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 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 the 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.
Global Atlantic Reinsurance Transaction
OnOctober 3, 2022 , Equitable Financial completed the transactions (the "Global Atlantic Transaction") contemplated by the previously announced Master Transaction Agreement, datedAugust 16, 2022 , by and between Equitable Financial andFirst Allmerica Financial Life Insurance Company , aMassachusetts -domiciled insurance company (the "Reinsurer"), a wholly owned subsidiary ofGlobal Atlantic Financial Group . At the closing of the Global Atlantic Transaction, Equitable Financial and the Reinsurer entered into a Coinsurance and Modified Coinsurance Agreement (the "EQUI-VEST Reinsurance Agreement"), pursuant to which Equitable Financial ceded to the Reinsurer, on a combined coinsurance and modified coinsurance basis, a 50% quota share of approximately 360,000 legacy Group EQUI-VEST deferred variable annuity contracts issued by Equitable Financial between 1980 and 2008, which predominately include Equitable Financial's highest guaranteed general account crediting rates of 3%, supported by general account assets of approximately$4 billion and$5 billion of separate account value (the "Reinsured Contracts"). At the closing of the Global Atlantic Transaction, Reinsurer deposited assets supporting the general account liabilities relating to the Reinsured Contracts into a trust account for the benefit of Equitable Financial, which assets will secure its obligations to Equitable Financial under the EQUI-VEST Reinsurance Agreement.Commonwealth Annuity and Life Insurance Company , an insurance company domiciled in theCommonwealth of Massachusetts and affiliate of Reinsurer ("Commonwealth"), provided a guarantee of Reinsurer's payment obligation to Equitable Financial under the EQUI-VEST Reinsurance Agreement.
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. These factors include, among others, concerns over resurgences of COVID-19, increased volatility in the capital markets, equity market declines, rising interest rates, inflationary pressures fueling concerns of a potential recession, plateauing or decreasing economic growth, high fuel and energy costs, changes in fiscal or monetary policy and geopolitical tensions. The invasion of theUkraine by Russian and the sanctions and other measures imposed in response to this conflict significantly increased the level of volatility in the financial markets and have increased the level of economic and political uncertainty. 73 -------------------------------------------------------------------------------- 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. In addition, our insurance liabilities and derivatives are sensitive to changing market factors, including equity market performance and interest rates, which are anticipated to continue to rise in 2023 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 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 "Risk Factors - Risks Relating to Conditions in the Financial Markets and Economy" and "Quantitative and Qualitative Disclosures About Market Risk."
COVID-19 Impact
COVID-19 continues to evolve, and we continue to closely monitor developments and the impact on our business, operations and investment portfolio. Although COVID-19 restrictions, including temporary business and school closures have been lifted in many places, resurgences of COVID-19 in various regions and appearances of new variants of the virus, has resulted, and may continue to result, in their full or partial reinstitution. In addition, although many countries have vaccinated large segments of their population, COVID-19 continues to interrupt business activities and trade in many countries, which has caused a significant impact on the economies and financial markets of many countries including an economic downturn. We expect these impacts to continue for the foreseeable future, which could adversely affect demand for our products and services and our investment returns. Indeed, 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 factors such as the volatility and strength of equity markets, interest rates, consumer spending, and government debt and spending. In response to the various pandemic related restrictions over the last few years we have adapted our processes to meet client needs. For example, we offer our modified underwriting policies with 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. We further developed digital tools and enhanced our remote engagement, which is resulting in improved retention and increases in retirement plan contributions. As businesses and the economy continue to return to pre-pandemic activity levels, we believe we can continue to leverage our digital enhancements to continue to grow our business, even as we return to in-person engagement and sales. While COVID-19 significantly affected the capital markets and economy, we believe we have taken the appropriate actions to help assure that our economic balance sheet is protected from 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. The extent and nature of COVID-19's full negative financial impact on our business cannot reasonably be estimated at this time due to developments that are still highly uncertain, including the severity and duration of future outbreaks, actions taken by governmental authorities and other third parties in response to such outbreaks and the availability and efficacy of vaccines against COVID-19 and its variants. For additional information regarding the potential impacts of COVID-19, see "Risk Factors-Risks Relating to Conditions in the Financial Markets and Economy-The coronavirus (COVID-19) pandemic." 74 --------------------------------------------------------------------------------
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."
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.
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
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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 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) is based on differing
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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 the 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
years ended
continuing operations, before income taxes and net income (loss).
Year Ended December 31,
2022 2021 2020
(in millions)
Impact of assumption update on Net income (loss):
Variable annuity product features related assumption
update $ 175 $ (91) $ (1,531)
Assumption updates for other business 7 (17) (1,060)
Impact of assumption updates on Income (loss) from
continuing operations, before income tax
182 (108) (2,591) Income tax benefit on assumption update (38) 23 544 Net income (loss) impact of assumption update$ 144 $ (85) $ (2,047) 2022 Assumption Updates The impact of the economic assumption update during 2022 was an increase of$182 million to income (loss) from continuing operations, before income taxes and an increase to net income (loss) of$144 million .
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
account balances of
million
2021 Assumption Updates
The impact of the economic 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, the reference interest rate utilized in ourU.S. GAAP fair value calculations was updated from the LIBOR swap curve to theUS Treasury curve due to the impending cessation of LIBOR and ourU.S. GAAP fair value liability risk margins were increased, resulting in little impact to overall valuation as our view regarding market participant pricing of our guarantees has not changed at this time. 77 --------------------------------------------------------------------------------
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.
Model Changes
There were no material model changes during 2022 and 2021.
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 2022, 2021 and 2020 by segment and
Corporate and Other.
Year Ended
2022 2021 2020
Impact of assumption updates by segment:
Individual Retirement $ (13) $ (47) $ (28)
Group Retirement 34 35 (3)
Protection Solutions 7 20 4
Impact of assumption updates on Corporate and Other - - (12)
Total impact on pre-tax Non-GAAP Operating Earnings $ 28 $ 8 $ (39)
2022 Assumption Updates
The impact of our 2022 annual review on Non-GAAP operating earnings was
favorable by
million
reflect updated
78 -------------------------------------------------------------------------------- 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 decreased Policy charges and fee income by$23 million , decreased Policyholders' benefits by$9 million , and decreased Amortization of DAC by$43 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.
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 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 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.
