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PROTECTIVE LIFE INSURANCE CO – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read in conjunction with our
consolidated condensed financial statements included under Part I, Item 1,
Financial Statements (Unaudited), of this Quarterly Report on Form 10-Q and our
audited consolidated financial statements for the year ended December 31, 2020 ,
included in our most recent Annual Report on Form 10-K.
For a more complete understanding of our business and current period results,
please read the following MD&A in conjunction with our latest Annual Report on
Form 10-K and other filings with the United States Securities and Exchange
Commission (the "SEC").
FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE
This report reviews our financial condition and results of operations, including
our liquidity and capital resources. Historical information is presented and
discussed, and where appropriate, factors that may affect future financial
performance are also identified and discussed. Certain statements made in this
report include "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements include any
statement that may predict, forecast, indicate, or imply future results,
performance, or achievements instead of historical facts and may contain words
like "believe", "expect", "estimate", "project", "budget", "forecast",
"anticipate", "plan", "will", "shall", "may", and other words, phrases, or
expressions with similar meaning. Forward-looking statements involve risks and
uncertainties, which may cause actual results to differ materially from the
results contained in the forward-looking statements, and we cannot give
assurances that such statements will prove to be correct. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results. We undertake no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future developments or otherwise. Actual results could differ
materially from those expressed in or implied by such forward-looking statements
due to a variety of factors, including:
COVID-19 Pandemic
•the coronavirus (COVID-19) global pandemic has adversely impacted our business,
and the ultimate effect on our business, results of operations, and financial
condition will depend on future developments that are highly uncertain,
including the scope and duration of the pandemic and actions taken by
governmental authorities in response to the pandemic;
Financial Environment
•interest rate fluctuations and sustained periods of low or high interest rates
could negatively affect our interest earnings and spread income, or otherwise
impact our business;
•our investments are subject to market and credit risks, which could be
heightened during periods of extreme volatility or disruption in financial and
credit markets;
•climate change may adversely affect our investment portfolio;
•elimination of London Inter-Bank Offered Rate ("LIBOR") may adversely affect
the interest rates on and value of certain derivatives and floating rate
securities we hold and floating rate securities we have issued, the value and
profitability of certain real estate lending and other activities we conduct,
and any other assets or liabilities whose value is tied to LIBOR;
•credit market volatility or disruption could adversely impact our financial
condition or results from operations;
•disruption of the capital and credit markets could negatively affect our
ability to meet our liquidity and financial needs;
•equity market volatility could negatively impact our business;
•our use of derivative financial instruments within our risk management strategy
may not be effective or sufficient;
•our ability to grow depends in large part upon the continued availability of
capital;
•we could be forced to sell investments at a loss to cover policyholder
withdrawals;
•difficult general economic conditions could materially adversely affect our
business and results of operations;
•we could be adversely affected by an inability to access our credit facility or
FHLB lending;
•the amount of statutory capital or risk-based capital that we have and the
amount of statutory capital or risk-based capital that we must hold to maintain
our financial strength and credit ratings and meet other requirements can vary
significantly from time to time and is sensitive to a number of factors outside
of our control;
•we could be adversely affected by a ratings downgrade or other negative action
by a rating organization;
•our securities lending program may subject us to liquidity and other risks;
•our financial condition or results of operations could be adversely impacted if
our assumptions regarding the fair value and future performance of our
investments differ from actual experience;
•adverse actions of certain funds or their advisers could have a detrimental
impact on our ability to sell our variable life and annuity products, or
maintain current levels of assets in those products;
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Industry and Regulation
•the business of our company is highly regulated and is subject to routine
audits, examinations, and actions by regulators, law enforcement agencies, and
self-regulatory organizations;
•we may be subject to regulations of, or regulations influenced by,
international regulatory authorities or initiatives;
•the National Association of Insurance Commissioners ("NAIC") actions,
pronouncements and initiatives may affect our product profitability, reserve and
capital requirements, financial condition or results of operations;
•laws, regulations and initiatives related to unreported deaths and unclaimed
property and death benefits may result in operational burdens, fines, unexpected
payments or escheatments;
•we are subject to insurance guaranty fund laws, rules and regulations that
could adversely affect our financial condition or results of operations;
•we are subject to insurable interest laws, rules and regulations that could
adversely affect our financial condition or results of operations;
•laws, rules and regulations promulgated in connection with the enactment of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act")
may adversely affect our results of operations or financial condition;
•new and amended regulations regarding the standard of care or standard of
conduct applicable to investment professionals, insurance agencies, and
financial institutions that recommend or sell annuities or life insurance
products may have a material adverse impact on our ability to sell annuities and
other products and to retain in-force business and on our financial condition or
results of operations;
•we may be subject to regulation, investigations, enforcement actions, fines and
penalties imposed by the SEC , the Financial Industry Regulatory Authority
("FINRA") and other federal and international regulators in connection with our
business operations;
•changes to tax law, or interpretations of existing tax law could adversely
affect our ability to compete with non-insurance products or reduce the demand
for certain insurance products;
•financial services companies and their subsidiaries are frequently the targets
of legal proceedings and increased regulatory scrutiny, including class action
litigation, which could result in substantial judgments, and law enforcement
investigations;
•if our business does not perform well, we may be required to recognize an
impairment of our goodwill and indefinite lived intangible assets which could
adversely affect our results of operations or financial condition;
•use of reinsurance introduces variability in our statements of income;
•our reinsurers could fail to meet assumed obligations, increase rates,
terminate agreements or be subject to adverse developments that could affect us;
•our policy claims fluctuate from period to period resulting in earnings
volatility;
•we operate in a mature, highly competitive industry, which could limit our
ability to gain or maintain our position in the industry and negatively affect
profitability;
•developments in technology may impact our business;
•our ability to maintain competitive unit costs is dependent upon the level of
new sales and persistency of existing business;
Privacy and Cyber Security
•a disruption or cyberattack affecting the electronic, communication and
information technology systems or other technologies of the Company or those on
whom the Company relies could adversely affect the Company's business, financial
condition, and results of operations;
•confidential information maintained in the systems of the Company or other
parties upon which the Company relies could be compromised or misappropriated as
a result of security breaches or other related lapses or incidents, damaging the
Company's business and reputation and adversely affecting its financial
condition and results of operations;
•compliance with existing and emerging privacy regulations could result in
increased compliance costs and/or lead to changes in business practices and
policies, and any failure to protect the confidentiality of consumer information
could adversely affect our reputation and have a material adverse effect on our
business, financial condition and results of operations;
Acquisitions, Dispositions or Other Corporate Structural Matters
•we may not realize our anticipated financial results from our acquisitions
strategy;
•assets allocated to the MONY Closed Block benefit only the holders of certain
policies; and adverse performance of Closed Block assets or adverse experience
of Closed Block liabilities may negatively affect us;
•we depend on the ability of our subsidiaries to transfer funds to us to meet
our obligations;
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•our use of affiliate and captive reinsurance companies to finance statutory
reserves related to our fixed annuity and term and universal life products and
to reduce volatility affecting our variable annuity products may be limited or
adversely affected by regulatory action, pronouncements, and interpretations;
•we are a wholly subsidiary of Protective Life Corporation ("PLC"), which is a
wholly subsidiary of Dai-ichi Life, and Dai-ichi Life has the ability to make
important decisions affecting our business;
General
•exposure to risks related to natural and man-made disasters and catastrophes,
such as diseases, epidemics, pandemics (including the novel coronavirus,
COVID-19), malicious acts, cyberattacks, terrorist acts, and climate change,
could adversely affect our operations and results;
•our results and financial condition may be negatively affected should actual
experience differ from management's models, assumptions, or estimates;
•we are dependent on the performance of others;
•our risk management policies, practices, and procedures could leave us exposed
to unidentified or unanticipated risks, which could negatively affect our
business or result in losses;
•our strategies for mitigating risks arising from our day-to-day operations may
prove ineffective resulting in a material adverse effect on our results of
operations and financial condition;
•events that damage our reputation or the reputation of our industry could
adversely impact our business, results of operations, or financial condition;
•we may not be able to protect our intellectual property and may be subject to
infringement claims;
•we may be required to establish a valuation allowance against our deferred tax
assets, which could have a material adverse effect on our results of operations,
financial condition, and capital position; and
•new accounting rules, changes to existing accounting rules, or the granting of
permitted accounting practices to competitors could negatively impact the
Company.
For more information about the risks, uncertainties, and other factors that
could affect our future results, please see Part II, Item 1A, Risk Factors, of
this report.
IMPORTANT INVESTOR INFORMATION
We file reports with the United States Securities and Exchange Commission (the
"SEC"), including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and other reports as required. We are an electronic
filer and the SEC maintains an internet site at www.sec.gov that contains these
reports and other information filed electronically by us. We make available
through the website of our parent company, PLC, https://investor.protective.com,
our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, Current reports
on Form 8-K, and amendments to those reports as soon as reasonably practicable
after such materials are electronically filed with or furnished to the SEC .
We also make available to the public current information, including financial
information, regarding the Company and our affiliates on the Financial
Information page of PLC's website, https://investor.protective.com. We encourage
investors, the media and others interested in us and our affiliates to review
the information we post on our website. The information found on our website is
not part of this or any other report filed with or furnished to the SEC .
OVERVIEW
Our Business
We are a wholly owned subsidiary of PLC. Founded in 1907, we are the largest
operating subsidiary of PLC. PLC is a wholly owned subsidiary of Dai-ichi Life
Holdings, Inc., a kabushiki kaisha organized under the laws of Japan ("Dai-ichi
Life"). We provide financial services through the production, distribution, and
administration of insurance and investment products. Unless the context
otherwise requires, the "Company," "we," "us," or "our" refers to the
consolidated group of Protective Life Insurance Company and our subsidiaries.
We have several operating segments, each having a strategic focus. An operating
segment is distinguished by products, channels of distribution, and/or other
strategic distinctions. We periodically evaluate our operating segments and make
adjustments to our segment reporting as needed.
Our operating segments are Retail Life and Annuity, Acquisitions, Stable Value
Products, and Asset Protection. We have an additional reporting segment referred
to as Corporate and Other.
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•Retail Life and Annuity - We primarily market fixed universal life ("UL"),
indexed universal life ("IUL"), variable universal life ("VUL"), level premium
term insurance ("traditional"), bank-owned life insurance ("BOLI"),
corporate-owned life insurance ("COLI"), fixed annuity, and variable annuity
("VA") products on a national basis primarily through networks of independent
insurance agents and brokers, broker-dealers, financial institutions,
independent distribution organizations, and affinity groups.
•Acquisitions - We focus on acquiring, converting, and/or servicing policies and
contracts from other companies. This segment's primary focus is on life
insurance policies and annuity products that were sold to individuals. The level
of the segment's acquisition activity is predicated upon many factors, including
available capital, operating capacity, potential return on capital, and market
dynamics. Policies acquired through the Acquisitions segment are typically
blocks of business where no new policies are being marketed, however, some
recent acquisitions have included ongoing new business activities. Ongoing new
product sales written by the Company from these acquisitions are included in the
Retail Life and Annuity segment. As a result, earnings and account values are
expected to decline as the result of lapses, deaths, and other terminations of
coverage unless new acquisitions are made.
•Stable Value Products - We sell fixed and floating rate funding agreements
directly to the trustees of municipal bond proceeds, money market funds, bank
trust departments, and other institutional investors. The segment also issues
funding agreements to the Federal Home Loan Bank ("FHLB"), and markets
guaranteed investment contracts ("GICs") to 401(k) and other qualified
retirement savings plans. We also have an unregistered funding agreement-backed
notes program which provides for offers of notes to both domestic and
international institutional investors.
•Asset Protection - We market extended service contracts, guaranteed asset
protection ("GAP") products, and other specialized ancillary products to protect
consumers' investments in automobiles and recreational vehicles. GAP products
are designed to cover the difference between the scheduled loan pay-off amount
and an asset's actual cash value in the case of a total loss. Each type of
specialized ancillary product protects against damage or other loss to a
particular aspect of the underlying asset.
•Corporate and Other - This segment primarily consists of net investment income
on assets supporting our equity capital, unallocated corporate overhead, and
expenses not attributable to the segments above. This segment includes earnings
from several non-strategic or runoff lines of business, financing and
investment-related transactions, and the operations of several small
subsidiaries.
Impact of COVID-19
Beginning in the first quarter of 2020, the outbreak of COVID-19 created
significant economic and social disruption in the global economy and financial
markets. These events impacted various operational and financial aspects of the
Company's business in 2020 and have and may continue to impact earnings
throughout 2021 based on, amongst other factors, the volume and severity of
claims related to COVID-19 and the financial disruption caused by the pandemic,
which could impact the Company's investment portfolio. The Company continues to
monitor the effects of COVID-19, including the spread of the Delta variant, and
will take that information into consideration during the planned return of its
workforce to the office.
Retail Life and Annuity segment and Acquisitions segment. The pre-tax adjusted
operating income in the Retail Life and Annuity segment and the Acquisitions
segment were impacted by the effects of the COVID-19 pandemic on mortality
during the nine months ended September 30, 2021 . The COVID-19 pandemic has
resulted in an increase in claims in the traditional life and universal life
blocks. The pandemic will continue to impact earnings based on, amongst other
factors, the volume and severity of claims related to COVID-19 and the financial
disruption caused by the pandemic, which could impact the Company's investment
portfolio. The pandemic has also affected the manner in which our Acquisitions
segment conducts due diligence, negotiates transactions, works with
counterparties and integrates acquisitions, in each case adapting processes and
procedures to reflect the increased reliance on technology and remote
interactions as a result of COVID-19.
Asset Protection segment. The primary impacts from COVID-19 on the Asset
Protection segment during 2020 included a temporary negative impact on sales due
to lower sales in the auto industry, a reduction in vehicle service and GAP
claims as a result of the effect of less miles driven and lower general and
administrative expenses, especially with respect to travel costs. While current
trends remain positive, there remains uncertainty around the potential effect of
the COVID-19 pandemic on the segment's 2021 results, including a potential
negative impact on sales 1) if a resurgence in COVID-19 cases result in
increased shut downs of economic activity or 2) prolonged supply chain issues
such as part and chip shortages continue to cause a reduction in auto production
and inventories.
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Commercial Mortgage Loans. We provide certain relief under the Coronavirus Aid
Relief, and Economic Security Act (the "CARES Act") under its COVID-19
Commercial Mortgage Loan Program (the "Loan Modification Program"). During the
nine months ended September 30, 2021 , we modified 23 loans under the Loan
Modification Program, representing $475 million in unpaid principal balance. As
of September 30, 2021 , since the inception of the CARES Act, there were 277
total loans modified under the Loan Modification Program, representing
$2.1 billion in unpaid principal balance. At September 30, 2021 , $1.7 billion of
these loans have resumed regular principal and interest payments in accordance
with the terms of the modification agreements and we expect the remaining $0.4
billion loans to resume scheduled payments in accordance with the agreed upon
terms. The modifications under this program include agreements to defer
principal payments only and/or to defer principal and interest payments for a
specified period of time. None of these modifications were considered troubled
debt restructurings.
CRITICAL ACCOUNTING POLICIES
Our accounting policies require the use of judgments relating to a variety of
assumptions and estimates, including, but not limited to expectations of current
and future mortality, morbidity, persistency, expenses, and interest rates, as
well as expectations around the valuations of securities. Because of the
inherent uncertainty when using the assumptions and estimates, the effect of
certain accounting policies under different conditions or assumptions could be
materially different from those reported in the consolidated condensed financial
statements. For a complete listing of our critical accounting policies, refer to
our Annual Report on Form 10-K for the year ended December 31, 2020 .
