of income taxes that we expect to pay to
or receive from various taxing jurisdictions in connection with its operations.
We provide for Federal and state income taxes currently payable, as well as
those deferred due to temporary differences between the financial reporting and
tax bases of assets and liabilities. Deferred tax assets and liabilities are
measured at the balance sheet date using enacted tax rates expected to apply to
taxable income in the years the temporary differences are expected to reverse.
The realization of deferred tax assets depends upon the existence of sufficient
taxable income within the carryforward periods under the tax law in the
applicable jurisdiction. Valuation allowances are established when management
determines, based on available information, that it is more likely than not that
deferred tax assets will not be realized. Management considers all available
evidence including past operating results, the existence of cumulative losses in
the most recent years, forecasted earnings, future taxable income and prudent
and feasible tax planning strategies. Our accounting for income taxes represents
management's best estimate of the tax consequences of various events and
transactions.
Significant management judgment is required in determining the provision for
income taxes and deferred tax assets and liabilities, and in evaluating our tax
positions including evaluating uncertainties under the guidance for Accounting
for Uncertainty in Income Taxes. Under the guidance, we determine whether it is
more likely than not that a tax position will be sustained upon examination by
the appropriate taxing authorities before any part of the benefit can be
recorded in the financial
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statements. Tax positions are then measured at the largest amount of benefit
that is greater than 50 percent likely of being realized upon settlement.
Our tax positions are reviewed quarterly, and the balances are adjusted as new
information becomes available.
Adoption of New Accounting Pronouncements
See Note 2 of the Notes to these Consolidated Financial Statements for a
complete discussion of newly issued accounting pronouncements.
Part II, Item 7A.
Public Storage Reports Results for the Fourth Quarter and Year Ended December 31, 2021
FEDNAT HOLDING CO FILES (8-K) Disclosing Results of Operations and Financial Condition, Financial Statements and Exhibits
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