Productivity Strategies
Retirement and Protection Businesses
As part of our continuing efforts to drive productivity improvements, inJanuary 2021 , we began a new program expected to achieve$80 million of targeted run-rate expense savings by 2023, of which$50 million has been achieved as ofDecember 31, 2022 . We expect to achieve these savings 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 1,063 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. 79 --------------------------------------------------------------------------------
Key Operating Measures
In addition to our results presented in accordance withU.S. GAAP, we report Non-GAAP Operating Earnings, Non-GAAP Operating ROE, 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; (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; and (iv) DAC amortization for the SCS variable annuity product arising from near-term fluctuations in index segment returns;
•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, lease write-offs related to non-recurring
restructuring activities, 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 and realized capital gains/losses from sales
or disposals of select securities, certain legal accruals; and a bespoke deal to
repurchase UL policies from one entity that had invested in numerous policies
purchased in the life settlement market, which disposed of the risk of
additional COI litigation by that entity related to those UL policies; 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.
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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.
The table below presents a reconciliation of net income (loss) attributable to
Holdings to Non-GAAP Operating Earnings for the years ended December 31, 2022 ,
2021 and 2020:
Year Ended December 31,
2022 2021 2020
(in millions)
Net income (loss) attributable to Holdings
(439)$ (648) Adjustments related to: Variable annuity product features (1) (1,315) 4,145 3,912 Investment (gains) losses 945 (867) (744)
Net actuarial (gains) losses related to pension and
other postretirement benefit obligations
82 120 109 Other adjustments (2) (3) (4) (5) 552 717 952 Income tax expense (benefit) related to above adjustments (6) (56) (864) (888) Non-recurring tax items (7) 16 13 (391) Non-GAAP Operating Earnings$ 2,009 $
2,825
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(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)Includes separation costs of$82 million and$108 million for the years endedDecember 31, 2021 and 2020, respectively. Separation costs were completed during 2021. (4)Includes Non-GMxB related derivative hedge losses of($34) million ,$65 million and($404) million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. (5)Includes certain gross legal expenses related to the cost of insurance litigation and claims related to a commercial relationship of$218 million and$207 million for the year endedDecember 31, 2022 and 2021, respectively. Includes policyholder benefit costs of$75 million for the year endedDecember 31, 2022 . (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
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. 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. The following table presents return on average equity attributable to Holdings' common shareholders, excluding AOCI and Non-GAAP Operating ROE for the year endedDecember 31, 2022 . Year Ended December 31, 2022 (in millions) Net income (loss) available to Holdings' common shareholders $ 1,705
Average equity attributable to Holdings' common shareholders, excluding
AOCI
$ 9,088
Return on average equity attributable to Holdings' common shareholders,
excluding AOCI
18.8 %
Non-GAAP Operating Earnings available to Holdings' common shareholders $
1,929
Average equity attributable to Holdings' common shareholders, excluding
AOCI $ 9,088
Non-GAAP Operating ROE 21.2 %
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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, 2022 , 2021 and 2020. Year Ended December 31, 2022 2021 2020 (per share amounts) Net income (loss) attributable to Holdings (1)$ 4.70 $ (1.05) $ (1.44) Less: Preferred stock dividends 0.21 0.19 0.12 Net income (loss) available to Holdings' common shareholders 4.49 (1.24) (1.56) Adjustments related to: Variable annuity product features (2) (3.46) 9.93 8.68 Investment (gains) losses 2.49 (2.08) (1.65)
Net actuarial (gains) losses related to pension and
other postretirement benefit obligations
0.22 0.29 0.24 Other adjustments (3) (4) (5) (6) 1.45 1.72 2.12 Income tax expense (benefit) related to above adjustments (7) (0.15) (2.07) (1.97) Non-recurring tax items (8) 0.04 0.03 (0.87) Non-GAAP operating earnings$ 5.08
______________
(1)For periods presented with a net loss, basic shares was used for the years endedDecember 31, 2022 , 2021 and 2020. (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 and$0.24 for the years endedDecember 31, 2021 and 2020, respectively. Separation costs were completed during 2021. (5)Includes Non-GMxB related derivative hedge losses of ($0.09 ),$0.14 and ($0.90 ) for the years endedDecember 31, 2022 and 2021, respectively. (6)Includes certain gross legal expenses related to the cost of insurance litigation and claims related to a commercial relationship of$0.57 and$0.50 for the years endedDecember 31, 2022 and 2021, respectively. Includes policyholder benefit costs of$0.20 for the year endedDecember 31, 2022 stemming from a deal to repurchase UL policies from one entity that had invested in numerous policies purchased in the life settlement market. 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
82 --------------------------------------------------------------------------------
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.
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 average economic interest in AB was approximately 64%, 65% and 65% for the years endedDecember 31, 2022 , 2021 and 2020 respectively. The slight decrease was due to the issuance of AB Units relating to AB's 100% acquisition ofCarVal Investments L.P. ("CarVal"). OnJuly 1, 2022 , AB issued 3.2 million AB Units (with a fair value of$133 million ) with the remaining 12.1 million AB units (with a fair value of$456 million ) issued onNovember 1, 2022 . AB also recorded a contingent consideration payable of$229 million (to be paid predominantly in AB Units) based on CarVal achieving certain performance objectives over a six-year period endingDecember 31, 2027 .
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,
2022 2021 2020
(in millions, except per share data)
REVENUES
Policy charges and fee income
Premiums
994 960 997
Net derivative gains (losses) 1,696 (4,465) (1,722)
Net investment income (loss) 3,315 3,846 3,477
Investment gains (losses), net:
Credit losses on available-for-sale debt securities and loans (314) 2 (58)
Other investment gains (losses), net (631) 866 802
Total investment gains (losses), net (945) 868 744
Investment management and service fees 4,891 5,395 4,608
Other income 825 795 576
Total revenues 14,017 11,036 12,415
83
--------------------------------------------------------------------------------
Year Ended December 31,
2022 2021 2020
(in millions, except per share data)
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits 3,385 3,218 5,326
Interest credited to policyholders' account balances 1,409 1,219 1,222
Compensation and benefits 2,199 2,360 2,096
Commissions and distribution-related payments 1,567 1,662 1,351
Interest expense 201 244 200
Amortization of deferred policy acquisition costs 542 393 1,613
Other operating costs and expenses 2,189 2,109 1,700
Total benefits and other deductions 11,492 11,205 13,508
Income (loss) from continuing operations, before income taxes 2,525 (169) (1,093)
Income tax (expense) benefit (499) 145 744
Net income (loss) 2,026 (24) (349)
Less: Net income (loss) attributable to the noncontrolling
interest
241 415 299 Net income (loss) attributable to Holdings 1,785 (439) (648) Less: Preferred stock dividends 80 79 53 Net income (loss) available to Holdings' common shareholders
EARNINGS PER COMMON SHARE Net income (loss) applicable to Holdings' common shareholders per common share: Basic$ 4.52 $ (1.24) $ (1.56) Diluted$ 4.49 $ (1.24) $ (1.56) Weighted average common shares outstanding (in millions): Basic 377.6 417.4 450.4 Diluted 379.9 417.4 450.4 Year Ended December 31, 2022 2021 2020 (in millions) Non-GAAP Operating Earnings$ 2,009 $ 2,825 $ 2,302
The following table summarizes our Non-GAAP Operating Earnings per common share
for the years ended
Year Ended December 31,
2022 2021 2020
Non-GAAP operating earnings per common share:
Basic $ 5.11 $ 6.58 $ 4.99
Diluted $ 5.08 $ 6.58 $ 4.99
84
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Year Ended
Net Income Attributable to Holdings
Net income attributable to Holdings increased by$2.2 billion to a net income of$1.8 billion for the year endedDecember 31, 2022 from a net loss of$439 million for the year endedDecember 31, 2021 . The following notable items were the primary drivers for the change in net income (loss):
Favorable items included:
•Net derivative gains increased$6.2 billion from a$4.5 billion loss in prior period driven by reduced interest rate derivative positions and equity market depreciation during 2022 as compared to equity market appreciation in 2021. •Compensation, benefits and other operating expenses decreased by$81 million mainly due to lower fund expenses as a result of lower average assets due to the Venerable Transaction, lower separation expenses, lower legal reserve accruals, reduced compensation & benefits and continued improvement from our efficiency program partially offset by higher general and administrative expenses in our Investment Management and Research segment and unfavorable COLI impacts related to 2022 equity market depreciation. •Commissions and distribution-related payments decreased by$95 million mainly due to lower payments to financial intermediaries for the distribution of AB mutual funds in our Investment Management and Research segment, lower AV in our Individual Retirement segment related to equity market depreciation during 2022 partially offset by higher sales of Employee Benefits products in our Protection Solutions segment.