RESULTS OF OPERATIONS
Our management and Board of Directors analyze and assess the operating
performance of each segment using pre-tax adjusted operating income (loss) and
after-tax adjusted operating income (loss). Consistent with GAAP accounting
guidance for segment reporting, pre-tax adjusted operating income (loss) is our
measure of segment performance. Pre-tax adjusted operating income (loss) is
calculated by adjusting income (loss) before income tax, by excluding the
following items:
•realized gains and losses on investments and derivatives,
•changes in the guaranteed living withdrawal benefits ("GLWB") embedded
derivatives exclusive of the portion attributable to the economic cost of the
GLWB,
•actual GLWB incurred claims,
•immediate impacts from changes in current market conditions on estimates of
future profitability on variable annuity and variable universal life products,
including impacts on deferred acquisition costs ("DAC"), value of business
acquired ("VOBA"), reserves and other items, and
•the amortization of DAC, VOBA, and certain policy liabilities that is impacted
by the exclusion of these items.
After-tax/Pre-tax adjusted operating income (loss)
After-tax adjusted operating income (loss) is derived from pre-tax adjusted
operating income (loss) with the inclusion of income tax expense or benefits
associated with pre-tax adjusted operating income. Income tax expense or
benefits is allocated to the items excluded from pre-tax adjusted operating
income (loss) at the statutory federal income tax rate for the associated
period. Income tax expense or benefits allocated to after-tax adjusted operating
income (loss) can vary period to period based on changes in our effective income
tax rate.
Pre-tax adjusted operating income (loss) and after-tax adjusted operating income
(loss) presented below are non-GAAP financial measures. The items excluded from
adjusted operating income (loss) are important to understanding the overall
results of operations. During Q1 2021, the Company began excluding from pre-tax
and after-tax adjusted operating income (loss) the impacts on DAC, VOBA,
reserves and other items due to changes in estimated profitability of variable
annuity and variable universal life products as a result of changes in current
market conditions. Management believes this change enhances the understanding of
the underlying performance trends of these products. Pre-tax adjusted operating
income (loss) and after-tax adjusted operating income (loss) are not substitutes
for income before income taxes or net income (loss), respectively. These
measures may not be comparable to similarly titled measures reported by other
companies. Our belief is that pre-tax and after-tax adjusted operating income
(loss) enhances management's and the Board of Directors' understanding of the
ongoing operations, and the underlying profitability of each segment, and helps
facilitate the allocation of resources.
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In determining the components of the pre-tax adjusted operating income (loss)
for each segment, premiums and policy fees, other income, benefits and
settlement expenses, and amortization of DAC and VOBA are attributed directly to
each operating segment. Net investment income is allocated based on directly
related assets required for transacting the business of that segment. Realized
gains (losses) and other operating expenses are allocated to the segments in a
manner that most appropriately reflects the operations of that segment.
Investments and other assets are allocated based on policy liabilities net of
associated policy assets, while DAC/VOBA and goodwill are shown in the segments
to which they are attributable.
Unlocking
We periodically review and update as appropriate our key assumptions used to
measure certain balances related to insurance products, including future
mortality, expenses, lapses, premium persistency, benefit utilization,
investment yields, interest rates, and separate account fund returns. Changes to
these assumptions result in adjustments which increase or decrease DAC and VOBA
amortization and/or benefits and expenses. Assumptions may be updated as part of
our annual assumption review process, as well as during our quarterly update of
historical business activity. This periodic review and updating of assumptions
is collectively referred to as "unlocking". When referring to unlocking the
reference is to changes in all balance sheet components associated with these
changes. The adjustments associated with unlocking can create significant
variability from period to period in the profitability of certain of the
Company's operating segments.
Additional information
Level term policies are policies in which premium rate remains the same for our
established level term period (e.g. 20 years). At the end of the level term
period, premium rates typically increase significantly and policyholder lapse
rates are typically high. Since most of our reinsurance premiums are paid on an
annual in advance basis, at each period end, we establish an accrual to adjust
for the income effect of policies expected to lapse in the next period. Premiums
paid to and refunded by reinsurers are included in reinsurance ceded, while
adjustments from the accrual for post level policy lapses is included in the
benefits and settlement expenses line in the statements of income. As a result,
over time there can be significant volatility in these individual line items due
to the impact of business entering the post level period.
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The following table presents a summary of results and reconciles pre-tax
adjusted operating income (loss) to consolidated income before income tax
expense and net income:
For The For The
Three Months Ended Nine Months Ended
September 30, Percent September 30,
2021 2020 Change 2021 2020 Change
(Dollars In Millions) (Dollars In Millions)
Pre-tax Adjusted Operating Income (Loss)
Retail Life and Annuity $ (85) $ 23 n/m $ (63) $ 47 n/m
Acquisitions 42 65 (35.4) 255 238 7.1
Stable Value Products 63 20 n/m 128 61 n/m
Asset Protection 9 8 12.5 31 33 (6.1)
Corporate and Other (26) (35) (25.7) (120) (108) 11.1
Pre-tax adjusted operating income 3 81 n/m 231 271 (14.8)
Non-operating income (loss) 56 79 (29.1) 156 (96) n/m
Income before income tax 59 160 (63.1) 387 175 n/m
Income tax expense (10) (29) (65.5) (74) (31) n/m
Net income $ 49 $ 131 (62.6)% $ 313 $ 144 n/m
Pre-tax adjusted operating income (loss) $ 3 $ 81 n/m $ 231 $ 271 (14.8)%
Adjusted operating income tax benefit
(expense) 1 (13) n/m (41) (52) (21.2)
After-tax adjusted operating income (loss) 4 68 n/m 190 219 (13.2)
Non-operating income (loss) 56 79 (29.1) 156 (96) n/m
Income tax expense on adjustments (11) (16) (31.3) (33) 21 n/n
Net income $ 49 $ 131 (62.6)% $ 313 $ 144 n/m
Non-operating income (loss)
Derivative gains (losses) $ 51 $ 88 (42.0)% $ 50 $ (152) n/m
Investment gains (losses) 16 23 (30.4) 111 (72) n/m
VA/VUL market impacts(1) (6) - n/m 13 - n/m
Less: related amortization(2) 31 55 (43.6) 93 (59) n/m
Less: VA GLWB economic cost (26) (23) 13.0 (75) (69) 8.7
Total non-operating income (loss) $ 56 $ 79 (29.1)% $ 156 $ (96) n/m
(1) Represents the immediate impacts on DAC, VOBA, reserves and other non-cash items in current period results due to changes in current market conditions on estimates of
profitability, which are excluded from pre-tax and after-tax adjusted operating income (loss) beginning in Q1 of 2021.
(2) Includes amortization of DAC/VOBA and benefits and settlement expenses that are impacted by realized gains (losses).
n/m - we define n/m as not meaningful for increases or decreases greater than 100%.
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Retail Life and Annuity
Segment Results of Operations
Segment results were as follows:
For The For The
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2021 2020 Change 2021 2020 Change
(Dollars In Millions) (Dollars In Millions)
REVENUES
Gross premiums and policy fees $ 570 $ 564 1.1% $ 1,735 $ 1,559 11.3%
Reinsurance ceded (203) (176) 15.3 (619) (381) 62.5
Net premiums and policy fees 367 388 (5.4) 1,116 1,178 (5.3)
Net investment income 277 252 9.9 819 754 8.6
Realized gains (losses) (23) (20) 15.0 (66) (60) 10.0
Other income 45 40 12.5 136 121 12.4
Total operating revenues 666 660 0.9 2,005 1,993 0.6
BENEFITS AND EXPENSES
Benefits and settlement expenses 652 547 19.2 1,766 1,663 6.2
Amortization of DAC/VOBA 41 39 5.1 133 137 (2.9)
Other operating expenses 58 51 13.7 169 146 15.8
Total operating benefits and expenses 751 637 17.9 2,068 1,946 6.3
PRE-TAX ADJUSTED OPERATING INCOME (LOSS) (85) 23 n/m (63) 47 n/m
Non-operating income (loss):
Realized gains (losses) 74 97 (23.7) 120 (185) n/m
Related benefits and settlement expenses (8) (9) (11.1) (8) 11 n/m
Related amortization of DAC/VOBA (18) (38) (52.6) (41) 67 n/m
VA/VUL market impacts(1) (5) - n/m 8 - n/m
Total non-operating income (loss) 43 50 (14.0) 79 (107) n/m
INCOME (LOSS) BEFORE INCOME TAX $ (42) $ 73 n/m $ 16 $ (60) n/m
(1) Represents the immediate impacts on DAC, VOBA, reserves and other non-cash items in current period results due to changes in current market conditions on estimates
of profitability, which are excluded from pre-tax and after-tax adjusted operating income (loss) beginning in Q1 of 2021.
n/m - we define n/m as not meaningful for increases or decreases greater than 100%.
The following table summarizes key data for the Retail Life and Annuity segment:
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For The For The
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2021 2020 Change 2021 2020 Change
(Dollars In Millions) (Dollars In Millions)
Sales By Product
Traditional life(1) $ 65 $ 74 (12.2)% $ 197 $ 192 2.6%
Universal life(1) 26 10 n/m 64 32 100.0
BOLI/COLI(2) 122 - n/m 641 - n/m
Fixed annuity(3) 303 793 (61.8) 1,112 1,804 (38.4)
Variable annuity(3) 256 80 n/m 751 173 n/m
$ 772 $ 957 (19.3)% $ 2,765 $ 2,201 25.6%
Average Account Values
Universal life(4) $ 7,853 $ 7,656 2.6% $ 7,775 $ 7,698 1.0%
Variable universal life 1,406 848 65.8 1,276 821 55.4
Fixed annuity(5) 12,203 11,099 9.9 12,022 10,759 11.7
Variable annuity 12,543 10,797 16.2 12,273 10,749 14.2
$ 34,005 $ 30,400 11.9% $ 33,346 $ 30,027 11.1%
Average Life Insurance In-force(6)
Traditional life $ 430,814 $ 382,629 12.6% $ 417,749 $ 374,968 11.4%
Universal life 290,907 288,154 1.0 289,765 288,522 0.4
$ 721,721 $ 670,783 7.6% $ 707,514 $ 663,490 6.6%
Interest Spread - Fixed Annuities(7)
Net investment income yield 3.57 % 3.43 % 3.62 % 3.68 %
Interest credited to policyholders 2.39 % 2.50 % 2.39 % 2.50 %
Interest spread 1.18 % 0.93 % 1.23 % 1.18 %
As of
September 30, December 31, Percent
2021 2020 Change
(Dollars In Millions)
VA GLWB Benefit Base $ 9,883 $ 9,817 0.7%
Account value subject to GLWB rider
2.3%
(1) Sales data for traditional life insurance, other than Single Premium Whole Life ("SPWL") insurance, is based on annualized premiums. SPWL insurance
sales are based on total single premium dollars received in the period. Universal life sales are based on annualized planned premiums, or "target"
premiums if lesser, plus 6% of amounts received in excess of target premiums and 10% of single premiums. "Target" premiums for universal life are those
premiums upon which full first year commissions are paid.
(2) BOLI sales are measured based on total premiums received. COLI sales represent expected premium within one year of policy issue date.
(3) Sales are measured based on the amount of purchase payments received less surrenders occurring within twelve months of the purchase payments.
(4) Includes general account balances held within VUL products.
(5) Includes general account balances held within VA products. Fixed annuity account value is net of non-affiliate reinsurance ceded.
(6) Amounts are not adjusted for reinsurance ceded.
(7) Interest spread on average general account values.
n/m - we define n/m as not meaningful for increases or decreases greater than 100%.
Annuity Account Values
Annuity account values are a significant driver of our operating results, and
are primarily driven by net additions (withdrawals) and the impact of market
changes. The income we earn on most of our fee-based products varies with the
level of underlying account values as many policy fees are determined by these
values. The investment income and interest we credit to policyholders on our
spread-based products varies with the level of general account values. To a
lesser extent, changes in account values impact our pattern of amortization of
DAC and VOBA and general and administrative expenses.
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Fixed Annuities
Fixed annuity account values in the rollforward below represent general account
reserves for fixed deferred and variable deferred annuities within the annuity
account balances line item on the consolidated condensed balance sheet. It also
includes the general account reserves associated with immediate annuity policies
within the future policy benefits and claims line item on the consolidated
condensed balance sheet. These reserves can differ from account value on certain
products. Immediate annuities do not have an account value, but do maintain a
GAAP reserve, which is included in the below rollforward. The entire GAAP
reserve for indexed annuities differs from account value due to the bifurcation
of the host contract and the embedded derivative. The below rollforward
represents the account value associated with fixed funds and reserves associated
with the host contract on indexed annuities.
For The For The
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Dollars In Millions)
Fixed Annuities
Beginning total account value $ 11,838 $ 10,533 $ 11,411 $ 10,027
Deposits and sales 328 752 1,182 1,748
Withdrawals and benefits (283) (254) (837) (810)
Policy fees/surrender charges (10) (1) (26) (3)
Interest credited and other activity 74 71 217 139
Ending account value $ 11,947 $ 11,101 $ 11,947 $ 11,101
Variable Annuities
Variable annuity account values in the rollforward below represent separate
account reserves for variable deferred and immediate annuities. These reserves
are a component of the liabilities related to separate accounts line item in the
consolidated condensed balance sheet.
As of or For The As of or For The
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Dollars In Millions)
Variable Account Value
Beginning balance $ 12,599 $ 10,684 $ 11,763 $ 12,162
Increase (decrease) in VA account values:
Deposits 217 50 635 114
Surrenders (254) (230) (770) (739)
Contract holder assessments (60) (56) (178) (169)
Change in market value and other activity (14) 463 1,038 (457)
Ending balance $ 12,488 $ 10,911 $ 12,488 $ 10,911
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Pre-Tax Adjusted Operating Income (Loss)
Three Month Comparison. Pre-tax adjusted operating income (loss) decreased
million
•Unfavorable prospective unlocking •Unfavorable mortality experience •Higher net investment income due to higher asset balances, as well as higher participation income and prepayment fee income on commercial mortgage loans •Higher fee income due to growth inVA account balances •Higher insurance operating expenses •Growth in guaranteed benefit reserves •Unfavorable impacts due to the exclusion of variable product market impacts from operating income in 2021. In 2021, the operating income definition was revised to exclude the impact of equity market changes on variable products. Nine Month Comparison. Pre-tax adjusted operating income (loss) decreased$110 million primarily driven by: •Unfavorable prospective unlocking •Unfavorable mortality experience •Higher net investment income due to higher asset balances •Higher fee income due to the growth inVA account balances •Higher insurance operating expenses •Growth in guaranteed benefit reserves •Favorable impacts due to the exclusion of variable product market impacts from operating income in 2021. In 2021, the operating income definition was revised to exclude the impact of equity market changes on variable products. Operating Revenues Three Month Comparison. Operating revenues increased$6 million primarily driven by: •Higher net investment income primarily due to higher liability balances and higher participation income and prepayment fee income on commercial mortgage loans •Higher annuity fees from the growth inVA account balances due to increases in equity markets and growth in fixed annuity sales with guaranteed benefit riders •Lower traditional life net premiums due to lower single premium whole life sales. Nine Month Comparison. Operating revenues increased$12 million primarily driven by: •Higher net investment income primarily due to higher liability balances, and higher participation income and prepayment fee income on commercial mortgage loans •Higher annuity fees from the growth inVA account balances due to increases in equity markets and growth in fixed annuity sales with guaranteed benefit riders •Lower life net premiums of$75 million primarily due to fluctuations in the number of traditional life policies entering their post level period at the end of 2019. These policies cause fluctuations in reinsurance premiums between periods for those contracts that enter the grace period and subsequently lapse.