•Net income attributable to noncontrolling interest decreased by
mainly due to losses from AB's consolidated VIEs and lower AB pre-tax income.
These were partially offset by the following unfavorable items:
•Investment gains decreased by$1.8 billion mainly due to rebalancing in the General Account portfolio associated with the Venerable Transaction in 2021 and Global Atlantic Transaction in 2022 and the duration program during 2022. •Fee-type revenue decreased by$836 million mainly driven by lower fees primarily from our Individual Retirement segment as a result of lower average Separate Accounts AV due to lower equity markets and the impact of AV ceded to Venerable and lower fees in our Investment Management and Research segment. •Net investment income decreased by$531 million mainly due to lower alternative investment income, lower assets due to the Venerable and Global Atlantic transactions, and lower income from seed capital investments (offset by hedging gains in derivatives), partially offset by higher income from floating rate securities, higher SCS asset balances and GA optimization.
•Interest credited to policyholders' account balances increased by
mainly due to increased interest rates and average outstanding amounts of
funding agreements and growth of SCS AV during 2022.
•Policyholders' benefits increased by$167 million mainly due to equity market depreciation during 2022 compared to equity market appreciation during 2021 (offset in Net Derivative gains), higher claims in Individual Retirement segment and higher life mortality net of PFBL reserve accruals partially offset by the impact of the Venerable Transaction on the GMxB reserve accrual.
•Amortization of DAC increased by
depreciation and less favorable assumption updates during 2022 compared to 2021.
•Income tax expense increased by$644 million primarily due to pre-tax income in the year ended 2022 compared to a pre-tax loss in the year ended 2021, and a higher effective tax rate in the year ended 2022.
See "-Significant Factors Impacting Our Results-Effect of Assumption Updates on
Operating Results" for more information regarding assumption updates.
Non-GAAP Operating Earnings
Non-GAAP Operating Earnings decreased by$816 million to$2.0 billion for the year endedDecember 31, 2022 from$2.8 billion in the year endedDecember 31, 2021 . The following notable items were the primary drivers for the change in Non-GAAP Operating Earnings. 85 --------------------------------------------------------------------------------
Unfavorable items included:
•Fee-type revenue decreased by$852 million mainly driven by lower fees primarily from our Individual Retirement segment as a result of lower average Separate Accounts AV due to lower equity markets and the impact of AV ceded to Venerable and lower fees in our Investment Management and Research segment. •Net investment income decreased by$410 million mainly due to lower alternative investment income, lower assets due to the Venerable and Global Atlantic transactions, and lower income from seed capital investments (offset by hedging gains in derivatives) partially offset by higher income from floating rate securities, higher SCS asset balances and GA optimization. •Policyholders' benefits increased by$412 million mainly due to the equity market depreciation during 2022 compared to equity market appreciation during 2021 (offset in Net Derivative gains), higher claims in Individual Retirement segment and higher life mortality net of PFBL reserve accruals, partially offset by the impact of the Venerable Transaction on the GMxB reserve accrual.
•Interest credited to policyholders' account balances increased by
mainly due to increased interest rates and average outstanding amounts of
funding agreements and growth of SCS AV during 2022.
•Amortization of DAC increased by
depreciation and less favorable assumption updates during 2022 compared to 2021.
These were partially offset by the following favorable items:
•Net derivative gains increased$742 million from a$208 million loss in the prior period mainly due to equity market depreciation (offset in Policyholders' benefits) during 2022. •Commissions and distribution-related payments decreased by$95 million mainly due to lower payments to financial intermediaries for the distribution of AB mutual funds in our Investment Management and Research segment, lower AV in our Individual Retirement segment related to equity market depreciation during 2022 partially offset by higher sales of Employee Benefits products in our Protection Solutions segment. •Earnings attributable to the noncontrolling interest decreased by$89 million mainly due to lower pre-tax Operating earnings in our Investment Management and Research segment. •Compensation, benefits and other operating costs and expenses decreased by$42 million mainly due to lower fund expenses as a result of lower average assets due to the Venerable Transaction, lower legal accruals, reduced compensation & benefits and continued improvement from our efficiency program partially offset by higher general and administrative expenses in our Investment Management and Research segment and unfavorable COLI impacts related to 2022 equity markets.
•Income tax expense decreased by
earnings, partially offset by a higher effective tax rate.