The major categories of net investment income are summarized as follows:
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For The For The
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Dollars In Millions) (Dollars In Millions)
Net Investment Income Fixed maturities$ 216 $ 198 $ 633 $ 584 Commercial mortgage loans 54 48 153 142 Commercial mortgage loan participation income 2 1 11 10 Other, net 5 5 22 18 Total net investment income$ 277 $ 252 $ 819 $ 754 Operating Benefits and Expenses Three Month Comparison. Operating benefits and expenses increased$114 million primarily driven by: •Higher prospective unlocking of$72 million due to annual assumption updates •Unfavorable mortality experience, primarily due to the impact of COVID-19 •Higher insurance operating expenses primarily driven by higher acquisition expenses andVA commissions on increasedVA account values •Growth in guaranteed benefit reserves due to fixed annuity sales and reserve increases in the universal life block •Unfavorable impacts due to the exclusion of other unlocking and changes in guaranteed benefit reserves associated with variable product market impacts from operating income in 2021. Nine Month Comparison. Operating benefits and expenses increased$122 million primarily driven by: •Higher prospective unlocking of$72 million due to annual assumption updates •Unfavorable mortality experience primarily due to the impact of COVID-19 •Higher insurance operating expenses driven by higher acquisition expenses, higher maintenance and overhead, and higher sales and commissions on increasedVA account values •Lower increase in life reserves of$104 million , excluding the impact of mortality experience, primarily due to fluctuations in the number of policies entering their post level period at the end of 2019. These policies cause fluctuations in reinsurance premiums between periods for those contracts that enter the grace period and subsequently lapse, which also results in accruals within benefits and settlement expense to adjust for the income effect of policies expected to lapse in the next period •Growth in guaranteed benefit reserves due to fixed annuity sales and reserve increases in the universal life block •Favorable impacts due to the exclusion of variable product market impacts from operating income in 2021. 59
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For The For The
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Dollars In Millions) (Dollars In Millions)
Benefit and settlement expense
Death claims $ 265 $ 192 $ 741 $ 586
Change in life reserves 226 198 546 618
Life surrenders 4 2 10 7
Change in annuity guaranteed benefit reserves 19 8 38 15
Payout annuities mortality variance (6) (4) (3) (12)
Interest credited and other expenses 144 151 434 449
Total benefits and settlement expenses $ 652 $ 547 $ 1,766 $ 1,663
Reinsurance
Currently, the Retail Life and Annuity segment reinsures significant amounts of
its life insurance in-force. Pursuant to the underlying reinsurance contracts,
reinsurers pay allowances to the segment as a percentage of both first year and
renewal premiums. Reinsurance allowances represent the amount the reinsurer is
willing to pay for reimbursement of acquisition costs incurred by the direct
writer of the business. A portion of reinsurance allowances received is deferred
as part of DAC and a portion is recognized immediately as a reduction of other
operating expenses. As the non-deferred portion of allowances reduces operating
expenses in the period received, these amounts represent a net increase to
adjusted operating income during that period.
Reinsurance allowances do not affect the methodology used to amortize DAC or the
period over which such DAC is amortized. However, they do affect the amounts
recognized as DAC amortization. DAC on universal life-type, limited-payment long
duration, and investment contracts business is amortized based on the estimated
gross profits of the policies in-force. Reinsurance allowances are considered in
the determination of estimated gross profits, and therefore, impact DAC
amortization on these lines of business. Deferred reinsurance allowances on
level term business are recorded as ceded DAC, which is amortized over the
estimated ceded premiums of the policies in-force. Thus, deferred reinsurance
allowances may impact DAC amortization.
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Impact of reinsurance
Reinsurance impacted the Retail Life and Annuity segment line items as shown in
the following table:
Retail Life and Annuity Segment
Line Item Impact of Reinsurance
For The For The
Three Months Ended Nine Months Ended
September 30, Percent September 30,
2021 2020 Change 2021 2020 Change
(Dollars In Millions) (Dollars In Millions)
REVENUES
Reinsurance ceded (203) $ (176) 15.3% $ (619) $ (381) 62.5%
Other income (4) (1) n/m (4) (2) n/m
Total operating revenues (207) (177) 16.9 (623) (383) 62.7
Realized gains (losses) (4) - n/m (7) (1) n/m
Total revenues (211) (177) 19.2 (630) (384) 64.1
BENEFITS AND EXPENSES
Benefits and settlement expenses (317) (154) n/m (799) (333) n/m
Amortization of DAC/VOBA (2) (1) n/m (5) (3) 66.7
Other operating expenses (45) (44) 2.3 (138) (145) (4.8)
Operating benefits and expenses (364) (199) 82.9 (942) (481)
95.8
Benefits and settlement expenses related to realized gains (losses) (2) 1 n/m (2) (1)
n/m
Amortization of DAC/VOBA related to realized gains (losses) (1) 2 n/m (1) 5 n/m Total benefits and expenses (367) (196) 87.2% (945) (477) 98.1% NET IMPACT OF REINSURANCE$ 156 $ 19 n/m$ 315 $ 96 n/m
n/m - we define n/m as not meaningful for increases or decreases greater than 100%.
The table above does not reflect the impact of reinsurance on our net investment income. By ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed, which will increase the assuming companies' profitability on the business that we cede. The net investment income impact to us and the assuming companies has not been quantified. The impact of including foregone investment income would be to substantially reduce the favorable net impact of reinsurance reflected above. The Retail Life and Annuity segment's reinsurance programs do not materially impact the "other income" line of our income statement. Three Month Comparison. The change in the net impact of reinsurance was favorable by$137 million primarily driven by: •Higher ceded benefits and settlement expenses due to the impact of prospective unlocking on UL excess benefit reserves and higher life claims primarily due to the impact of COVID-19 •Higher ceded net premiums driven by higher ceded traditional life premiums. Nine Month Comparison. The change in the net impact of reinsurance was favorable by$219 million primarily driven by: •Higher ceded benefits and settlement expenses primarily due to fluctuations in the number of policies entering their post level period at the end of 2019, due to accruals within benefits and settlement expense to adjust for the income effect of policies expected to lapse in the next period •Higher impact of prospective unlocking on UL excess benefit reserves and higher ceded life claims primarily due to the impact of COVID-19 •Higher ceded traditional life premiums of$238 million primarily due to fluctuations in the number of policies entering their post level period at the end of 2019. These post levels policies cause fluctuations in reinsurance premiums between periods for those contracts that enter the grace period and subsequently lapse. 61 -------------------------------------------------------------------------------- Table of Contents Acquisitions Segment Results of Operations Segment results were as follows: For The For The Three Months Ended Nine Months Ended September 30, Percent September 30, Percent 2021 2020 Change 2021 2020 Change (Dollars In Millions) (Dollars In Millions) REVENUES Gross premiums and policy fees$ 408 $ 405 0.7%$ 1,213 $ 1,161 4.5% Reinsurance ceded (58) (63) (7.9) (191) (162) 17.9 Net premiums and policy fees 350 342 2.3 1,022 999 2.3 Net investment income 393 406 (3.2) 1,192 1,235 (3.5) Realized gains (losses) (3) (3) - (9) (9) - Other income 6 37 (83.8) 27 124 (78.2) Total operating revenues 746 782 (4.6) 2,232 2,349 (5.0) BENEFITS AND EXPENSES Benefits and settlement expenses 637 645 (1.2) 1,796 1,906 (5.8) Amortization of DAC/VOBA 9 7 28.6 7 13 (46.2) Other operating expenses 58 65 (10.8) 174 192 (9.4) Total operating benefits and expenses 704 717 (1.8) 1,977 2,111
(6.3)
PRE-TAX ADJUSTED OPERATING INCOME 42 65 (35.4) 255 238 7.1 Non-operating income (loss) Realized gains 3 20 (85.0) 50 50 - Related benefits and settlement expenses (3) (1) n/m (35) (8)
n/m
Related amortization of VOBA (2) (7) (71.4) (9) (11)
(18.2)
VA/VUL market impacts(1) (1) - n/m 5 -
n/m
Total non-operating income (3) 12 n/m 11 31
(64.5)
INCOME BEFORE INCOME TAX $ 39$ 77 (49.4)% $ 266$ 269
(1.1)%
(1) Represents the immediate impacts on DAC, VOBA, reserves and other non-cash items in current period results due to changes in current market
conditions on estimates of profitability, which are excluded from pre-tax and after-tax adjusted operating income (loss) beginning in Q1 of 2021.
n/m - we define n/m as not meaningful for increases or decreases greater than 100%.
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The following table summarizes key data for the Acquisitions segment:
For The For The
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2021 2020 Change 2021 2020 Change
(Dollars In Millions) (Dollars In Millions)
Average Life Insurance In-Force(1)
Traditional $ 218,982 $ 242,435 (9.7)% $ 225,485 $ 247,093 (8.7)%
Universal life 67,665 67,638 - 67,901 67,953 (0.1)
$ 286,647 $ 310,073 (7.6)% $ 293,386 $ 315,046 (6.9)%
Average Account Values
Universal life(2) $ 15,121 $ 15,571 (2.9)% $ 15,339 $ 15,612 (1.7)%
Variable universal life 9,323 7,869 18.5 9,092 7,702 18.0
Fixed annuity(2) 9,375 10,219 (8.3) 9,544 10,362 (7.9)
Variable annuity 5,626 4,859 15.8 5,493 4,946 11.1
$ 39,445 $ 38,518 2.4% $ 39,468 $ 38,622 2.2%
Interest Spread - Fixed Annuities
Net investment income yield 3.97 % 3.91 % 3.94 % 3.96 %
Interest credited to policyholders 3.39 % 3.35 % 3.36 % 3.30 %
Interest spread(3) 0.58 % 0.56 % 0.58 % 0.66 %
(1) Amounts are not adjusted for coinsurance ceded.
(2) Includes general account balances held within variable products and is net of non-affiliate reinsurance ceded. Excludes
structured annuity products.
(3) Interest spread on average general account values
n/m - we define n/m as not meaningful for increases or decreases greater than 100%.
Pre-Tax Adjusted Operating Income
Three Month Comparison. Pre-tax adjusted operating income decreased
primarily driven by:
•Unfavorable mortality experience •Lower net investment income and interest spread due to expected run off of the in-force blocks of business •Lower expenses related to system conversions and integration of acquired blocks •Favorable prospective unlocking Nine Month Comparison. Pre-tax adjusted operating income increased$17 million primarily driven by: •Favorable mortality experience in the payout annuity block, partially offset by unfavorable mortality experience in the life products •Lower net investment income and interest spread due to expected run off of the in-force blocks of business •Lower benefits on participating policies, primarily related to a reduction in the policyholder dividend obligation associated with policies in the regulatory closed block •Lower expenses related to system conversions and integration of acquired blocks •Favorable prospective unlocking •Other income received in the first quarter of 2020 related to the final settlement of a prior acquisition Operating Revenues Three Month Comparison. Operating revenues decreased$36 million primarily driven by: •Lower net investment income due to expected run off of the in-force blocks of business •Lower other income and higher premiums and policy fees due to a change in 2021 of the classification of certain policy fees Nine Month Comparison. Operating revenues decreased$117 million primarily driven by: •Lower net investment income due to expected run off of the in-force blocks of business 63 -------------------------------------------------------------------------------- Table of Contents •Other income of$15 million received the first quarter of 2020 related to the final settlement of a prior acquisition •Lower other income and higher premiums and policy fees due to a change in 2021 of the classification of certain policy fees The major categories of net investment income are summarized as follows: For The For The Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (Dollars In Millions) (Dollars In Millions) Net Investment Income Fixed maturities$ 362 $ 367 $ 1,065 $ 1,096 Commercial mortgage loans 15 20 52 58 Other, net 16 19 75 81 Total net investment income$ 393 $ 406 $ 1,192 $ 1,235 Operating Benefits and Expenses Three Month Comparison. Operating benefits and expenses decreased$13 million primarily driven by: •Unfavorable mortality experience •Lower annuity interest credited primarily due to lower fixed annuity account balances •Lower expenses of$8 million related to system conversions and integration of acquired blocks •Higher prospective unlocking of$6 million due to annual assumption updates Nine Month Comparison. Operating benefits and expenses decreased$134 million primarily driven by: •Favorable mortality experience on payout annuity block, partially offset by unfavorable mortality experience in the life products •Lower benefits on participating policies of$15 million , primarily related to a reduction in the policyholder dividend obligation associated with policies in the regulatory closed block •Lower expenses of$14 million related to system conversions and integration of acquired blocks •Favorable prospective unlocking of$6 million due to annual assumption updates For The For The Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (Dollars In Millions) (Dollars In Millions) Benefit and settlement expense Death claims$ 321 $ 279 $ 927$ 863 Change in life reserves (11) (9) (109) (102) Life surrenders 47 59 154 198 Payout annuities mortality variance (7) 4 (33) 5 Accident & Health benefit and settlement expense 14 14 42 45 Interest credited and other expenses 273 298 815 897 Total benefits and settlement expenses$ 637 $ 645 $ 1,796 $ 1,906
Reinsurance
The Acquisitions segment currently reinsures portions of both its life and annuity in-force. The cost of reinsurance to the segment is reflected in the chart shown below. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . 64
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Impact of reinsurance
Reinsurance impacted the Acquisitions segment line items as shown in the
following table:
Acquisitions Segment
Line Item Impact of Reinsurance
For The For The
Three Months Ended Nine Months Ended
September 30, Percent September 30,
2021 2020 Change 2021 2020 Change
(Dollars In Millions) (Dollars In Millions)
REVENUES
Reinsurance ceded $ (58) $ (63) (7.9)% $ (191) $ (162) 17.9%
BENEFITS AND EXPENSES
Benefits and settlement expenses (48) (65) (26.2) (191) (148) 29.1
Amortization of DAC/VOBA - - n/m (1) -
Other operating expenses (7) (6) 16.7 (20) (21) (4.8)
Total benefits and expenses (55) (71) (22.5) (212) (169) 25.4
NET IMPACT OF REINSURANCE(1) $ (3) $ 8 n/m $ 21 $ 7 n/m
(1) Assumes no investment income on reinsurance. Foregone investment income would substantially reduce the favorable impact of reinsurance.
n/m - we define n/m as not meaningful for increases or decreases greater than 100%.
The segment's reinsurance programs do not materially impact the other income line of our income statement. In addition, net investment income generally has no direct impact on reinsurance cost. However, by ceding business to the assuming companies, we forgo investment income on the reserves ceded to the assuming companies. Conversely, the assuming companies will receive investment income on the reserves assumed which will increase the assuming companies' profitability on business assumed from the Company. For business ceded under modified coinsurance arrangements, the amount of investment income attributable to the assuming company is included as part of the overall change in policy reserves and, as such, is reflected in benefit and settlement expenses. The net investment income impact to us and the assuming companies has not been quantified as it is not fully reflected in our consolidated financial statements. Three Month Comparison. The change in the net impact of reinsurance was unfavorable by$11 million primarily driven by: •Lower ceded traditional life premiums and policy fees driven by expected run off of the in-force blocks of business •Lower ceded benefits and settlement expenses driven by expected run off of the in-force blocks of business as well as lower ceded claims Nine Month Comparison. The change in the net impact of reinsurance was favorable by$14 million primarily driven by: •Higher ceded traditional life premiums primarily due to fluctuations in the number of policies entering their post level period at the end of 2019. These post level policies cause fluctuations in reinsurance premiums between periods for those contracts that enter the grace period and subsequently lapse •Higher ceded benefits and settlement expenses primarily due to fluctuations in the number of policies entering their post level period at the end of 2019, due to accruals within benefits and settlement expense to adjust for the income effect of policies expected to lapse in the next period 65 -------------------------------------------------------------------------------- Table of Contents Stable Value Products Segment Results of Operations Segment results were as follows: For The For The Three Months Ended Nine Months Ended September 30, Percent September 30, Percent 2021 2020 Change 2021 2020 Change (Dollars In Millions) (Dollars In Millions) REVENUES Net investment income $ 97$ 54 79.6% 228 169 34.9% Total operating revenues 97 54 79.6 228 169 34.9 BENEFITS AND EXPENSES Benefits and settlement expenses 31 32 (3.1) 93 102 (8.8) Amortization of DAC 2 1 n/m 4 3 n/m Other operating expenses 1 1 n/m 3 3 n/m Total benefits and expenses 34 34 - 100 108 (7.4) PRE-TAX ADJUSTED OPERATING INCOME 63 20 n/m 128 61 n/m Add: realized gains (losses) 9 (6) n/m 47 (32) n/m INCOME BEFORE INCOME TAX $ 72$ 14 n/m 175 29 n/m
n/m - we define n/m as not meaningful for increases or decreases greater than 100%.