Year Ended
Net Income Attributable to Holdings
For discussion that compares results for the year endedDecember 31, 2021 to the year endedDecember 31, 2020 refer to the MD&A section in our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("2021 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 the Consolidated Financial Statements for further information on our segments. 86 --------------------------------------------------------------------------------
The following table summarizes operating earnings (loss) on our segments and
Corporate and Other for the years ended
Year Ended December 31,
2022 2021 2020
(in millions)
Operating earnings (loss) by segment:
Individual Retirement $ 1,140 $ 1,444 $ 1,536
Group Retirement 525 631 491
Investment Management and Research 424 564 432
Protection Solutions 179 317 146
Corporate and Other (259) (131) (303)
Non-GAAP Operating Earnings $ 2,009 $ 2,825 $ 2,302
Effective Tax Rates by Segment
For 2022, 2021 and 2020 Income tax expense was allocated to the Company's business segments using a 19%, 17% and 16% ETR respectively, for our retirement and protection businesses (Individual Retirement, Group Retirement, and Protection Solutions) and a 28%, 27% and 27% 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,
2022 2021 2020
(in millions)
Operating earnings $ 1,140 $ 1,444 $ 1,536
87
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Key components of operating earnings are:
Year Ended December 31,
2022 2021 2020
(in millions)
REVENUES
Policy charges, fee income and premiums$ 1,513 $ 1,867 $ 2,034 Net investment income 1,308 1,287 1,246 Net derivative gains (losses) 495 (128) 331 Investment management, service fees and other income 604 759 700 Segment revenues
BENEFITS AND OTHER DEDUCTIONS Policyholders' benefits$ 1,142 $ 720 $ 1,207 Interest credited to policyholders' account balances 373 276 312 Commissions and distribution-related payments 283 328 281 Amortization of deferred policy acquisition costs 362 303 299 Compensation, benefits and other operating costs and expenses 358 411 382 Interest expense 1 - - Segment benefits and other deductions
The following table summarizes AV for our Individual Retirement segment as of
the dates indicated:
December 31, 2022 December 31, 2021
(in millions)
AV (1)
General Account $ 38,748 $ 37,698
Separate Accounts 57,011 74,206
Total AV $ 95,759 $ 111,904
(1)AV presented are net of reinsurance.
The following table summarizes a roll-forward of AV for our Individual
Retirement segment for the periods presented:
Year Ended December 31,
2022 2021 2020
(in millions)
Balance as of beginning of period $ 111,904 $ 117,390 $ 108,922
Gross premiums 11,746 11,249 7,493
Surrenders, withdrawals and benefits (10,046) (12,143) (8,622)
Net flows (1) 1,700 (894) (1,129)
Investment performance, interest credited and policy
charges (1)
(17,845) 12,316 9,606 Ceded to Venerable (2) - (16,927) - Reclassified to Liabilities held for sale - - (3) Other (3) (4) - 19 (6) Balance as of end of period$ 95,759 $ 111,904 $ 117,390 ______________ (1)For the years endedDecember 31, 2022 and 2021, net flows of($312) million and($830) million and investment performance, interest credited and policy charges of$689 million and$589 million , respectively, are excluded as these amounts are related to ceded AV to Venerable. 88 -------------------------------------------------------------------------------- (2)EffectiveJune 1, 2021 , AV excludes activity related to ceded AV to Venerable. In addition, 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 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 and$57 million of AV transfer of a closed block of GMxB business from the Group Retirement Segment to the Individual Retirement Segment. (4)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.
Year Ended
the Individual Retirement Segment
Operating earnings
Operating earnings decreased$304 million to$1.1 billion during the year endedDecember 31, 2022 from$1.4 billion in the year endedDecember 31, 2021 . The following notable items were the primary drivers of the change in operating earnings:
Unfavorable items included:
•Fee-type revenue decreased by
Accounts AV as result of lower equity markets and the impact of AV ceded to
Venerable, partially offset by commission reimbursements in Other Income.
•Interest credited to policyholders' account balances increased by
mainly due to the growth of SCS AV during 2022.
•Amortization of DAC increased by
depreciation during 2022 compared to equity market appreciation in 2021.
These were partially offset by the following favorable items:
•Net GMxB results increased$92 million primarily due to improved GMxB margin from the Venerable Transaction, which mitigated the higher claims in 2022. GMxB results are included in policy charges and fee income, net derivative gains (losses), and policyholders' benefits.
•Compensation, benefits and other operating costs and expenses decreased by
million
associated with lower headcount, and lower subadvisory fees.
•Commissions and distribution-related payments decreased by
due to lower AV due to equity market depreciation during 2022.
•Net investment income increased by$21 million mainly due to higher income from floating rate securities, higher SCS asset balances and GA optimization, partially offset by lower alternative investment income, lower prepayments and lower assets due to the Venerable transaction.
•Income tax expense decreased by
earnings partially offset by a higher effective tax rate in 2022.
Net Flows and AV
•The decline in AV of$16.1 billion in the year endedDecember 31, 2022 was driven by a decrease in investments performance and interest credited to account balances, net of policy charges of$17.8 billion as a result of equity market depreciation in 2022, partially offset by net inflows of$1.7 billion . •Net inflows of$1.7 billion were$2.6 billion higher than in the year endedDecember 31, 2021 , mainly driven by$3.9 billion of inflows on our newer, less capital-intensive products, partially offset by$2.2 billion of outflows on our older fixed-rate GMxB block. 89 --------------------------------------------------------------------------------
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 2021 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,
2022 2021 2020
(in millions)
Operating earnings $ 525 $ 631 $ 491
Key components of operating earnings are:
Year Ended December 31,
2022 2021 2020
(in millions)
REVENUES
Policy charges, fee income and premiums$ 318 $ 371 $ 295 Net investment income 624 752 641 Net derivative (losses) gains (25) (19) 1 Investment management, service fees and other income 256 268 211 Segment revenues
BENEFITS AND OTHER DEDUCTIONS Policyholders' benefits $ - $ -$ 2 Interest credited to policyholders' account balances 281 303 303 Commissions and distribution-related payments 57 56 45 Amortization of deferred policy acquisition costs 12 - 21 Compensation, benefits and other operating costs and expenses 177 248 192 Interest expense 1 - - Segment benefits and other deductions
The following table summarizes AV and AUA for our Group Retirement segment as of
the dates indicated:
90 --------------------------------------------------------------------------------
December 31,
2022 2021
(in millions)
AV and AUA
General Account $ 9,175 $ 13,046
Separate Accounts and Mutual Funds (1) 22,830 34,763
Total AV and AUA (2)
$ 32,005 $ 47,809
____________
(1) Prior period amounts related to Separate Account AV and Mutual Funds AUA were revised to include Mutual Fund AUA. The impact of the revision toDecember 31, 2021 total AV and AUA was$457 million . (2) AV presented are net of reinsurance.
The following table summarizes a roll-forward of AV and AUA for our Group
Retirement segment for the periods indicated:
Year Ended December 31,
2022 2021 2020
(in millions)
Balance as of beginning of period (1) $ 47,809 $ 42,756 $ 37,880
Gross premiums 4,448 3,839 3,343
Surrenders, withdrawals and benefits (3,814) (4,016) (3,047)
Net flows (1) (3) 634 (177) 296
Investment performance, interest credited and policy charges
(1) (3) (7,075) 5,287 4,283
Ceded to Global Atlantic (4) (9,363) - -
Other (2) - (57) -
Balance as of end of period $ 32,005 $ 47,809 $ 42,459
____________
(1)Prior period amounts related to the AV and AUA roll-forward were updated to
include Mutual Fund AUA. The impact of the revision to the beginning balance of
the year ended December 31, 2021 was $297 million . Net Flows revision impact for
the year ended December 31, 2021 was $129 million . Investment performance,
interest credited and policy charges revision impact for the year ended December
31, 2021 was $30 million .