The following table summarizes key data for the Stable Value Products segment:
For The For The
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2021 2020 Change 2021 2020 Change
(Dollars In Millions) (Dollars In Millions)
Sales(1)
GIC $ - $ 75 n/m $ - $ 78 n/m
GFA 1,200 750 60.0% 3,910 1,750 n/m
$ 1,200 $ 825 45.5% $ 3,910 $ 1,828 n/m
Average Account Values $ 8,110 $ 6,074 33.5% $ 7,412 $ 5,807 27.6%
Ending Account Values $ 8,237 $ 6,017 36.9% $ 8,237 $ 6,017 36.9%
Operating Spread
Net investment income yield 4.77 % 3.56 % 4.07 % 3.89 %
Interest credited 1.53 2.13 1.68 2.35
Operating expenses 0.11 0.11 0.11 0.11
Operating spread 3.13 % 1.32 % 2.28 % 1.43 %
Adjusted operating spread(2) 1.54 % 1.31 % 1.56 % 1.25 %
(1) Sales are measured at the time the purchase payments are received.
(2) Excludes participation commercial mortgage loan income, accelerated discount accretion from called securities, and the impact of commercial mortgage
loan prepayments.
n/m - we define n/m as not meaningful for increases or decreases greater than 100%.
Pre-Tax Adjusted Operating Income
Three Month Comparison. Pre-tax adjusted operating income increased $43 million
primarily driven by:
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•Increase in net investment income of $32 million due to an increase in
participation income on commercial mortgage loans and income on called
securities and prepayments
•Increase in net investment income of $8 million due to an increase in the
average balance
Nine Month Comparison. Pre-tax adjusted operating income increased $67 million
primarily driven by:
•Increase in net investment income of $34 million due to an increase in
participation income on commercial mortgage loans and income on called
securities and prepayments
•Increase in net investment income of $19 million due to an increase in the
average balance
For The For The
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Dollars In Millions) (Dollars In Millions)
Net Investment Income
Fixed maturities $ 33 $ 25 $ 92 $ 81
Participation commercial mortgage loan income 29 - 35 7
Commercial mortgage loan income 36 30 103 82
Other income and expenses (1) (1) (2) (1)
Total net investment income $ 97 $ 54 $ 228 $ 169
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Asset Protection
Segment Results of Operations
Segment results were as follows:
For The For The
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2021 2020 Change 2021 2020 Change
(Dollars In Millions) (Dollars In Millions)
REVENUES
Gross premiums and policy fees $ 73 $ 74 (1.4)% $ 219 $ 222 (1.4)%
Reinsurance ceded (50) (48) 4.2 (144) (140) 2.9
Net premiums and policy fees 23 26 (11.5) 75 82 (8.5)
Net investment income 5 5 - 16 19 (15.8)
Other income 38 37 2.7 114 108 5.6
Total operating revenues 66 68 (2.9) 205 209 (1.9)
BENEFITS AND EXPENSES
Benefits and settlement expenses 14 21 (33.3) 47 59 (20.3)
Amortization of DAC/VOBA 17 18 (5.6) 47 48 (2.1)
Other operating expenses 26 21 23.8 80 69 15.9
Total benefits and expenses 57 60 (5.0) 174 176 (1.1)
PRE-TAX ADJUSTED OPERATING INCOME 9 8 12.5 31 33 (6.1)
INCOME BEFORE INCOME TAX $ 9 $ 8 12.5% $ 31 $ 33 (6.1)%
n/m - we define n/m as not meaningful for increases or decreases greater than 100%.
The following table summarizes key data for the Asset Protection segment:
For The For The
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2021 2020 Change 2021 2020 Change
(Dollars In Millions) (Dollars In Millions)
Sales(1)
Credit insurance $ - $ 2 n/m $ - $ 4 n/m
Service contracts 134 114 17.5 % 383 294 30.3 %
GAP 22 21 4.8 66 57 15.8
$ 156 $ 137 13.9 % $ 449 $ 355 26.5 %
Loss Ratios(2)
Credit insurance 88.5 % 37.0 % 47.5 % 32.1 %
Service contracts 63.5 65.9 58.7 62.0
GAP 40.2 132.1 74.9 114.3
(1) Sales are based on the amount of single premiums and fees received
(2) Incurred claims as a percentage of earned premiums
68 -------------------------------------------------------------------------------- Table of Contents Pre-Tax Adjusted Operating Income Three Month Comparison. Pre-tax adjusted operating income increased$1 million primarily driven by: •Favorable impact of lower loss ratios from the GAP product line, due to higher used car values •Higher expenses due to higher sales and commissions in the service contract line •Increase in sales due to the positive impact of increased industry auto sales Nine Month Comparison. Pre-tax adjusted operating income decreased$2 million primarily driven by: •Favorable impact of lower loss ratios from the GAP product line, due to higher used car values •Lower net investment income due to lower investment yields •Higher expenses due to higher sales and commissions in the service contract line •Increase in sales due to the positive impact of increased industry auto sales
Reinsurance
The majority of the Asset Protection segment's reinsurance activity relates to
the cession of single premium credit life and credit accident and health
insurance, vehicle service contracts, and guaranteed asset protection insurance
to producer affiliated reinsurance companies ("PARCs"). These arrangements are
coinsurance contracts ceding the business on a first dollar quota share basis at
100% to limit the segment's exposure and allow the PARCs to share in the
underwriting income of the product. Reinsurance contracts do not relieve the
Asset Protection segment from obligations to policyholders. A more detailed
discussion of the components of reinsurance can be found in the Reinsurance
section of Note 2, Summary of Significant Accounting Policies, to the Annual
Report on Form 10-K for the fiscal year ended December 31, 2020 .
Impact of Reinsurance
Reinsurance impacted the Asset Protection segment line items as shown in the
following table:
Asset Protection Segment
Line Item Impact of Reinsurance
For The For The
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2021 2020 Change 2021 2020 Change
(Dollars In Millions) (Dollars In Millions)
REVENUES
Reinsurance ceded $ (50) $ (48) 4.2% $ (144) $ (140) 2.9%
BENEFITS AND EXPENSES
Benefits and settlement expenses (19) (22) (13.6) (59) (63) (6.3)
Amortization of DAC/VOBA (1) (1) - (4) (3) 33.3
Other operating expenses (1) (1) - (4) (3) 33.3
Total benefits and expenses (21) (24) (12.5) (67) (69) (2.9)
NET IMPACT OF REINSURANCE(1) $ (29) $ (24) 20.8% $ (77) $ (71) 8.5%
(1) Assumes no investment income on reinsurance. Foregone investment income would substantially change the impact of reinsurance.
n/m - we define n/m as not meaningful for increases or decreases greater than 100%.
Three Month Comparison. The change in the net impact of reinsurance was unfavorable by$5 million primarily driven by: •Decrease in ceded GAP losses as a result of lower loss ratios driven by higher used car prices Nine Month Comparison. The change in the net impact of reinsurance was unfavorable by$6 million primarily driven by: •Decrease in ceded GAP losses as a result of lower loss ratios driven by higher used car prices •Increase in ceded service contract premiums related to higher service contract premium volume 69 -------------------------------------------------------------------------------- Table of Contents Corporate and Other Segment Results of Operations Segment results were as follows: For The For The Three Months Ended Nine Months Ended September 30, Percent September 30, Percent 2021 2020 Change 2021 2020 Change (Dollars In Millions) (Dollars In Millions) REVENUES Gross premiums and policy fees $ 3$ 2 50.0% $ 8$ 8 -% Reinsurance ceded - - n/m - - n/m Net premiums and policy fees 3 2 50.0 8 8 - Net investment income(1) (19) 23 n/m (40) 59 n/m Other income - 1 - - 1 n/m Total operating revenues (16) 26 n/m (32) 68 n/m BENEFITS AND EXPENSES Benefits and settlement expenses 1 4 (75.0) 8 10 (20.0) Amortization of DAC/VOBA - - n/m - - n/m Other operating expenses(1) 9 57 (84.2) 80 166 (51.8) Total benefits and expenses 10 61 (83.6) 88 176 (50.0) PRE-TAX ADJUSTED OPERATING INCOME (LOSS) (26) (35) (25.7) (120) (108) 11.1 Add: realized gains (losses) 7 23 (69.6) 19 12 58.3 INCOME (LOSS) BEFORE INCOME TAX$ (19) $ (12) n/m$ (101) $ (96) 5.2% (1) The net investment income and other operating expenses lines decreased$30 million and$33 million , respectively, in the three month comparison and$90 million and$100 million , respectively, in the nine month comparison as a result of the impacts of a captive reinsurance company reorganization that occurred during 2020. See the Company's Annual Report on Form 10-K, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for the year endedDecember 31, 2020 for additional information on this transaction. n/m - we define n/m as not meaningful for increases or decreases greater than 100%. Three Month Comparison. The decreased pre-tax adjusted operating loss was primarily due to a decrease in corporate overhead expense, partially offset by unfavorable portfolio yields. Nine Month Comparison. The increased pre-tax adjusted operating loss was primarily due to an increase in corporate overhead expense. 70 -------------------------------------------------------------------------------- Table of Contents CONSOLIDATED INVESTMENTS As ofSeptember 30, 2021 , our investment portfolio was$90.0 billion . The types of assets in which we may invest are influenced by various state insurance laws which prescribe qualified investment assets. Within the parameters of these laws, we invest in assets giving consideration to such factors as liquidity and capital needs, investment quality, investment return, matching of assets and liabilities, and the overall composition of the investment portfolio by asset type and credit exposure. Within our fixed maturity investments, we maintain portfolios classified as "available-for-sale" and "trading". We purchase our available-for-sale investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, we may sell any of our available-for-sale and trading investments to maintain proper matching of assets and liabilities. Accordingly, we classified$70.8 billion , or 96.1%, of our fixed maturities as "available-for-sale" as ofSeptember 30, 2021 . These securities are carried at fair value on our consolidated balance sheets. Changes in fair value for our available-for-sale portfolio, net of tax and the related impact on certain insurance assets and liabilities, are recorded directly to shareowner's equity. Declines in fair value that are due to credit losses are recorded as realized gains (losses) in the consolidated condensed statements of income. Credit losses are recorded in realized gains (losses) with a corresponding adjustment to the allowance for credit losses, except that the credit losses recognized cannot exceed the difference between the book value and fair value of the security as of the date of the analysis. In future periods, recoveries in the present value of expected cash flows are recorded as a reversal of the previously recognized allowance for credit losses with an offsetting adjustment to realized gains (losses). Trading securities are carried at fair value and changes in fair value are recorded on the income statement as they occur. Our trading portfolio accounted for$2.8 billion , or 3.9%, of our fixed maturities and$87 million of short-term investments as ofSeptember 30, 2021 . Changes in fair value on theModco trading portfolios, including gains and losses from sales, are passed to third party reinsurers through the contractual terms of the related reinsurance arrangements. Partially offsetting these amounts are corresponding changes in the fair value of the embedded derivative associated with the underlying reinsurance arrangement. Fair values for private, non-traded securities are determined as follows: 1) we obtain estimates from independent pricing services and 2) we estimate fair value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics. We analyze the independent pricing services valuation methodologies and related inputs, including an assessment of the observability of market inputs. Upon obtaining this information related to fair value, management makes a determination as to the appropriate valuation amount. For more information about the fair values of our investments please refer to Note 4, Fair Value of Financial Instruments, to the financial statements. The following table presents the reported values of our invested assets: As of September 30, 2021 December 31, 2020 (Dollars In Millions) Publicly issued bonds (amortized cost: 2021 -$44,577 ; 2020 -$44,169 ) $ 48,741 54.1 % $ 49,571 56.0 % Privately issued bonds (amortized cost: 2021 -$23,441 ; 2020 -$21,332 ) 24,557 27.3 22,817 25.8 Redeemable preferred stocks (amortized cost: 2021 -$305 ; 2020 -$196 ) 318 0.4 207 0.2 Fixed maturities 73,616 81.8 % 72,595 82.0 % Equity securities (cost: 2021 -$740 ; 2020 -$635 ) 772 0.9 667 0.8 Commercial mortgage loans 10,506 11.7 10,006 11.3 Investment real estate 10 - 10 - Policy loans 1,543 1.7 1,593 1.8 Other long-term investments 2,916 3.2 3,241 3.7 Short-term investments 629 0.7 462 0.4 Total investments $ 89,992 100.0 % $ 88,574 100.0 % Included in the preceding table are$2.8 billion and$2.9 billion of fixed maturities and$87 million and$76 million of short-term investments classified as trading securities as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. All of the fixed maturities in the trading portfolio are invested assets that are held pursuant toModco arrangements under which the economic risks and benefits of the investments are passed to third party reinsurers. 71 -------------------------------------------------------------------------------- Table of Contents Fixed Maturity Investments As ofSeptember 30, 2021 , our fixed maturity investment holdings were$73.6 billion . The approximate percentage distribution of our fixed maturity investments by quality rating is as follows: As of Rating September 30, 2021 December 31, 2020 (Dollars In Millions) AAA $ 9,592 13.0 % $ 9,497 13.1 % AA 7,131 9.7 7,337 10.1 A 23,057 31.3 24,372 33.6 BBB 31,122 42.3 28,654 39.5 Below investment grade 2,714 3.7 2,735 3.7 $ 73,616 100.0 % $ 72,595 100.0 % We use various Nationally Recognized Statistical Rating Organizations' ("NRSRO") ratings when classifying securities by quality ratings. When the various NRSRO ratings are not consistent for a security, we use the second-highest convention in assigning the rating. When there are no such published ratings, we assign a rating based on the statutory accounting rating system if such ratings are available. The distribution of our fixed maturity investments by type is as follows: As of Type September 30, 2021 December 31, 2020 (Dollars In Millions) Corporate securities $ 55,507 75.4 %$ 53,967 74.3 % Residential mortgage-backed securities 7,504 10.2 6,877 9.5 Commercial mortgage-backed securities 2,498 3.4 2,748 3.8 Other asset-backed securities 1,657 2.3 1,741 2.4 U.S. government-related securities 845 1.1 1,606 2.2 Other government-related securities 826 1.1 747 1.0 States, municipals, and political subdivisions 4,461 6.1 4,702 6.5 Redeemable preferred stocks 318 0.4 207 0.3 Total fixed income portfolio $ 73,616 100.0 %$ 72,595 100.0 % 72
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The industry segment composition of our fixed maturity securities is presented
in the following table:
As of
As of September % Fair December 31, % Fair
30, 2021 Value 2020 Value
(Dollars In Millions)
Banking $ 8,306 11.3 % $ 7,752 10.7 %
Other finance 989 1.3 959 1.3
Electric utility 5,736 7.8 5,792 8.0
Energy 4,661 6.3 4,756 6.6
Natural gas 1,289 1.8 1,275 1.8
Insurance 6,416 8.7 6,022 8.3
Communications 2,918 4.0 2,967 4.1
Basic industrial 2,727 3.7 2,532 3.5
Consumer noncyclical 7,329 9.9 7,374 10.2
Consumer cyclical 2,837 3.9 2,833 3.9
Finance companies 509 0.7 319 0.4
Capital goods 3,575 4.9 3,648 5.0
Transportation 2,064 2.8 2,236 3.1
Other industrial 710 1.0 691 1.0
Brokerage 2,021 2.7 1,786 2.5
Technology 3,121 4.2 2,596 3.6
Real estate 552 0.7 587 0.8
Other utility 65 0.1 48 -
Commercial mortgage-backed securities 2,498 3.4 2,748 3.8
Other asset-backed securities 1,657 2.3 1,741 2.4
Residential mortgage-backed non-agency securities 6,193 8.4 5,607 7.7
Residential mortgage-backed agency securities 1,311 1.8 1,270 1.8
U.S. government-related securities 845 1.1 1,607 2.0
Other government-related securities 826 1.1 747 1.0
State, municipals, and political divisions 4,461 6.1 4,702 6.5
Total $ 73,616 100.0 % $ 72,595 100.0 %
The total
As of
Rating September 30, 2021 December 31, 2020
(Dollars In Millions)
AAA $ 272 9.6 % $ 340 11.9 %
AA 272 9.5 268 9.4
A 921 32.4 909 31.8
BBB 1,239 43.6 1,205 42.1
Below investment grade 139 4.9 140 4.8
$ 2,843 100.0 % $ 2,862 100.0 %
A portion of our bond portfolio is invested in residential mortgage-backed
securities ("RMBS"), commercial mortgage-backed securities ("CMBS"), and other
asset-backed securities (collectively referred to as asset-backed securities or
"ABS"). ABS are securities that are backed by a pool of assets. These holdings
as of September 30, 2021 , were $11.7 billion . Mortgage-backed securities ("MBS")
are constructed from pools of mortgages and may have cash flow volatility as a
result of changes in the rate at which prepayments of principal occur with
respect to the underlying loans. Excluding limitations on access to lending and
other extraordinary economic conditions, prepayments of principal on the
underlying loans can be expected to accelerate with decreases in market interest
rates and diminish with increases in interest rates.