(2)For the year ended December 31, 2021 , amounts reflect AV transfer of GMxB
closed block business from Group Retirement Segment to the Individual Retirement
Segment.
(3)For the year ended December 31, 2022 , net outflows of $179 million and
investment performance, interest credited and policy charges of ($422) million ,
respectively, are excluded as these amounts are related to ceded AV to Global
Atlantic .
(4)Effective October 3, 2022 , AV excludes activity related to ceded AV to Global
Atlantic Transaction. In addition, roll-forward reflects the AV ceded pursuant
to the Global Atlantic Transaction as of the transaction date. For additional
information on the Global Atlantic Transaction see MD&A - Executive Summary
"Global Atlantic Reinsurance Transaction".
91
--------------------------------------------------------------------------------
Year Ended
the Group Retirement Segment
Operating earnings Operating earnings decreased by$106 million to$525 million during the year endedDecember 31, 2022 from$631 million during the year endedDecember 31, 2021 . The following notable items were the primary drivers of the change in operating earnings:
Unfavorable items included:
•Net investment income decreased by
alternative investment income, lower prepayments and lower assets from the
Global Atlantic Transaction partially offset by higher income from floating rate
securities and GA optimization.
•Fee-type revenue decreased by
AV from market depreciation and ceded assets from the Global Atlantic
Transaction.
•Amortization of DAC increased by
adjustment in 2021.
These were partially offset by the following favorable items:
•Compensation, benefits and other operating costs and expenses decreased by
million
•Interest credited to policyholders' account balances decreased by
mainly due to the portion of policies ceded from the Global Atlantic
Transaction.
•Income tax expense decreased by
earnings partially offset by a higher effective tax rate in 2022.
Net Flows and AV
•The decrease in AV of
primarily due to the Global Atlantic Transaction and market depreciation,
partially offset by net inflows of
•Net inflows of
by net outflows from the portion of policies ceded pursuant to the Global
Atlantic Transaction, gross premiums reflecting strong sales and client
engagement, partially offset by modestly higher outflows.
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 2021 Form 10-K.
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 average economic interest in AB of approximately 64%, 65% and 65% during years endedDecember 31, 2022 , 2021 and 2020. 92 --------------------------------------------------------------------------------
Year Ended December 31,
2022 2021 2020
(in millions)
Operating earnings $ 424 $ 564 $ 432
Key components of operating earnings are:
Year Ended December 31,
2022 2021 2020
(in millions)
REVENUES
Net investment income $ (43) $ 13 $ 31
Net derivative gains (losses) 41 (13) (36)
Investment management, service fees and other income 4,107 4,430 3,708
Segment revenues
BENEFITS AND OTHER DEDUCTIONS
Commissions and distribution related payments
Compensation, benefits and other operating costs and expenses 2,519 2,507 2,211 Interest expense 18 5 6 Segment benefits and other deductions$ 3,167 $ 3,220 $ 2,786 Changes in AUM in the Investment Management and Research segment for the periods presented were as follows: Year Ended December 31, 2022 2021 2020 (in billions) Balance as of beginning of period$ 778.6 $ 685.9 $ 622.9 Long-term flows Sales/new accounts 115.6 150.0 124.1 Redemptions/terminations (95.4) (103.8) (109.3) Cash flow/unreinvested dividends (23.8) (20.1) (17.4) Net long-term inflows (outflows) (2) (3.6) 26.1 (2.6) Adjustments (1) (0.4) - - Acquisition (3) 12.2 - 0.2 Market appreciation (depreciation) (140.4) 66.6 65.4 Net change (132.2) 92.7 63.0 Balance as of end of period$ 646.4 $ 778.6 $ 685.9 __________ (1)Approximately$0.4 billion of Institutional AUM was removed from AB total assets under management during the second quarter 2022 due to a change in the fee structure. (2)Net flows include$4.5 billion and$1.3 billion of AXA redemptions for 2022 and 2021, respectively. (3)The CarVal acquisition added approximately$12.2 billion of Institutional AUM in the third quarter 2022. 93 --------------------------------------------------------------------------------
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,
2022 2021 2020
(in billions)
Distribution Channel:
Institutions $ 308.4 $ 325.7 $ 285.9
Retail 267.8 291.0 236.5
Private Wealth 110.3 114.1 97.1
Total $ 686.5 $ 730.8 $ 619.5
Investment Service:
Equity Actively Managed $ 239.7 $ 252.2 $ 179.8
Equity Passively Managed (1) 60.4 68.7 57.1
Fixed Income Actively Managed - Taxable 210.0 253.1 254.4
Fixed Income Actively Managed - Tax-exempt 54.1 53.8 47.9
Fixed Income Passively Managed (1) 11.5 9.6 9.4
Alternatives/Multi-Asset Solutions (2) 110.8 93.4 70.9
Total $ 686.5 $ 730.8 $ 619.5
____________
(1)Includes index and enhanced index services.
(2)Includes certain multi-asset solutions and services not included in equity of
fixed income services.
Year Ended
the Investment Management and Research Segment
Operating earnings
Operating earnings decreased$140 million to$424 million during the year endedDecember 31, 2022 from$564 million in the year endedDecember 31, 2021 . The following notable items were the primary drivers of the change in operating earnings:
Unfavorable items included:
•Fee-type revenue decreased by$323 million primarily due to lower investment advisory base fees, performance based fees and Bernstein Research Services revenues. The decrease in investment advisory base fees was primarily driven by lower average AUM. The decrease in performance based fees was primarily due to lower performance fees earned on Financial Services Opportunities,U.S. Select Equity,Arya Partners and Private Credit Services, partially offset by higherU.S. Real Estate Funds fees. The decrease in Bernstein Research Services revenues were primarily driven by significantly lower customer trading activity inEurope andAsia due to local market conditions. •Compensation, benefits, interest expense and other operating costs increased by$25 million mainly due to higher general and administrative costs, primarily relating to higher professional fees, portfolio servicing fees and technology fees, partially offset by lower compensation and benefit costs. •Net investment income, net of derivative gains, was unfavorable by$2 million . Net investment income decreased by$56 million mainly due to higher losses on the seed capital investments subject to market risk, offset by an increase in net derivative gains of$54 million mainly due to higher gains from economically hedging the seed capital investments.
These were partially offset by the following favorable items:
•Commissions and distribution-related payments decreased by$78 million mainly due to lower payments to financial intermediaries for the distribution of AB mutual funds.
•Earnings attributable to noncontrolling interest decreased by
to lower pre-tax earnings.
•Income tax expense decreased by
94 --------------------------------------------------------------------------------
Long-Term Net Flows and AUM
•Total AUM as ofDecember 31, 2022 was$646.4 billion , down($132.2) billion , or 17.0%, compared toDecember 31, 2021 . The decrease was primarily as a result of market depreciation of($140.4) billion and net outflows of($3.6) billion , offset by the addition of$12.2 billion due to the acquisition of CarVal. Retail net outflows were($11.6) billion , partially offset by Institutional and Private Wealth net inflows of$6.3 billion and$1.7 billion
•Excluding AXA redemptions of
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. In recent years, we have refocused our product offering and distribution towards less capital intensive, higher return accumulation and protection products. For example, inJanuary 2021 , we discontinued offering our most interest sensitive IUL product. 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,
2022 2021 2020
(in millions)
Operating earnings (loss) $ 179 $ 317 $ 146
95
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Key components of operating earnings (loss) are:
Year Ended December 31,
2022 2021 2020
(in millions)
REVENUES
Policy charges, fee income and premiums $ 2,087 $ 2,016 $ 1,970
Net investment income 981 1,102 944
Net derivative (losses) gains (20) (20) 5
Investment management, service fees and other income 254 260 225
Segment revenues $
3,302
BENEFITS AND OTHER DEDUCTIONS Policyholders' benefits$ 1,906 $ 1,850 $ 1,875 Interest credited to policyholders' account balances 511 516 514 Commissions and distribution related payments 191 170 160 Amortization of deferred policy acquisition costs 112 93 84 Compensation, benefits and other operating costs and expenses 361 345 337 Interest expense 1 - - Segment benefits and other deductions $
3,082
The following table summarizes Protection Solutions Reserves for our Protection
Solutions segment as of the dates presented:
December 31, 2022 December 31 ,
2021
(in millions)
Protection Solutions Reserves (1)
General Account $ 18,237 $
18,625
Separate Accounts 13,634
17,012
Total Protection Solutions Reserves $ 31,871 $
35,637
_______________
(1)Does not include Protection Solutions Reserves for our employee benefits
business as it is a scaling 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:
December 31, 2022 December
31, 2021
(in billions)
In-force face amount by product: (1)
Universal Life (2) $ 43.1 $ 45.9
Indexed Universal Life 27.5 27.9
Variable Universal Life (3) 133.4 132.8
Term 211.9 215.4
Whole Life 1.1 1.2
Total in-force face amount $ 417.0 $ 423.2
_______________
(1)Includes individual life insurance and does not include employee benefits as
it is a scaling business and therefore has immaterial in-force policies.
(2)UL includes GUL.
(3)VUL includes VL and COLI.
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Year Ended
the Protection Solutions Segment
Operating earnings
Operating earnings decreased$138 million to$179 million during the year endedDecember 31, 2022 from$317 million in the year endedDecember 31, 2021 . The following notable items were the primary drivers of the change in operating earnings:
Unfavorable items included:
•Net investment income decreased by$121 million mainly due to lower alternative investment income and lower prepayments, partially offset by higher income from floating rate securities, TIPS, and GA optimization.
•Policyholders' benefits increased by
mortality, net of PFBL reserve accruals, and growth in Employee Benefits.
•Commissions and distribution-related payments increased by
due to higher sales of Employee Benefits products.
•Amortization of DAC increased by
assumption updates in 2022 compared to 2021.
•Compensation, benefits and other operating costs and expenses increased by
million
These were partially offset by the following favorable items:
•Fee-type revenue increased by
to growth in Employee Benefits (offset in Policyholder's benefits).
•Income tax expense decreased by
earnings, partially offset by a higher effective tax rate in 2022.
Year Ended
the Protection Solutions Segment
For discussion that compares results for the year ended
year ended
Corporate and Other
Corporate and Other includes some of our financing and investment expenses. It also includes:Equitable Advisors broker-dealer business, the Closed Block, run-off variable annuity reinsurance business, run-off group pension business, run-off health business, benefit plans for our employees, certain strategic investments and certain unallocated items, including capital and related investments, interest expense and financing fees and corporate expense. AB's results of operations are reflected in the Investment Management and Research segment. Accordingly, Corporate and Other does not include any items applicable to AB. The following table summarizes operating earnings (loss) of Corporate and Other for the periods presented: Year Ended December 31, 2022 2021 2020 (in millions) Operating earnings (loss)$ (259) $ (131) $ (303) 97
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General Account Investment Portfolio
The General Account investment portfolio is used to support the insurance and annuity liabilities of our Individual Retirement, Group Retirement and Protection Solutions business segments. In the first quarter 2022, the Company changed its methodology for allocating its General Account investment portfolio, which resulted in a change in the asset and net investment income allocation amongst the Company's business segments. Following this change, the segmentation of the general account investments is now more closely aligned with the liability characteristics of the product groups. Management determined that the change in the allocation methodology allows for improved flexibility and infuses an active asset liability management practice into the segmentation process. Additionally, the Company also changed its basis for allocating the spread earned from our FHLB investment borrowing and FABN programs. The spread earned from our FHLB investment borrowing and FABN programs includes the investment income on the assets less interest credited on the funding agreements. The net spread as reflected in net investment income is allocated to the segments based on the percentage of the individual segment insurance liabilities over the combined segment insurance liabilities. Our investment philosophy is driven by our long-term commitments to clients, robust risk management and strategic asset allocation. Our General Account investment portfolio investment strategy seeks to achieve sustainable risk-adjusted returns by focusing on principal preservation and investment return, subject to duration and liquidity requirements by product as well as diversification of investment risks. Investment activities are undertaken based on established investment 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 issuers and asset classes, each of which seek to mitigate the impact of cash flow variability arising from these risks. Significant interest rate increases and market volatility in 2022 have reduced the fair value of fixed maturities from a net unrealized gain position to a net unrealized loss. These effects apply across the portfolio and are being assessed within aggregate asset and liability management strategies. As a part of asset and liability management, 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. 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. In addition, from time to time we use derivatives for hedging purposes to reduce our exposure to equity markets, interest rates, foreign currency and credit spreads. We incorporate ESG factors into the investment processes for a significant portion of our General Account 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. 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 and quality of our investment portfolio. Investments in our surplus portfolio are generally comprised of a mix of fixed maturity investment grade and below investment grade securities as well as various alternative investments, primarily private equity and real estate equity. Although alternative investments are subject to period over period earnings fluctuations, they have historically achieved returns in excess of the fixed maturity portfolio. 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, see Note 3 and Note 4 of the Notes to the Consolidated Financial Statements.
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.