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The following tables include the percentage of our collateral grouped by rating
category and categorizes the estimated fair value by year of security
origination for our Prime, Non-Prime, Commercial, and Other asset-backed
securities as of September 30, 2021 and December 31, 2020 .
As of September 30, 2021
Prime(1) Non-Prime(1) Commercial Other asset-backed Total
Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized
Value Cost Value Cost Value Cost Value Cost Value Cost
(Dollars In Millions)
Rating $
AAA $ 6,137 $ 6,129 $ 1 $ 1 $ 1,389 $ 1,328 $ 542 $ 525 $ 8,069 $ 7,983
AA - - - - 572 551 272 262 844 813
A 1,312 1,316 6 6 396 377 675 667 2,389 2,366
BBB 5 5 2 2 124 122 149 143 280 272
Below 17 18 24 22 17 22 19 20 77 82
$ 7,471 $ 7,468 $ 33
Rating %
AAA 82.2 % 82.1 % 3.7 % 4.0 % 55.6 % 55.3 % 32.7 % 32.5 % 69.2 % 69.3 %
AA - - 0.2 0.2 22.9 23.0 16.4 16.2 7.2 7.1
A 17.5 17.6 19.7 18.4 15.8 15.7 40.7 41.3 20.5 20.5
BBB 0.1 0.1 4.7 5.9 5.0 5.1 9.0 8.8 2.4 2.4
Below 0.2 0.2 71.7 71.5 0.7 0.9 1.2 1.2 0.7 0.7
100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
100.0 % 100.0 % 100.0 %
Estimated Fair Value of Security by Year of Security Origination
2017 and prior $ 1,474 $ 1,440 $ 33 $ 31 $ 2,252 $ 2,169 $ 1,354 $ 1,318 $ 5,113 $ 4,958
2018 386 379 - - 146 134 128 127 660 640
2019 470 465 - - 74 71 41 40 585 576
2020 1,415 1,421 - - 16 16 33 31 1,464 1,468
2021 3,726 3,763 - - 10 10 101 101 3,837 3,874
Total $ 7,471 $ 7,468 $ 33 $ 31 $ 2,498 $ 2,400 $ 1,657 $ 1,617 $ 11,659 $ 11,516
(1) Included in Residential Mortgage-Backed securities.
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As of December 31, 2020
Prime(1) Non-Prime(1) Commercial Other asset-backed Total
Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized
Value Cost Value Cost Value Cost Value Cost Value Cost
(Dollars In Millions)
Rating $
AAA $ 5,541 $ 5,420 $ 2 $ 2 $ 1,596 $ 1,514 $ 543 $ 527 $ 7,682 $ 7,463
AA - - - - 587 570 277 268 864 838
A 1,268 1,228 8 7 469 449 731 727 2,476 2,411
BBB 4 4 1 1 85 86 164 158 254 249
Below 24 24 29 27 11 19 26 29 90 99
$ 6,837 $ 6,676 $ 40
Rating %
AAA 81.1 % 81.2 % 5.3 % 5.6 % 58.1 % 57.4 % 31.2 % 30.8 % 67.6 % 67.5 %
AA - - 0.2 0.2 21.4 21.6 15.9 15.7 7.6 7.6
A 18.5 18.3 19.7 18.2 17.0 17.0 42.0 42.6 21.8 21.7
BBB 0.1 0.1 2.8 2.9 3.1 3.3 9.4 9.2 2.2 2.3
Below 0.3 0.4 72.0 73.1 0.4 0.7 1.5 1.7 0.8 0.9
100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
100.0 % 100.0 % 100.0 %
Estimated Fair Value of Security by Year of Security Origination
2016 and prior $ 1,701 $ 1,647 $ 38 $ 35 $ 2,238 $ 2,167 $ 1,069 $ 1,044 $ 5,046 $ 4,893
2017 737 711 2 2 270 249 402 397 1,411 1,359
2018 1,001 970 - - 151 136 148 148 1,300 1,254
2019 1,070 1,045 - - 75 71 92 91 1,237 1,207
2020 2,328 2,303 - - 14 15 30 29 2,372 2,347
Total $ 6,837 $ 6,676 $ 40 $ 37 $ 2,748 $ 2,638 $ 1,741 $ 1,709 $ 11,366 $ 11,060
(1) Included in Residential Mortgage-Backed securities
The majority of our RMBS holdings as of
senior bonds in the capital structure. Our total non-agency portfolio has a
weighted-average life of 7.5 years. The following table categorizes the
weighted-average life for our non-agency portfolio, by category of material
holdings, as of
Weighted-Average
Non-agency portfolio Life
Prime 7.59
Sub-prime 1.61
Commercial Mortgage Loans
We invest a portion of our investment portfolio in commercial mortgage loans. As
of September 30, 2021 our commercial mortgage loan holdings were $10.6 billion ,
or $10.5 billion net of allowance for credit losses. We specialize in making
commercial mortgage loans on credit-oriented commercial properties. Our
underwriting procedures relative to our commercial mortgage loan portfolio are
based, in our view, on a conservative and disciplined approach. We concentrate
on a small number of commercial real estate asset types associated with the
necessities of life (grocery anchored and credit tenant retail, industrial,
multi-family, senior living, and credit tenant and medical office). We believe
that these asset types tend to weather economic downturns better than other
commercial asset classes in which we have chosen not to participate. We believe
this disciplined approach has helped to maintain a relatively low delinquency
and foreclosure rate throughout our history. The majority of our commercial
mortgage loan portfolio was underwritten by us. From time to time, we may
acquire loans in conjunction with an acquisition.
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Our commercial mortgage loans are stated at unpaid principal balance, adjusted
for any unamortized premium or discount, and net of the allowance for credit
losses. Interest income is accrued on the principal amount of the loan based on
the loan's contractual interest rate. Amortization of premiums and discounts is
recorded using the effective yield method. Interest income, amortization of
premiums and discounts, and prepayment fees are reported in net investment
income.
Certain of the commercial mortgage loans have call options that occur within the
next 9 years. However, if interest rates were to significantly increase, we may
be unable to exercise the call options on our existing commercial mortgage loans
commensurate with the significantly increased market rates. As of September 30,
2021 , assuming the loans are called at their next call dates, $54 million of
principal would become due for the remainder of 2021, $450 million in 2022
through 2026, and $12 million in 2027 through 2029.
We offer a type of commercial mortgage loan under which we will permit a
loan-to-value ratio of up to 85% in exchange for a participation interest in the
cash flows from the underlying real estate. As of September 30, 2021 and
December 31, 2020 , $620 million and $806 million , respectively, of our total
commercial mortgage loans principal balance have this participation feature.
Cash flows received as a result of this participation feature are recorded as
interest income. During the three and nine months ended September 30, 2021 and
2020, the Company recognized $32 million and $46 million , and $1 million and $17
million respectively, of participation commercial mortgage loan income.
The following table includes a breakdown of our commercial mortgage loan
portfolio:
Commercial Mortgage Loan Portfolio Profile
As of September 30, As of December 31,
2021 2020
(Dollars In Millions)
Number of commercial mortgage loans 1,789 1,827
Amortized cost $ 10,609 $ 10,228
Unpaid principal balance $ 10,556 $ 10,148
Allowance for funded commercial mortgage loan credit
losses
$ (103) $ (222) Average commercial mortgage loan size $ 6 $ 6 Weighted-average amortization 22.2 years 21.4 years Weighted-average coupon 4.13 % 4.34 % Weighted-average LTV 54.15 % 53.91 % Weighted-average debt coverage ratio 1.73 1.72 Number of unfunded commercial mortgage loan commitments 126 117 Unfunded commercial mortgage loan commitments $ 1,294 $ 801 Allowance for unfunded commercial mortgage commitment credit losses $ (9) $ (22) We record commercial mortgage loans net of an allowance for credit losses. This allowance is calculated and recorded at a loan level, based on analysis and input data for loans with similar risk characteristics. As ofSeptember 30, 2021 andDecember 31, 2020 , there were allowances for funded commercial mortgage loan and unfunded commercial mortgage loan commitments credit losses of$112 million and$245 million , respectively. While our commercial mortgage loans do not have quoted market values, as ofSeptember 30, 2021 we estimated the fair value of our commercial mortgage loans to be$11.2 billion (using an internal fair value model which calculates the value of most loans by using the loan's discounted cash flows to the loan's call or maturity date), which was 5.12% more than the amortized cost. At the time of origination, our commercial mortgage lending criteria targets that the loan-to-value ratio on each commercial mortgage loan is 75% or less. We target projected rental payments from credit anchors (i.e., excluding rental payments from smaller local tenants) of 70% of the property's projected operating expenses and debt service. As ofSeptember 30, 2021 , we did not have any commercial mortgage loans that were nonperforming, restructured, or foreclosed. As ofDecember 31, 2020 we had$3 million of invested assets that consisted of commercial mortgage loans that were nonperforming, restructured or foreclosed and converted to real estate properties. For all commercial mortgage loans, the 76 -------------------------------------------------------------------------------- Table of Contents impact of troubled debt restructurings is reflected in our investment balance and in the allowance for commercial mortgage loan credit losses. During the nine months endedSeptember 30, 2021 , we recognized one troubled debt restructuring transaction as a result of granting a concession to a borrower which included loan terms unavailable from other lenders. This concession was the result of an agreement between the creditor and the debtor. The Company did not identify any loans whose principal was permanently impaired during the nine months endedSeptember 30, 2021 . It is our policy to cease to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. We use the same methodology and assumptions to estimate the allowance for unfunded commercial mortgage loan commitments credit losses as for funded commercial mortgage loans. As ofSeptember 30, 2021 , the allowance for unfunded commercial mortgage loan commitments credit losses was$9 million , which was a slight decrease of$3 million from the second quarter of 2021. Unrealized Gains and Losses -Available-for-Sale Securities The information presented below relates to investments at a certain point in time and is not necessarily indicative of the status of the portfolio at any time afterSeptember 30, 2021 , the balance sheet date. Information about unrealized gains and losses is subject to rapidly changing conditions, including volatility of financial markets and changes in interest rates. Management considers a number of factors in determining if an unrealized loss is related to a credit loss, including the expected cash to be collected and the intent, likelihood, and/or ability to hold the security until recovery. Consistent with our long-standing practice, we do not utilize a "bright line test" to determine whether a credit loss has occurred. On a quarterly basis, we perform an analysis on every security with an unrealized loss to determine whether a credit loss has occurred. This analysis includes reviewing several metrics including collateral, expected cash flows, ratings, and liquidity. Furthermore, since the timing of recognizing realized gains and losses is largely based on management's decisions as to the timing and selection of investments to be sold, the tables and information provided below should be considered within the context of the overall unrealized gain/(loss) position of the portfolio. We had an overall net unrealized gain of$5.3 billion , prior to tax and the related impact of certain insurance assets and liabilities offsets, as ofSeptember 30, 2021 , and an overall net unrealized gain of$6.9 billion as ofDecember 31, 2020 . 77 -------------------------------------------------------------------------------- Table of Contents For fixed maturity securities held that are in an unrealized loss position as ofSeptember 30, 2021 , the fair value, amortized cost, unrealized loss, allowance for expected credit losses ("ACL"), and total time period that the security has been in an unrealized loss position are presented in the table below: % % % Fair Fair Amortized Amortized Unrealized Unrealized Value Value Cost Cost ACL % ACL Loss Loss (Dollars In Millions) <= 90 days$ 4,739 53.5 %$ 4,802 52.8 % $ - - %$ (63) 27.8 % >90 days but <= 180 days 379 4.3 385 4.2 - - (6) 2.6 >180 days but <= 270 days 2,825 31.8 2,922 32.2 - - (97) 42.8 >270 days but <= 1 year 198 2.2 210 2.4 - - (12) 5.3 >1 year but <= 2 years 298 3.4 315 3.5 (1) 50.0 (16) 7.0 >2 years but <= 3 years 105 1.2 110 1.2 - - (5) 2.2 >3 years but <= 4 years 97 1.1 104 1.1 - - (7) 3.1 >4 years but <= 5 years 48 0.5 49 0.5 - - (1) 0.4 >5 years 174 2.0 195 2.1 (1) 50.0 (20) 8.8 Total$ 8,863 100.0 %$ 9,092 100.0 %$ (2) 100.0 %$ (227) 100.0 %
The range of maturity dates for securities in an unrealized loss position as of
maturing between 5 and 10 years, and 62.7% maturing after 10 years. The
following table shows the credit rating of securities in an unrealized loss
position as of
% %
S&P or Equivalent Fair % Amortized Amortized Unrealized Unrealized
Designation Value Fair Value Cost Cost ACL % ACL Loss Loss
(Dollars In Millions)
AAA/AA/A $ 5,489 61.9 % $ 5,618 61.8 % $ - - % $ (129) 56.8 %
BBB 2,988 33.7 3,059 33.6 - - (71) 31.3
Investment grade 8,477 95.6 % 8,677 95.4 % - - % (200) 88.1 %
BB 380 4.3 407 4.5 (1) 50.0 (26) 11.5
B 6 0.1 8 0.1 (1) 50.0 (1) 0.4
CCC or lower - - - - - - - -
Below investment grade 386 4.4 % 415 4.6 % (2) 100.0 % (27) 11.9 %
Total $ 8,863 100.0 % $ 9,092 100.0 % $ (2) 100.0 % $ (227) 100.0 %
As of September 30, 2021 , the Barclays Investment Grade Index was priced at 87
bps versus a 10 year average of 135 bps. Similarly, the Barclays High Yield
Index was priced at 332 bps versus a 10 year average of 488 bps. As of
September 30, 2021 , the five, ten, and thirty-year U.S. Treasury obligations
were trading at levels of 1.0%, 1.5%, and 2.0%, as compared to 10 year averages
of 1.4%, 2.0%, and 2.8%, respectively.
As of September 30, 2021 , 88.1% of the unrealized loss was associated with
securities that were rated investment grade. We have examined the performance of
the underlying collateral and cash flows and expect that our investments will
continue to perform in accordance with their contractual terms. Factors such as
credit enhancements within the deal structures and the underlying collateral
performance/characteristics support the recoverability of the investments. Based
on the factors discussed, we concluded that an allowance for credit losses was
not necessary. However, from time to time, we may sell securities in the
ordinary course of managing our portfolio to meet diversification, credit
quality, yield enhancement, asset/liability management, and liquidity
requirements.