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Year Ended December 31,
2022 2021 2020
Yield Amount (2) Yield Amount (2) Yield Amount (2)
(Dollars in millions)
Fixed Maturities: Income (loss) 3.57 %$ 2,619 3.40 %$ 2,429 3.46 %$ 2,318 Ending assets 72,255 72,545 71,738 Mortgages: Income (loss) 3.92 % 587 4.08 % 547 4.13 % 517 Ending assets 16,481 14,033 13,159 Other Equity Investments: (1) Income (loss) 5.21 % 171 20.45 % 534 6.14 % 95 Ending assets 3,433 2,901 1,621 Policy Loans: Income (loss) 5.35 % 215 5.01 % 203 5.28 % 204 Ending assets 4,033 4,024 4,118 Cash and Short-term Investments: Income (loss) (1.44) % (24) (0.13) % (2) 0.03 % 1 Ending assets 1,419 1,662 2,095 Funding agreements: Interest expense and other (156) (56) (75) Ending assets (liabilities) (8,501) (6,647) (6,897) Total Invested Assets: Income (loss) 3.79 % 3,412 4.28 % 3,655 3.72 % 3,060 Ending Assets 89,120 88,518 85,834 Short Duration Fixed Maturities: Income (loss) 3.62 % 5 4.48 % 78 3.39 % 184 Ending assets 87 142 4,704 Total: Investment income (loss) 3.79 % 3,417 4.28 % 3,733 3.70 % 3,244 Less: investment fees (3) (0.15) % (138) (0.14) % (118) (0.12) % (107) Investment Income, Net 3.63 % 3,279 4.15 % 3,615 3.57 % 3,137 Ending Net Assets$ 89,207 $ 88,660 $ 90,538 _____________ (1)Includes, as ofDecember 31, 2022 ,December 31, 2021 andDecember 31, 2020 respectively,$400 million ,$319 million and$333 million of other invested assets. Amounts for certain consolidated VIE investments are shown net of associated non-controlling interest. (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.
AFS 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 below investment grade securities in the General Account investment portfolio consist of loans to middle market companies, public high yield securities, bank loans, as well as "fallen angels," originally purchased as investment grade investments.
AFS 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.
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AFS 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, 2022
Corporate Securities :
Finance $ 13,537 $ - $ 9 $ 1,682 $ 11,864 19 %
Manufacturing 11,797 2 14 1,793 10,016 16 %
Utilities 6,808 - 14 1,063 5,759 9 %
Services 8,299 22 16 1,236 7,057 11 %
Energy 3,740 - 11 574 3,177 5 %
Retail and wholesale 3,394 - 14 433 2,975 5 %
Transportation 2,277 - 8 367 1,918 3 %
Other 124 - 3 15 112 - %
Total corporate securities 49,976 24 89 7,163 42,878 68 %
U.S. government 7,054 - 1 1,218 5,837 10 %
Residential mortgage-backed (2) 908 - 1 87 822 1 %
Preferred stock 41 - 2 - 43 - %
State & political 609 - 7 89 527 1 %
Foreign governments 985 - 2 151 836 1 %
Commercial mortgage-backed 3,823 - - 588 3,235 5 %
Asset-backed securities 8,859 - 4 373 8,490 14 %
Total $ 72,255 $ 24 $ 106 $ 9,669 $ 62,668 100 %
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 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 %
______________
(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.
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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.
AFS 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, 2022
1................................ Aaa, Aa, A$ 44,612 $ -$ 56 $ 5,652 $ 39,016 2................................ Baa 24,843 - 47 3,804 21,086 Investment grade 69,455 - 103 9,456 60,102 3................................ Ba 1,565 2 1 130 1,434 4................................ B 1,161 20 1 75 1,067 5................................ Caa 64 2 1 7 56 6................................ Ca, C 10 - - 1 9 Below investment grade 2,800 24 3 213 2,566 Total Fixed Maturities$ 72,255 $ 24$ 106 $ 9,669 $ 62,668
As of
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 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.
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Mortgage Loans by Region and Property Type
December 31, 2022 December 31, 2021
Amortized Amortized
Cost % of Total Cost % of Total
(in millions)
By Region :
U.S. Regions:
Pacific $ 4,903 30 % $ 4,297 30 %
Middle Atlantic 3,529 21 3,441 24
South Atlantic 2,059 12 1,982 14
East North Central 1,087 7 1,103 8
Mountain 1,368 8 978 7
West North Central 826 5 834 6
West South Central 1,111 7 609 5
New England 859 5 579 4
East South Central 475 3 146 1
Total U.S. $ 16,217 98 % $ 13,969 99 %
Other Regions:
Europe $ 393 2 % $ 126 1 %
Total Other $ 393 2 $ 126 1
Total Mortgage Loans $ 16,610 100 % $ 14,095 100 %
By Property Type:
Office $ 4,749 29 % $ 3,944 28 %
Multifamily 5,657 33 4,694 33
Agricultural loans 2,590 16 2,644 19
Retail 327 2 728 5
Industrial 2,125 13 1,204 9
Hospitality 427 3 410 3
Other 735 4 471 3
Total Mortgage Loans $ 16,610 100 % $ 14,095 100 %
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 2023.
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, 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
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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,
2022 2021
(in millions)
Highly Liquid Assets, beginning of period $ 1,742 $ 3,088
Dividends from subsidiaries 1,801 792
Capital contributions to subsidiaries (225) (815)
M&A Activity - 215
Total Business Capital Activity 1,576 192
Purchase of treasury shares (849) (1,637)
Shareholder dividends paid (294) (296)
Total Share Repurchases, Dividends and Acquisition Activity (1,143) (1,933)
Issuance of preferred stock - 293
Preferred stock dividend (80) (79)
Total Preferred Stock Activity (80) 214
Issuance of long-term debt - -
Repayment of long-term debt - (280)
Total External Debt Activity - (280)
Proceeds from loans from affiliates - 1,000
Net decrease (increase) in existing facilities to affiliates (1) (235) (80)
Total Affiliated Debt Activity (235) 920
Interest paid on external debt and P-Caps (209) (233)
Others, net 341 (226)
Total Other Activity 132 (459)
Net increase (decrease) in highly liquid assets 250 (1,346)
Highly Liquid Assets, end of period $
1,992
(1) Represents net activity of draws and repayments of existing credit
facilities between Holdings and affiliates.
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Capital Contribution to Our Subsidiaries
During the year ended
contributions of
Loans from Our Subsidiaries
There were no loans from our subsidiaries during the year ended
2022
Cash Distributions from Our Subsidiaries
During the year ended
distributions from AB of
Financial of
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's insurance laws, which are 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 obtain 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 formula above, Equitable Financial could pay an Ordinary Dividend of up to approximately$1.7 billion in 2023.