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Expectations that investments in mortgage-backed and asset-backed securities
will continue to perform in accordance with their contractual terms are based on
assumptions that a market participant would use in determining the current fair
value. It is reasonably possible that the underlying collateral of these
investments will perform worse than current market expectations and that such an
event may lead to adverse changes in the cash flows on our holdings of these
types of securities. This could lead to potential future write-downs within our
portfolio of mortgage-backed and asset-backed securities. Expectations that our
investments in corporate securities and/or debt obligations will continue to
perform in accordance with their contractual terms are based on evidence
gathered through our normal credit surveillance process. Although we do not
anticipate such events, it is reasonably possible that issuers of our
investments in corporate securities will perform worse than current
expectations. Such events may lead us to recognize potential future write-downs
within our portfolio of corporate securities. It is also possible that such
unanticipated events would lead us to dispose of those certain holdings and
recognize the effects of any such market movements in our financial statements.
As of September 30, 2021 , we held a total of 558 positions that were in an
unrealized loss position. Included in that amount were 40 positions of below
investment grade securities with a fair value of $386 million that were in an
unrealized loss position. Total unrealized losses related to below investment
grade securities were $27 million , $23 million of which had been in an
unrealized loss position for more than twelve months. Below investment grade
securities in an unrealized loss position were 0.4% of invested assets.
As of September 30, 2021 , securities in an unrealized loss position that were
rated as below investment grade represented 4.4% of the total fair value and
11.9% of the total unrealized loss. We have the ability and intent to hold these
securities to maturity. After a review of each security and its expected cash
flows, we believe the decline in fair value to be non-credit related.
The following table includes the fair value, amortized cost, unrealized loss,
ACL, and total time period that the security has been in an unrealized loss
position for all below investment grade securities as of September 30, 2021 :
% % %
Fair Fair Amortized Amortized Unrealized Unrealized
Value Value Cost Cost ACL % ACL Loss Loss
(Dollars In Millions)
<= 90 days $ 46 11.9 % $ 47 11.3 % $ - - % $ (1) 3.7 %
>90 days but <=
180 days - - - - - - - -
>180 days but <=
270 days 53 13.7 56 13.5 - - (3) 11.1
>270 days but <=
1 year - - - - - - - -
>1 year but <= 2
years 48 12.4 54 13.0 (1) 50.0 (5) 18.5
>2 years but <= 3
years 38 9.8 39 9.4 - - (1) 3.7
>3 years but <= 4
years 40 10.4 45 10.8 - - (5) 18.5
>4 years but <= 5
years 20 5.2 21 5.1 - - (1) 3.7
>5 years 141 36.6 153 36.9 (1) 50.0 (11) 40.8
Total $ 386 100.0 % $ 415 100.0 % $ (2) 100.0 % $ (27) 100.0 %
We have no material concentrations of issuers or guarantors of fixed maturity
securities. The industry segment composition of all securities in an unrealized
loss position held as of September 30, 2021 , is presented in the following
table:
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% % %
Fair Fair Amortized Amortized Unrealized Unrealized
Value Value Cost Cost ACL % ACL Loss Loss
(Dollars In Millions)
Banking $ 851 9.7 % $ 869 9.6 % $ - - % $ (18) 8.0 %
Other finance 136 1.5 145 1.6 - - (9) 4.0
Electric utility 393 4.4 406 4.5 - - (13) 5.7
Energy 348 3.9 363 4.0 - - (15) 6.6
Natural gas 48 0.5 49 0.5 - - (1) 0.4
Insurance 397 4.5 410 4.5 - - (13) 5.7
Communications 267 3.0 276 3.0 (1) 50.0 (8) 3.5
Basic industrial 224 2.5 229 2.5 - - (5) 2.2
Consumer noncyclical 586 6.6 603 6.6 - - (17) 7.5
Consumer cyclical 370 4.2 384 4.2 - - (14) 6.2
Finance companies 109 1.2 111 1.2 - - (2) 0.9
Capital goods 174 2.0 178 2.0 - - (4) 1.8
Transportation 80 0.9 81 0.9 - - (1) 0.4
Other industrial 40 0.5 41 0.5 - - (1) 0.4
Brokerage 146 1.6 151 1.7 - - (5) 2.2
Technology 325 3.7 334 3.7 - - (9) 4.0
Commercial mortgage-backed
securities 140 1.6 147 1.6 (1) 50.0 (6) 2.6
Other asset-backed securities 184 2.1 185 2.0 - - (1) 0.4
Residential mortgage-backed
non-agency securities 2,733 30.8 2,765 30.4 - - (32) 14.1
Residential mortgage-backed
agency securities 738 8.3 764 8.4 - - (26) 11.5
U.S. government-related
securities 459 5.2 483 5.3 - - (24) 10.6
Other government-related
securities 76 0.9 78 0.9 - - (2) 0.9
States, municipals, and
political divisions 39 0.4 40 0.4 - - (1) 0.4
Total $ 8,863 100.0 % $ 9,092 100.0 % $ (2) 100.0 % $ (227) 100.0 %
We have no material concentrations of issuers or guarantors of fixed maturity
securities. The industry segment composition of all securities in an unrealized
loss position held as of December 31, 2020 , is presented in the following table:
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Fair % Fair Amortized % Amortized Unrealized % Unrealized
Value Value Cost Cost ACL % ACL Loss Loss
(Dollars In Millions)
Banking $ 163 5.1 % $ 165 5.0 % $ - - % $ (2) 1.2 %
Other finance 95 3.0 103 3.1 - - (8) 6.3
Electric utility 221 7.0 231 6.9 - 0.6 (10) 7.6
Energy 431 13.7 482 14.6 (16) 68.2 (35) 26.9
Natural gas 14 0.4 14 0.4 - 1.0 - 0.2
Insurance 87 2.8 100 3.1 - - (13) 10.0
Communications 54 1.6 56 1.6 (2) 8.3 - (0.4)
Basic industrial - - - - - - - -
Consumer noncyclical 188 5.9 193 5.8 - - (5) 3.9
Consumer cyclical 243 7.6 256 7.6 - - (13) 10.4
Finance companies 1 0.1 2 0.1 - - (1) 0.7
Capital goods 32 1.0 33 1.0 - - (1) 1.0
Transportation 153 4.8 161 4.8 - - (8) 5.1
Other industrial 18 0.6 18 0.5 - - - 0.1
Brokerage 39 1.2 41 1.2 - - (2) 1.3
Technology 52 1.6 55 1.6 - - (3) 1.9
Commercial mortgage-backed
securities 293 9.2 316 9.5 (4) 15.7 (19) 15.1
Other asset-backed securities 472 14.9 480 14.4 (1) 6.2 (7) 5.1
Residential mortgage-backed
non-agency securities 292 9.2 293 8.8 - - (1) 0.9
Residential mortgage-backed agency
securities 103 3.2 103 3.1 - - - -
U.S. government-related securities 312 5.1 315 5.0 - - (3) 1.3
Other government-related securities 26 0.8 27 0.8 - - (1) 0.8
States, municipals, and political
divisions 39 1.2 39 1.1 - - - 0.6
Total $ 3,328 100.0 % $ 3,483 100.0 % $ (23) 100.0 % $ (132) 100.0 %
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-------------------------------------------------------------------------------- Table of Contents Risk Management and Impairment Review We monitor the overall credit quality of our portfolio within established guidelines. The following table includes our available-for-sale fixed maturities by credit rating as ofSeptember 30, 2021 : Percent of Rating Fair Value Fair Value (Dollars In Millions) AAA $ 9,320 13.2 % AA 6,859 9.7 A 22,136 31.2 BBB 29,883 42.2 Investment grade 68,198 96.3 BB 2,453 3.5 B 119 0.2 CCC or lower 3 - Below investment grade 2,575 3.7 Total $ 70,773 100.0 % Not included in the table above are$2.7 billion of investment grade and$139 million of below investment grade fixed maturities classified as trading securities. Limiting bond exposure to any creditor group is another way we manage credit risk. We held no credit default swaps on the positions listed below as ofSeptember 30, 2021 . The following table summarizes our ten largest fixed maturity exposures to an individual creditor group as ofSeptember 30, 2021 : Fair Value of Funded Unfunded Total Creditor Securities Exposures Fair Value (Dollars In Millions) JP Morgan Chase & Co$ 294 $ 13 $ 307 AT&T Inc. 298 - 298 Wells Fargo & Company 289 1 290 UnitedHealth Group Inc. 288 - 288 Verizon Communications Inc 285 - 285 Berkshire Hathaway Inc. 285 - 285 TIAA Board of Overseers 279 - 279 BNP Paribas 267 12 279 HSBC Holdings PLC 278 - 278 Standard Chartered PLC 273 - 273 Total$ 2,836 $ 26 $ 2,862 Determining whether a decline in the current fair value of invested assets is a credit loss is both objective and subjective, and can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets. We review our positions on a monthly basis for possible credit concerns and review our current exposure, credit enhancement, and delinquency experience. Management considers a number of factors when determining the impairment status of individual securities. These include the economic condition of various industry segments and geographic locations and other areas of identified risks. Since it is possible for the impairment of one investment to affect other investments, we engage in ongoing risk management to safeguard against and limit any further risk to our investment portfolio. Special attention is given to correlative risks within specific industries, related parties, and business markets. 82 -------------------------------------------------------------------------------- Table of Contents For certain securitized financial assets with contractual cash flows, including RMBS, CMBS, and other asset-backed securities (collectively referred to as asset-backed securities or "ABS"), GAAP requires us to periodically update our best estimate of cash flows over the life of the security. If the fair value of a securitized financial asset is less than its cost or amortized cost and there has been a decrease in the present value of the expected cash flows since the last revised estimate, a credit loss is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. Projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral. In addition, we consider our intent and ability to retain a temporarily depressed security until recovery. For securities which the Company has the intent and ability to hold until the recovery of the amortized cost basis, analysis of expected cash flows is used to measure the amount of the credit loss, if any, and the Company uses the effective interest rate implicit in the security at the date of acquisition to discount expected cash flows. For floating rate securities, the Company's policy is to lock in the interest rate at the first instance of an impairment. Estimates of expected cash flows are not probability-weighted, but will reflect the Company's best estimate based on past events, current conditions, and reasonable and supportable forecasts of future events. To the extent the amortized cost basis of the security exceeds the present value of future cash flows expected to be collected, this difference represents a credit loss. Credit losses are recorded in current earnings with a corresponding adjustment to the allowance for credit losses, except that the credit loss recognized cannot exceed the difference between the book value and fair value of the security as of the date of the analysis. In future periods, recoveries in the present value of expected cash flows are recorded in current earnings as a reversal of the previously recognized allowance for credit losses. There are certain risks and uncertainties associated with determining whether declines in fair values are the result of credit losses. These include significant changes in general economic conditions and business markets, trends in certain industry segments, interest rate fluctuations, rating agency actions, changes in significant accounting estimates and assumptions, commission of fraud, and legislative actions. We continuously monitor these factors as they relate to the investment portfolio in determining the status of each investment. We have deposits with certain financial institutions which exceed federally insured limits. We have reviewed the creditworthiness of these financial institutions and believe that there is minimal risk of a material loss. Certain European countries have experienced varying degrees of financial stress, which could have a detrimental impact on regional or global economic conditions and on sovereign and non-sovereign obligations. The chart shown below includes our non-sovereign fair value exposures in these countries as ofSeptember 30, 2021 . As ofSeptember 30, 2021 , we had no material unfunded exposure and had no material direct sovereign exposure. 83
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Total Gross
Non-sovereign Debt Funded
Financial Instrument and Country Financial Non-financial
Exposure
(Dollars In Millions)
Securities:
United Kingdom $ 1,304 $ 1,456 $ 2,760
France 749 410 1,159
Netherlands 346 354 700
Germany 249 836 1,085
Switzerland 459 156 615
Spain 245 359 604
Belgium - 209 209
Norway - 126 126
Finland 109 - 109
Ireland 72 126 198
Italy 75 175 250
Luxembourg - 34 34
Sweden - 53 53
Denmark 57 - 57
Portugal - 25 25
Austria - 21 21
Total securities 3,665 4,340 8,005
Derivatives:
United Kingdom 125 - 125
Switzerland 26 - 26
France 53 - 53
Total derivatives 204 - 204
Total securities $ 3,869 $ 4,340 $ 8,209
Realized Gains and Losses
The following table sets forth realized gains (losses) - investments/derivatives
for the periods shown:
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For The For The
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Dollars In Millions)
Fixed maturity gains - sales $ 5 $ 3 $ 45 $ 49
Fixed maturity losses - sales - - (1) (4)
Equity gains and losses - 16 3 (1)
Change in net expected credit losses - fixed
maturities - (38) 5 (121)
Commercial mortgage loans 37 (2) 129 (101)
Modco trading portfolio (25) 45 (69) 108
Other investments (1) (1) (1) (2)
Total realized gains (losses) - investments 16 23 111 (72)
Derivatives related to VA contracts:
Interest rate futures - 2 8 (3)
Equity futures 2 (1) (10) 132
Currency futures 4 (9) 9 1
Equity options 1 (42) (81) 67
Interest rate swaps (24) (58) (167) 364
Total return swaps 6 (31) (119) 30
Embedded derivative - GLWB (15) 190 287 (681)
Total derivatives related to VA contracts (26) 51 (73) (90)
Derivatives related to FIA contracts:
Embedded derivative 61 (9) 25 (38)
Funds withheld derivative - (3) (5) (10)
Equity futures - 1 3 (7)
Equity options (3) 25 45 15
Other derivatives - - (2) -
Total derivatives related to FIA contracts 58 14 66 (40)
Derivatives related to IUL contracts:
Embedded derivative (3) 16 (15) 1
Equity futures - - - (2)
Equity options 1 6 9 1
Total derivatives related to IUL contracts (2) 22 (6) -
Embedded derivative - Modco reinsurance
treaties 19 (25) 66 (56)
Derivatives with PLC(1) - 20 - 22
Other derivatives 2 6 (3) 12
Total realized gains (losses) - derivatives 51 88 50 (152)
Total realized gains (losses) $ 67 $ 111 $ 161 $ (224)
(1) The Company and certain of its subsidiaries had an interest support agreement, a yearly renewable term ("YRT") premium
support agreement, and portfolio maintenance agreements PLC through
part of the Captive Merger and a new portfolio maintenance agreement was entered into with PLC on that date.