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.AB Holding is required to distribute all of its Available Cash Flow, as defined in the Amended and Restated Agreement of Limited Partnership ofAB Holding , to holders of AB Holding Units pro rata in accordance with their percentage interest inAB Holding . Available Cash Flow is defined as the cash distributionsAB Holding receives from ABLP minus such amounts as the General Partner determines, in its sole discretion, should be retained byAB 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 fromAB Holding are made pro rata based on the holder's percentage ownership interest inAB Holding . As ofDecember 31, 2022 , 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:
104 --------------------------------------------------------------------------------
Owner Percentage Ownership EQH and its subsidiaries 59.9 %AB Holding 39.4 % Unaffiliated holders 0.7 % Total 100.0 % Including both the general partnership and limited partnership interests inAB Holding and ABLP, Holdings and its subsidiaries had an approximate 61% economic interest in AB as ofDecember 31, 2022 . The issuance of AB Units relating to the CarVal acquisition is not expected to have a significant impact on the Company's cash flows. 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, 2022 , 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 the Consolidated Financial
Statements in this Form 10-.
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
For information pertaining to our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock see Note 20 of the Notes to the Consolidated Financial Statements.
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.
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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 Preferred Stock, Series B Preferred Stock 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 the Consolidated Financial
Statements.
Share Repurchase Programs
For information regarding activity pertaining to share repurchase programs, see
Note 20 of the Notes to the 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 the Consolidated Financial Statements for a description of our retirement and protection businesses' portfolio of liquid assets.
Hedging Activities
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
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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 the 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 the 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.
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, 2022 and 2021, AB had$900 million and$755 million outstanding under the EQH Facility, with interest rates of approximately 4.3% and 0.2%, respectively. Average daily borrowing of the EQH Facility during the full year 2022 and the full year 2021 were$655 million and$405 million , respectively, with a weighted average interest rates of approximately 1.7% and 0.2%, respectively. EQH Uncommitted Facility In addition to theEQH Facility, AB entered into a$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 interest generally 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 ofDecember 31, 2022 , AB had$90 million outstanding balance on the EQH Uncommitted Facility, with interest rate of approximately 4.3%. Average daily borrowing of the EQH Uncommitted Facility during the full year 2022 was$1 million with weighted average interest rate of approximately 4.3%. During 2021, AB did not draw on the facility. 107 --------------------------------------------------------------------------------
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. See Note 18 of the Notes to the Consolidated Financial Statements for additional information relating to Prescribed and 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 subsidiary 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 the 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,
S&P and Moody's have a stable outlook.
AM Best S&P Moody's
Last review date Feb '23 Jun '22 Jan '23
Financial Strength Ratings:
Equitable Financial Life Insurance Company A A+ A1
Equitable Financial Life Insurance Company of America A A+ A1
Credit Ratings:
Equitable Holdings, Inc. bbb+ BBB+ Baa1
Last review date Sep '22 Jan '23
AllianceBernstein L.P. A A2
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Material Cash Requirements
The table below summarizes the material short and long-term cash requirements related to contractual and other obligations as ofDecember 31, 2022 . Short-term cash requirements are considered to be 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
2028 and
Total 2023 2024-2025 2026-2027 thereafter
(in millions)
Material Cash Requirements:
Insurance liabilities (1) $ 111,931 $ 2,582
FHLB Funding Agreements
8,501 6,130 1,049 630 692 Interest on FHLB Funding Agreements 346 113 109 52 72 FABN Funding Agreements 7,159 1,000 1,900 2,100 2,159 Interest on FABN Funding Agreements 369 95 172 76 26 Operating leases, net of sublease commitments 1,003 144 198 149 512 Long-Term and Short-term Debt 3,870 520 - - 3,350 Interest on long-term debt and short-term debt 2,416 175 330 330 1,581 Interest on P-Caps 371 24 47 47 253 Employee benefits 3,304 211 444 369 2,280 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$314 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:
•As ofDecember 31, 2022 , AB had a$399 million accrual for compensation and benefits, of which$10 million is expected to be paid in 2023,$15 million in 2024-2025,$17 million in 2026-2027 and$38 million in 2028 and thereafter.Further, AB expects to make contributions to its qualified profit-sharing plan of$18 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, 2022 , 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, 2022 , AB had funded$22 million of this commitment. 109 --------------------------------------------------------------------------------
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 the 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 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. 110 -------------------------------------------------------------------------------- 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 the 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 the 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 Note 7 of the Notes to the Consolidated Financial Statements. The GMDB/GMIB reserve balance before reinsurance ceded was$10.9 billion as ofDecember 31, 2022 . 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, 2022 Increase/(Decrease) in GMDB/GMIB Reserves (in millions) 1% decrease in future rate of return $ 1,547 1% increase in future rate of return $ (1,583)
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. Interest rates used in establishing such liabilities range from 1.5% to 5.4% (weighted average of 3.6%). 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
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-------------------------------------------------------------------------------- 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 the 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, 2022 , the average rate of investment yields assumed (excluding policy loans) were 4.4% 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 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.
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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. We did not have a loss recognition event in 2022 or 2021. 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. 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 113 -------------------------------------------------------------------------------- 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, 2022
Increase/(Decrease)
in DAC
(in millions)
Decrease in future mortality by 1% $ 17
Increase in future mortality by 1% $ (17)
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, 2022 , 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% (4.9% net of product weighted average Separate Accounts fees), and the gross maximum and minimum short-term annual rate of return limitations were 15.0% (12.9% net of product weighted average Separate Accounts fees and Investment Advisory fees) and 0.0% (2.1)% 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. 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 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. AtDecember 31, 2022 , current projections of future average gross market returns assume approximately an 11.0% annualized return for sixteen quarters, followed by 7.3% annualized return for four quarters, followed by 7.0% thereafter.
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.
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DAC Sensitivity - Rate of Return
December 31, 2022
Increase/(Decrease)
in DAC
(in millions)
Decrease in future rate of return by 1% $ (126)
Increase in future rate of return by 1% $ 145
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 the Consolidated Financial Statements.
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.
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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 to January 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.
•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.
116 -------------------------------------------------------------------------------- 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 Note 2 and Note 3 of the Notes to the 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.
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 the Consolidated Financial Statements
for additional details on significant inputs into the OTC derivative pricing
models and credit risk adjustment.
117
--------------------------------------------------------------------------------
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 the 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 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.
118
--------------------------------------------------------------------------------
Future policyholders'
benefits and other
policyholders' liabilities
(before reinsurance ceded)
(in billions)
100% increase in Holdings' credit spread $
4.7
As reported $
5.8
50% decrease in Holdings' credit spread $
6.4
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, 2022 , our goodwill of$5.1 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. AtDecember 31, 2022 , we determined that it was more likely than not that a portion of our capital deferred tax assets would not be realized. The Company recorded a valuation allowance of$1.6 billion through Other Comprehensive Income. For more information, see Note 16 - Income Taxes. 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 119 --------------------------------------------------------------------------------
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 the Consolidated Financial Statements for a complete
discussion of newly issued accounting pronouncements.
Part II, Item 7A.
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