Realized gains (losses) on investments reflect portfolio management activities designed to maintain proper matching of assets and liabilities and to enhance long-term investment portfolio performance. The change in net realized gains (losses) - investments, excluding changes in the allowance for credit losses andModco trading portfolio activity during the three and nine months endedSeptember 30, 2021 , primarily reflects the normal operation of our asset/liability program within the context of the changing interest rate and spread environment. 85 -------------------------------------------------------------------------------- Table of Contents Realized losses are comprised of net changes in expected credit losses and actual sales of investments. These impairments resulted from our analysis of circumstances and our belief that credit events, loss severity, changes in credit enhancement, and/or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to these investments. These net changes in expected credit losses are presented in the chart below: For The For The Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (Dollars In Millions) Other MBS $ - $ - $ -$ (1) Corporate securities - (38) 3 (120) CMBS - - 2 - Total $ -$ (38) $ 5 $ (121) As previously discussed, management considers several factors when determining whether a credit loss has occurred. Although we purchase securities with the intent to hold them until maturity, we may change our position as a result of a change in circumstances. Any such decision is consistent with our classification of all but a specific portion of our investment portfolio as available-for-sale. For the nine months endedSeptember 30, 2021 , we sold securities in an unrealized loss position with a fair value of$35 million . For such securities, the proceeds, realized loss, and total time period that the security had been in an unrealized loss position are presented in the table below: Proceeds % Proceeds Realized Loss % Realized Loss (Dollars In Millions) <= 90 days$ 20 57.1 % $ - - % >90 days but <= 180 days - - - - >180 days but <= 270 days - - - - >270 days but <= 1 year - - - - >1 year 15 42.9 (1) 100.0 Total$ 35 100.0 % $ (1) 100.0 % For the three and nine months endedSeptember 30, 2021 , we sold securities in an unrealized loss position with sale proceeds of$12 million and$35 million , respectively. The losses realized on the sale of these securities in each period were immaterial. We made the decision to exit these holdings in conjunction with our overall asset/liability management process. For the three and nine months endedSeptember 30, 2021 , we sold securities in an unrealized gain position with sale proceeds of$232 million and$1.4 billion . The gains realized on the sale of these securities were$5 million and$45 million , respectively. For the three and nine months endedSeptember 30, 2021 , net losses of$25 million and$69 million , respectively, related to changes in fair value on ourModco trading portfolios, were included in realized gains and losses. Also, for the three and nine months endedSeptember 30, 2021 , approximately$3 million and$19 million of gains were realized through the sale of certain securities, which will be paid to our reinsurance partners over time through the reinsurance settlement process for this block of business. TheModco embedded derivative, included those associated with the trading portfolios had realized pre-tax gains of$19 million and$66 million during the three and nine months endedSeptember 30, 2021 . The gains on the embedded derivative were due to treasury yields increasing during the three and nine months endedSeptember 30, 2021 . We use various derivative instruments to manage risks related to certain life insurance and annuity products. We can use these derivatives as economic hedges against risks inherent in the products. These risks have a direct impact on the cost of these products and are correlated with the equity markets, interest rates, foreign currency levels, and overall volatility. The hedged risks are recorded through the recognition of embedded derivatives associated with the products. These products include the GLWB rider associated with the variable annuity, fixed indexed annuity products as well as indexed universal life products. During the three and nine months endedSeptember 30, 2021 , we experienced$26 million and$73 million in losses on derivatives related toVA contracts. These net losses on derivatives related toVA contracts were affected by capital market impacts, changes in the Company's non-performance risk, and variations in actual sub-account fund performance from the indices included in our hedging program, as well as updates to certain policyholder assumptions during the three and nine months endedSeptember 30, 2021 . 86 -------------------------------------------------------------------------------- Table of Contents The Funds Withheld derivative associated withProtective Life Reinsurance Bermuda Ltd. ("PL Re") had no pre-tax realized gains or losses for the three months endedSeptember 30, 2021 and losses of$5 million for the nine months endedSeptember 30, 2021 . OnOctober 1, 2020 ,Golden Gate II Captive Insurance Company ("Golden Gate II"),Golden Gate III Vermont Captive Insurance Company ("Golden Gate III"),Golden Gate IV Vermont Captive Insurance Company ("Golden Gate IV"), andGolden Gate V Vermont Captive Insurance Company ("Golden Gate V"), all of which were wholly owned captive insurance company subsidiaries of the Company (collectively the "Captives") merged with and into (the "Captive Merger") Golden Gate. In conjunction with the Captive Merger, the Company terminated its interest support, yearly renewable term ("YRT") premium support, and portfolio maintenance agreements with PLC. As part of the Captive Merger, Golden Gate entered into a new portfolio maintenance agreement with PLC. The Company recognized no gains or losses on this agreement for the three and nine months endedSeptember 30, 2021 . We also use various swaps and other types of derivatives to mitigate risk related to other exposures. These contracts generated gains of$2 million and losses of$3 million for the three and nine months endedSeptember 30, 2021 . LIQUIDITY AND CAPITAL RESOURCES The Holding Company Overview Our primary sources of funding are from our insurance operations and revenues from investments. These sources of cash support our operations and are used to pay dividends to PLC. The states in which we and our insurance subsidiaries are domiciled impose certain restrictions on the ability to pay dividends. These restrictions are based in part on the prior year's statutory income and/or surplus. Debt and other capital resources Our primary sources of capital are from retained income from our insurance operations and capital infusions from our parent, PLC. Additionally, we have access to the Credit Facility discussed below. Under a revolving line of credit arrangement (the "Credit Facility"), PLC and the Company have the ability to borrow on an unsecured basis up to a combined aggregate principal amount of$1 billion . Under certain circumstances, the Credit Facility allows for a request that the commitment under the Credit Facility be increased up to a maximum principal amount of$2 billion . We are not aware of any non-compliance with the financial debt covenants of the Credit Facility as ofSeptember 30, 2021 . We did not have an outstanding balance drawn on the Credit Facility as ofSeptember 30, 2021 orDecember 31, 2020 . PLC had an outstanding balance under the Credit Facility of$350 million and$190 million as ofSeptember 30, 2021 andDecember 31, 2020 . Liquidity Liquidity refers to a company's ability to generate adequate amounts of cash to meet its needs. We meet our liquidity requirements primarily through positive cash flows from our operating subsidiaries. Primary sources of cash from the operating subsidiaries are premiums, deposits for policyholder accounts, investment sales and maturities, and investment income. Primary uses of cash include benefit payments, withdrawals from policyholder accounts, investment purchases, policy acquisition costs, interest payments, and other operating expenses. We believe that we have sufficient liquidity to fund our cash needs under normal operating scenarios. In the event of significant unanticipated cash requirements beyond our normal liquidity needs, we have additional sources of liquidity available depending on market conditions and the amount and timing of the liquidity need. These additional sources of liquidity include cash flows from operations, the sale of liquid assets, accessing our credit facility, and other sources described herein. Our decision to sell investment assets could be impacted by accounting rules, including rules relating to the likelihood of a requirement to sell securities before recovery of our cost basis. Under stressful market and economic conditions, liquidity may broadly deteriorate, which could negatively impact our ability to sell investment assets. If we require on short notice significant amounts of cash in excess of normal requirements, we may have difficulty selling investment assets in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both. 87 -------------------------------------------------------------------------------- Table of Contents The liquidity requirements of our regulated insurance subsidiaries primarily relate to the liabilities associated with their various insurance and investment products, operating expenses, and income taxes. Liabilities arising from insurance and investment products include the payment of policyholder benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans, and obligations to redeem funding agreements. We maintain investment strategies intended to provide adequate funds to pay benefits and expected surrenders, withdrawals, loans, and redemption obligations without forced sales of investments. In addition, our insurance subsidiaries hold highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund our expected operating expenses, surrenders, and withdrawals. We were committed as ofSeptember 30, 2021 to fund commercial mortgage loans in the amount of$1.3 billion . Our cash flows are used to fund an investment portfolio that provides for future benefit payments. We employ a formal asset/liability program to manage the cash flows of our investment portfolio relative to our long-term benefit obligations. As ofSeptember 30, 2021 , we held cash and short-term investments of$1.0 billion . The following chart includes the cash flows provided by or used in operating, investing, and financing activities for the following periods: For The Nine Months Ended September 30, 2021 2020 (Dollars In Millions) Net cash (used in) provided by operating activities $ (771)$ 35 Net cash used in investing activities (3,469) (1,684) Net cash provided by financing activities 3,993 1,885 Total $ (247)$ 236 For The Nine Months EndedSeptember 30, 2021 as compared to the Nine Months EndedSeptember 30, 2020 Net cash (used in) provided by operating activities - Cash flows from operating activities are affected by the timing of premiums received, reinsurance transactions, investment activities, and benefits and expenses paid. Due to the nature of our business and the fact that many of the products we sell produce financing and investing cash flows it is important to consider cash flows generated by investing and financing activities in conjunction with those generated by operating activities. Net cash used in investing activities - Changes in cash from investing activities primarily related to our investment portfolio. Net cash provided by financing activities - Changes in cash from financing activities included$774 million of inflows from secured financing liabilities for the nine months endedSeptember 30, 2021 , as compared to the$103 million of outflows for the nine months endedSeptember 30, 2020 and$3.3 billion of net inflows of investment product and universal life net activity as compared to$2.0 billion in the prior year. The Company and certain of its subsidiaries, are members of the FHLB ofCincinnati , the FHLB ofNew York , and the FHLB ofAtlanta . FHLB advances provide an attractive funding source for short-term borrowing and for the sale of funding agreements. Membership in the FHLB requires that we purchase FHLB capital stock based on a minimum requirement and a percentage of the dollar amount of advances outstanding. Our borrowing capacity is determined by criteria established by each respective bank. In addition, our obligations under the advances must be collateralized. We maintain control over any such pledged assets, including the right of substitution. As ofSeptember 30, 2021 , we had$1.4 billion of funding agreement-related advances and accrued interest outstanding under the FHLB program. While we anticipate that the cash flows of our operating subsidiaries will be sufficient to meet our investment commitments and operating cash needs in a normal credit market environment, we recognize that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, we have established repurchase agreement programs for certain of our insurance subsidiaries to provide liquidity when needed. We expect that the rate received on its investments will equal or exceed its borrowing rate. Under this program, we may, from time to time, sell an investment security at a specific price and agree to repurchase that security at another specified price at a later date. These borrowings are typically for a term less than 90 days. The fair value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities, and the agreements provide for net settlement in the event of default or on termination of the agreements. As ofSeptember 30, 2021 , the fair value of securities pledged under the repurchase program was$1,124 million , and the repurchase 88 -------------------------------------------------------------------------------- Table of Contents obligation of$1,104 million was included in our consolidated condensed balance sheets (at an average borrowing rate of 13 basis points). During the nine months endedSeptember 30, 2021 , the maximum balance outstanding at any one point in time related to these programs was$1,289 million . The average daily balance was$537 million (at an average borrowing rate of 12 basis points) during the nine months endedSeptember 30, 2021 . As ofDecember 31, 2020 , the fair value of securities pledged under the repurchase program was$452 million and the repurchase obligation of$437 million was included in our consolidated condensed balance sheets (at an average borrowing rate of 15 basis points). During the year endedDecember 31, 2020 , the maximum balance outstanding at any one point in time related to these programs was$825 million . The average daily balance was$143 million (at an average borrowing rate of 33 basis points) during the year endedDecember 31, 2020 . We participate in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned out to third parties for short periods of time. We require collateral at least equal to 102% of the fair value of the loaned securities to be separately maintained. The loaned securities' fair value is monitored on a daily basis and collateral is adjusted accordingly. We maintain ownership of the securities at all times and are entitled to receive from the borrower any payments for interest received on such securities during the loan term. Securities lending transactions are accounted for as secured borrowings. As ofSeptember 30, 2021 andDecember 31, 2020 , securities with a fair value of$160 million and$57 million , respectively, were loaned under this program. As collateral for the loaned securities, we receive cash, which is primarily reinvested in short-term agreements, which are collateralized byU.S. Government orU.S. Government Agency securities, and government money market funds. These investments are recorded in short-term investments with a corresponding liability recorded in secured financing liabilities to account for its obligation to return the collateral. As ofSeptember 30, 2021 andDecember 31, 2020 , the fair value of the collateral related to this program was$166 million and$59 million and we have an obligation to return$166 million and$59 million of collateral to the securities borrowers, respectively. Statutory Capital A life insurance company's statutory capital is computed according to rules prescribed by theNational Association of Insurance Commissioners ("NAIC"), as modified by state law. Generally speaking, other states in which a company does business defer to the interpretation of the domiciliary state with respect to NAIC rules, unless inconsistent with the other state's regulations. Statutory accounting rules are different from GAAP and are intended to reflect a more conservative view, for example, requiring immediate expensing of policy acquisition costs. The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The achievement of long-term growth will require growth in the statutory capital of the Company and its insurance subsidiaries. The Company and its subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or our equity contributions. In general, dividends up to specified levels are considered ordinary and may be paid without prior approval of the insurance commissioner of the state of domicile. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as an ordinary dividend to us from our insurance subsidiaries in 2021 is$454 million . State insurance regulators and the NAIC have adopted risk-based capital ("RBC") requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus appropriate for an insurance company to support its overall business operations based on its size and risk profile. A company's risk-based statutory surplus is calculated by applying factors and performing calculations relating to various asset, premium, claim, expense, and reserve items. Regulators can then measure the adequacy of a company's statutory surplus by comparing it to RBC. We manage our capital consumption by using the ratio of our total adjusted capital, as defined by the insurance regulators, to our company action level RBC (known as the RBC ratio), also as defined by insurance regulators. Statutory reserves established forVA contracts are sensitive to changes in the equity markets and are affected by the level of account values relative to the level of any guarantees and product design. As a result, the relationship between reserve changes and equity market performance may be non-linear during any given reporting period. Market conditions greatly influence the capital required due to their impact on the valuation of reserves and derivative investments mitigating the risk in these reserves. Risk mitigation activities may result in material and sometimes counterintuitive impacts on statutory surplus and RBC ratio. Notably, as changes in these market and non-market factors occur, both our potential obligation and the related statutory reserves and/or required capital can vary at a non-linear rate. Our statutory surplus is impacted by credit spreads as a result of accounting for the assets and liabilities on our fixed market value adjusted ("MVA") annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair value. In determining the statutory reserve for the fixed MVA annuities, we are required to use current crediting rates based onU.S. Treasuries. In many capital market scenarios, current crediting rates based onU.S. Treasuries are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in the statutory reserve from 89 -------------------------------------------------------------------------------- Table of Contents period to period will likely substantially offset the change in the fair value of the statutory separate account assets. However, in periods of volatile credit markets, actual credit spreads on investment assets may increase or decrease sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value gains or losses. As actual credit spreads are not fully reflected in current crediting rates based onU.S. Treasuries, the calculation of statutory reserves will not substantially offset the change in fair value of the statutory separate account assets resulting in a change in statutory surplus. We cede material amounts of insurance and transfer related assets to other insurance companies through reinsurance. However, notwithstanding the transfer of related assets, we remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations that it assumed. We evaluate the financial condition of our reinsurers and monitor the associated concentration of credit risk. For the three and nine months endedSeptember 30, 2021 , we ceded premiums to third party reinsurers amounting to$311 million and$954 million . In addition, we had receivables from reinsurers amounting to$4.6 billion as ofSeptember 30, 2021 . We review reinsurance receivable amounts for collectability and establish bad debt reserves if deemed appropriate.Scottish Re (U.S.), Inc. ("SRUS") was placed in rehabilitation onMarch 6, 2019 by theState of Delaware . Under the related order, the Insurance Commissioner of theState of Delaware has been appointed the receiver of SRUS (the "Receiver") and provided with authority to conduct and continue the business of SRUS in the interest of its cedents, creditors, and stockholder. The order was accompanied by an injunction requiring the continued payment of reinsurance premiums to SRUS and temporarily prohibiting cedents, including the Company, from offsetting premiums payable against receivables from SRUS. OnJune 20, 2019 , theDelaware Court of Chancery (the "Court") entered an order approving a Revised Offset Plan, which allows cedents, including the Company, to offset premiums under certain circumstances. A proposed Rehabilitation Plan ("Original Rehabilitation Plan") was filed by the Receiver onJune 30, 2020 . The Original Rehabilitation Plan presents the following two options to each cedent: 1) remain in business with SRUS and be governed by the Rehabilitation Plan, or 2) recapture business ceded to SRUS. Due to SRUS's financial status, neither option would pay 100% of the Company's outstanding claims. The Original Rehabilitation Plan would impose certain financial terms and conditions on the cedents based on the election made, the type of business ceded, the manner in which the business is collateralized, and the amount of losses sustained by the cedent. OnOctober 9, 2020 , the Receiver filed a proposed order setting forth a schedule to present the Original Rehabilitation Plan for Court approval, which order contemplated possible modifications to the Rehabilitation Plan to be filed with the Court byMarch 16, 2021 . The Court approved the order. OnMarch 16, 2021 , the Receiver filed a draft Amended Rehabilitation Plan ("Amended Plan"). The majority of the substance and form of the original Rehabilitation Plan, including its two option structure described above, remained in place. For much of 2020 and into early 2021, a group of interested parties collectively requested certain information and financial data from the Receiver that would allow them to more fully evaluate first the Original Rehabilitation Plan and then the Amended Plan, and also had a number of conversations with counsel for the Receiver regarding concerns over the Plan. OnJuly 26, 2021 , the Receiver shared with interested parties an outline of a Modified Plan, along with a liquidation analysis. While there are significant changes proposed in the Modified Plan (as compared to the Original Rehabilitation Plan and the Amended Plan), much of the economic substance (including not paying claims in full) of the Original/Amended Rehabilitation Plan are likely to be included in the Modified Plan.
The Court has yet to rule further or to re-establish a schedule for
pre-confirmation procedures or a hearing on confirmation.
The Company continues to monitor SRUS and the actions of the receiver through discussions with legal counsel and review of publicly available information. An allowance for credit losses related to SRUS is included in the overall reinsurance allowance for credit losses. As ofSeptember 30, 2021 , management does not believe that the ultimate outcome of the rehabilitation process will have a material impact on our financial position or results of operations. Captive Reinsurance Companies The Company and its subsidiaries are subject to a regulation entitled "Valuation of Life Insurance Policies Model Regulation," commonly known as "Regulation XXX," and a supporting guideline entitled "The Application of the Valuation of Life Insurance Policies Model Regulation," commonly known as "Guideline AXXX." The regulation and supporting guideline require insurers to establish statutory reserves for term and universal life insurance policies with long-term premium guarantees that are consistent with the statutory reserves required for other individual life insurance policies with similar guarantees. Many market participants believe that these levels of reserves are non-economic. We utilize a captive reinsurance company to implement reinsurance and capital management actions to satisfy these reserve requirements by financing the non-economic reserves through third-party financial institutions. 90 -------------------------------------------------------------------------------- Table of Contents Golden Gate assumes business from affiliates only. Golden Gate is capitalized to a level we believe is sufficient to support its contractual risks and other general obligations. Golden Gate is a wholly owned subsidiary of the Company and is subject to regulations in its domiciliary state ofVermont . NAIC, through various committees, subgroups and dedicated task forces, is reviewing the use of captives and special purpose vehicles used to transfer insurance risk in relation to existing state laws and regulations, and several committees have adopted or exposed for comment white papers and reports that, if or when implemented, could impose additional requirements on the use of captives and other reinsurers. NAIC and state adoption of Actuarial Guideline XLVIII and the Term and Universal Life Insurance Reserve Financing Model Regulation may make the use of new captive structures in the future less capital efficient and/or lead to lower product terms and could impact the Company's ability to engage in certain reinsurance transactions with non-affiliates.Shades Creek Captive Insurance Company ("Shades Creek") was a direct wholly owned insurance subsidiary of PLC throughDecember 31, 2020 . OnJanuary 1, 2021 , Shades Creek was merged with and into the Company, with the Company being the surviving entity. We accounted for the transaction pursuant to ASC 805-50 "Transactions between Entities under Common Control". The transferred assets and liabilities of Shades Creek were recorded by the Company at their carrying value at the date of transfer. In accordance with ASC 805-50, all prior financial information has been recast to reflect this transaction as of the earliest period presented under common control,January 1, 2020 . We use an affiliatedBermuda domiciled reinsurance company, PL Re, to reinsure certain fixed annuity business as a part of our capital management strategy. Ratings Various Nationally Recognized Statistical Rating Organizations ("rating organizations") review the financial performance and condition of insurers, including us and our insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer's ability to meet policyholder and contract holder obligations. These ratings are important to maintaining public confidence in an insurer's products, its ability to market its products and its competitive position. The following table summarizes the current financial strength ratings of our significant member companies from the major independent rating organizations: Standard & Ratings A.M. Best Fitch Poor's Moody's Insurance company financial strength rating: Protective Life Insurance Company A+ A+ AA- A1 West Coast Life Insurance Company A+ A+ AA- A1 Protective Life and Annuity Insurance Company A+ A+ AA- -Protective Property & Casualty Insurance Company A - - - MONY Life Insurance Company A+ A+ A+ A1 Our ratings are subject to review and change by the rating organizations at any time and without notice. A downgrade or other negative action by a rating organization with respect to our financial strength ratings or those of our insurance subsidiaries could adversely affect sales, relationships with distributors, the level of policy surrenders and withdrawals, competitive position in the marketplace, and the cost or availability of reinsurance. The rating agencies may take various actions, positive or negative, with respect to the debt and financial strength ratings of PLC and its subsidiaries, including as a result of PLC's status as a subsidiary of Dai-ichi Life. Rating organizations also publish credit ratings for the issuers of debt securities, including PLC. Credit ratings are indicators of a debt issuer's ability to meet the terms of debt obligations in a timely manner. PLC is an important source of funding for the Company, so its credit ratings may affect the Company's liquidity. These ratings are important in the debt issuer's overall ability to access credit markets and other types of liquidity. Ratings are not recommendations to buy our securities or products. A downgrade or other negative action by a rating organization with respect to PLC's credit rating could limit its access to capital markets, increase the cost of issuing debt, and a downgrade of sufficient magnitude, combined with other negative factors, could require PLC to post collateral. The rating agencies may take various actions, positive or negative, with respect to PLC's debt ratings, including as a result of its status as a subsidiary of Dai-ichi Life. 91 -------------------------------------------------------------------------------- Table of Contents LIABILITIES Many of our products contain surrender charges and other features that are designed to reward persistency and penalize the early withdrawal of funds. Certain stable value and annuity contracts have market-value adjustments that protect us against investment losses if interest rates are higher at the time of surrender than at the time of issue. As ofSeptember 30, 2021 , we had policy liabilities and accruals of$54.8 billion . Our interest-sensitive life insurance policies have a weighted average minimum credited interest rate of 3.47%. Contractual Obligations There have been no material additions or changes outside of the ordinary course of business to our contractual obligations as compared to the amounts disclosed within our 2020 Annual Report on Form 10-K filed onMarch 30, 2021 . For additional details related to our commitments, see Note 11, Commitments and Contingencies in our unaudited consolidated condensed financial statements. OFF-BALANCE SHEET ARRANGEMENTS We have entered into operating leases that do not result in an obligation being recorded on the balance sheet. Refer to Note 11, Commitments and Contingencies, of the consolidated condensed financial statements for more information. The Company uses the same methodology and assumptions to estimate the allowance for unfunded commercial mortgage loan commitments credit losses as for funded commercial mortgage loans. As ofSeptember 30, 2021 , the allowance for unfunded commercial mortgage loan commitments credit losses was$9 million . The Company had a total of 126 unfunded commitments that had a balance of$1.3 billion . MARKET RISK EXPOSURES Our financial position and earnings are subject to various market risks including changes in interest rates, the yield curve, spreads between risk-adjusted and risk-free interest rates, foreign currency rates, used vehicle prices, equity price risks and issuer defaults. We analyze and manage the risks arising from market exposures of financial instruments, as well as other risks, through an integrated asset/liability management process. The primary focus of our asset/liability program is the management of interest rate risk within the insurance operations. Our asset/liability management programs and procedures involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, credit and market risk, and cash flow characteristics to maintain an appropriate balance between risk and profitability for each product category, and for us as a whole.
It is our policy to maintain asset and liability durations within one year of
one another, although, from time to time, a broader interval may be allowed.
We are exposed to credit risk within our investment portfolio and through
derivative counterparties. Credit risk relates to the uncertainty of an
obligor's continued ability to make timely payments in accordance with the
contractual terms of the instrument or contract. We manage credit risk through
established investment policies which attempt to address quality of obligors and
counterparties, credit concentration limits, diversification requirements, and
acceptable risk levels under expected and stressed scenarios. Derivative
counterparty credit risk is measured as the amount owed to us, net of collateral
held, based upon current market conditions. In addition, we periodically assess
exposure related to potential payment obligations between us and our
counterparties. We minimize the credit risk in derivative financial instruments
by entering into transactions with high quality counterparties (A-rated or
higher at the time we enter into the contract), and we maintain credit support
annexes with certain of those counterparties.
We utilize a risk management strategy that incorporates the use of derivative
financial instruments to reduce exposure to certain risks, including but not
limited to, interest rate risk, currency exchange risk, volatility risk, and
equity market risk. These strategies are developed through our analysis of data
from financial simulation models and other internal and industry sources, and
are then incorporated into our risk management program. See Note 5, Derivative
Financial Instruments, to the consolidated condensed financial statements
included in this report for additional information on our financial instruments.
Derivative instruments expose us to credit and market risk and could result in
material changes from period to period. We attempt to minimize our credit risk
by entering into transactions with highly rated counterparties. We manage the
market risk by establishing and monitoring limits as to the types and degrees of
risk that may be undertaken. We monitor our use of derivatives in connection
with our overall asset/liability management programs and risk management
strategies. In addition, all derivative programs are monitored by our risk
management department.
92
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Derivative instruments that are used as part of our interest rate risk
management strategy include interest rate swaps, interest rate futures, interest
rate caps, and interest rate swaptions.
Derivative instruments that are used as part of the Company's foreign currency
exchange risk management strategy include foreign currency swaps, foreign
currency futures, foreign equity futures, and foreign equity options.
We may use the following types of derivative contracts to mitigate our exposure
to certain guaranteed benefits related to VA contracts, fixed indexed annuities,
and indexed universal life:
•Foreign Currency Futures
•Foreign Currency Options
•Variance Swaps
•Interest Rate Futures
•Equity Options
•Equity Futures
•Credit Derivatives
•Interest Rate Swaps
•Interest Rate Swaptions
•Volatility Futures
•Volatility Options
•Funds Withheld Agreement
•Total Return Swaps
Other Derivatives
The Company and certain of its subsidiaries had an interest support agreement,
YRT premium support agreements, and portfolio maintenance agreements with PLC
through October 1, 2020 . These agreements were terminated as part of the Captive
Merger and a new portfolio maintenance agreement was entered into with PLC on
that date.
We have a funds withheld account that consists of various derivative instruments
held by us that is used to hedge the GLWB and GMDB riders and fixed indexed
annuity products. The economic performance of derivatives in the funds withheld
account is ceded to subsidiaries of PLC. The funds withheld account is accounted
for as a derivative financial instrument.
We believe that our asset/liability management programs and procedures and
certain product features provide protection against the effects of changes in
interest rates under various scenarios. Additionally, we believe our
asset/liability management programs and procedures provide sufficient liquidity
to enable us to fulfill our obligation to pay benefits under our various
insurance and deposit contracts. However, our asset/liability management
programs and procedures incorporate assumptions about the relationship between
short-term and long-term interest rates (i.e., the slope of the yield curve),
relationships between risk-adjusted and risk-free interest rates, market
liquidity, spread movements, implied volatility, policyholder behavior, and
other factors, and the effectiveness of our asset/liability management programs
and procedures may be negatively affected whenever actual results differ from
those assumptions.
In the ordinary course of our commercial mortgage lending operations, we may
commit to provide a commercial mortgage loan before the property to be mortgaged
has been built or acquired. The commercial mortgage loan commitment is a
contractual obligation to fund a commercial mortgage loan when called upon by
the borrower. The commitment is not recognized in our financial statements until
the commitment is actually funded. The commercial mortgage loan commitment
contains terms, including the rate of interest, which may be different than
prevailing interest rates. As of September 30, 2021 , we had outstanding
commercial mortgage loan commitments of $1.3 billion at a weighted average
interest rate of 3.43%.
Impact of Continued Low Interest Rate Environment
Significant changes in interest rates expose us to the risk of not realizing
anticipated spreads between the interest rate earned on investments and the
interest rate credited to in-force policies and contracts. In addition, certain
of our insurance and investment products guarantee a minimum guaranteed interest
rate ("MGIR"). In periods of prolonged low interest rates, the interest spread
earned may be negatively impacted to the extent our ability to reduce
policyholder crediting rates is limited by the guaranteed minimum credited
interest rates. Additionally, those policies without account values may exhibit
lower profitability in periods of prolonged low interest rates due to reduced
investment income.
The tables below present account values by range of current minimum guaranteed
interest rates and current crediting rates for our universal life and deferred
fixed annuity products as of September 30, 2021 and December 31, 2020 :
Credited Rate Summary
93
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Table of Contents
September 30, 2021
1-50 bps More than
At above 50 bps
MGIR MGIR above MGIR Total
(Account Value In Millions)
Crediting Rate
Universal Life Insurance
2% $ 15 $ 908 $ 2,560 $ 3,483
>2% - 3% 5,505 747 1,098 7,350
>3% - 4% 7,378 386 36 7,800
>4% - 5% 2,192 478 84 2,754
>5% - 6% 311 - - 311
Subtotal 15,401 2,519 3,778 21,698
Fixed Annuities
1% $ 308 $ 1,027 $ 1,753 $ 3,088
>1% - 2% 493 197 2,171 2,861
>2% - 3% 1,369 47 2 1,418
>3% - 4% 257 - - 257
>4% - 5% 247 - - 247
>5% - 6% - - - -
Subtotal 2,674 1,271 3,926 7,871
Total $ 18,075 $ 3,790 $ 7,704 $ 29,569
Percentage of Total 61 % 13 % 26 % 100 %
Credited Rate Summary
December 31, 2020
1-50 bps More than
At above 50 bps
MGIR MGIR above MGIR Total
(Account Value In Millions)
Crediting Rate
Universal Life Insurance
2% $ - $ 143 $ 2,176 $ 2,319
>2% - 3% 4,032 1,482 1,244 6,758
>3% - 4% 9,487 472 36 9,995
>4% - 5% 2,261 386 172 2,819
>5% - 6% 316 - - 316
Subtotal 16,096 2,483 3,628 22,207
Fixed Annuities
1% $ 273 $ 654 $ 1,975 $ 2,902
>1% - 2% 517 215 2,185 2,917
>2% - 3% 1,436 52 4 1,492
>3% - 4% 265 - - 265
>4% - 5% 251 - - 251
>5% - 6% - - - -
Subtotal 2,742 921 4,164 7,827
Total $ 18,838 $ 3,404 $ 7,792 $ 30,034
Percentage of Total 63 % 11 % 26 % 100 %
94
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Table of Contents We are active in mitigating the impact of a continued low interest rate environment through product design, as well as adjusting crediting rates on current in-force policies and contracts. We also manage interest rate and reinvestment risks through our asset/liability management process. Our asset/liability management programs and procedures involve the monitoring of asset and liability durations; cash flow testing under various interest rate scenarios; and the regular rebalancing of assets and liabilities with respect to yield, credit and market risk, and cash flow characteristics. These programs also incorporate the use of derivative financial instruments primarily to reduce our exposure to interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk. IMPACT OF INFLATION Inflation increases the need for life insurance. Many policyholders who once had adequate insurance programs may increase their life insurance coverage to provide the same relative financial benefit and protection. Higher interest rates may result in higher sales of certain of our investment products. The higher interest rates that have traditionally accompanied inflation could also affect our operations. Policy loans increase as policy loan interest rates become relatively more attractive. As interest rates increase, disintermediation of stable value and annuity account balances and individual life policy cash values may increase. The fair value of our fixed-rate, long-term investments may decrease, we may be unable to implement fully the interest rate reset and call provisions of our commercial mortgage loans, and our ability to make attractive commercial mortgage loans, including participation commercial mortgage loans, may decrease. In addition, participation commercial mortgage loan income may decrease. The difference between the interest rate earned on investments and the interest rate credited to life insurance and investment products may also be adversely affected by rising interest rates. During the periods covered by this report, we believe inflation has not had a material impact on our business. RECENTLY ISSUED ACCOUNTING STANDARDS See Note 2, Summary of Significant Accounting Policies, to the consolidated condensed financial statements for information regarding recently issued accounting standards. Item 3. Quantitative and Qualitative Disclosures about Market Risk See Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Market Risk Exposures". Item 4. Controls and Procedures (a) Disclosure controls and procedures In order to ensure that the information the Company must disclose in its filings with theSecurities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, the Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rule 13a -15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on their evaluation as ofSeptember 30, 2021 , the end of the period covered by this Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level. It should be noted that any system of controls, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of any control system is based in part upon certain judgments, including the costs and benefits of controls and the likelihood of future events. Because of these and other inherent limitations of control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been detected. (b) Changes in internal control over financial reporting There have been no changes in the Company's internal control over financial reporting during the three months endedSeptember 30, 2021 , that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company's internal controls exist within a dynamic environment and the Company continually strives to improve its internal controls and procedures to enhance the quality of its financial reporting.
AMERINST INSURANCE GROUP LTD – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
ACORDA THERAPEUTICS INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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