NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A — Basis of Financial Statements
The financial information in this report presented for interim periods is unaudited and includes the accounts of Fidelity National Financial, Inc. and its subsidiaries (collectively, “we,” “us,” “our,” the "Company" or “FNF”) prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All adjustments made were of a normal, recurring nature. This report should be read in conjunction with our Annual Report on Form 10-K (our "Annual Report") for the year ended December 31, 2022.
Description of the Business
We are a leading provider of (i) title insurance, escrow and other title-related services, including loan sub-servicing, valuations, default services and home warranty products, (ii) technology to the real estate and mortgage industries and (iii) annuity and life insurance products. FNF is one of the nation’s largest title insurance companies operating through its title insurance underwriters - Fidelity National Title Insurance Company ("FNTIC"), Chicago Title Insurance Company ("Chicago Title"), Commonwealth Land Title Insurance Company ("Commonwealth Title"), Alamo Title Insurance and National Title Insurance of New York Inc. - which collectively issue more title insurance policies than any other title company in the United States. Through our subsidiary, ServiceLink Holdings, LLC ("ServiceLink"), we provide mortgage transaction services, including title-related services and facilitation of production and management of mortgage loans. We are also a leading provider of insurance solutions serving retail annuity and life customers and institutional clients through our majority-owned subsidiary, F&G Annuities & Life ("F&G").
For information about our reportable segments refer to Note H Segment Information.
Recent Developments
7.40% F&G Senior Notes
On January 13, 2023, F&G completed its issuance and sale of $500 million aggregate amount of its 7.40% Senior Notes due 2028 (the "7.40% F&G Notes"), pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. F&G intends to use the net proceeds from the offering for general corporate purposes, including to support the growth of assets under management and for F&G's future liquidity requirements. For further information about the 7.40% F&G Notes refer to Note O Notes Payable.
Title Point Acquisition
On January 1, 2023, we completed our previously announced acquisition of TitlePoint for $224 million in cash, subject to customary working capital adjustments. TitlePoint enables searches for detailed property information, images of documents and maps from hundreds of counties across the U.S and is a leader in the science of real estate property research technology. For further information about the TitlePoint acquisition refer to Note N Acquisitions.
Income Tax
Income tax expense was $14 million and $156 million in the three months ended March 31, 2023 and 2022, respectively. Income tax expense as a percentage of earnings before income taxes was (19)% and 28% in the three months ended March 31, 2023 and 2022, respectively. The change in income tax expense as a percentage of (loss) earnings before taxes in the three months ended March 31, 2023 as compared to the corresponding period in 2022 is primarily attributable to the recording of a valuation allowance in the 2022 period. The valuation allowance is associated with tax benefits from deferred tax assets related to recognized valuation losses on equity securities that we will more likely than not be able to realize for tax purposes. Additionally, the tax benefit associated with the valuation losses on equity securities in the three months ended March 31, 2023 was further reduced by an increase in the valuation allowance in 2023.
Earnings Per Share
Basic earnings per share, as presented on the Condensed Consolidated Statement of Operations, is computed by dividing net earnings available to common shareholders in a given period by the weighted average number of common shares outstanding during such period. In periods when earnings are positive, diluted
earnings per share is calculated by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding plus assumed conversions of potentially dilutive securities. For periods when we recognize a net loss, diluted loss per share is equal to basic loss per share as the impact of assumed conversions of potentially dilutive securities is considered to be antidilutive. We have granted certain stock options and shares of restricted stock, which have been treated as common share equivalents for purposes of calculating diluted earnings per share for periods in which positive earnings have been reported. Options or other instruments, which provide the ability to purchase shares of our common stock that are antidilutive, are excluded from the computation of diluted earnings per share.
Recent Accounting Pronouncements
Adopted Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-12, as clarified and amended by ASU 2019-09, Financial Services-Insurance: Effective Date and ASU 2020-11, Financial Services-Insurance: Effective Date and Early Application, effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. This update introduced the following requirements: assumptions used to measure cash flows for traditional and limited-payment contracts must be reviewed at least annually with the effect of changes in those assumptions being recognized in the statement of operations; the discount rate applied to measure the liability for future policy benefits and limited-payment contracts must be updated at each reporting date with the effect of changes in the rate being recognized in accumulated other comprehensive income (loss) (“AOCI”); Market risk benefits (“MRB”) associated with deposit contracts must be measured at fair value, with the effect of the change in the fair value recognized in earnings, except for the change attributable to instrument-specific credit risk, which is recognized in AOCI; deferred acquisition costs are no longer required to be amortized in proportion to premiums, gross profits, or gross margins; instead, those balances must be amortized on a constant level basis over the expected term of the related contracts; deferred acquisition costs must be written off for unexpected contract terminations; and disaggregated roll forwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, MRBs, separate account liabilities and deferred acquisition costs, as well as information about significant inputs, judgments, assumptions, and methods used in measurement are required to be disclosed. We adopted this standard, which required the new guidance be applied as of the beginning of the earliest period presented or January 1, 2021, referred to as the transition date, and elected the full retrospective transition method. As a result of adoption, the Company recorded a cumulative-effect adjustment, which increased opening 2021 retained earnings by $73 million, net of tax.
Summary of Updated Significant Accounting Policies
Since our Annual Report on Form 10-K for the year ended December 31, 2022, as a result of the adoption of ASU 2018-12 we have updated the following significant accounting policies, which have been followed in preparing the accompanying unaudited Condensed Consolidated Financial Statements:
Investments
Fixed Maturity Securities Available-for-Sale
Fixed maturity securities are purchased to support our investment strategies, which are developed based on factors including rate of return, maturity, credit risk, duration, tax considerations and regulatory requirements. Our investments in fixed maturity securities have been designated as available-for-sale ("AFS") and are carried at fair value, net of allowance for expected credit losses, with unrealized gains and losses included within AOCI, net of deferred income taxes. Fair values for fixed maturity securities are principally a function of current market conditions and are primarily valued based on quoted prices in markets that are not active or model inputs that are observable or unobservable. We recognize investment income on fixed maturities based on the effective interest method, which results in the recognition of a constant rate of return on the investment equal to the prevailing rate at the time of purchase or at the time of subsequent adjustments of book value. Realized gains and losses on sales of our fixed maturity securities are determined on the first-in first-out cost basis. We generally record security transactions on a trade date basis except for private placements, which are recorded on a settlement date basis. Realized gains and losses on sales of fixed maturity securities are reported within Recognized gains and losses, net in the accompanying Condensed Consolidated Statements of Operations. Fixed maturity securities AFS are subject to an allowance for credit loss and changes in the allowance are reported in net earnings as a component of Recognized gains and losses, net. For details on our policy around allowance for expected credit losses on AFS securities, refer to Note D Investments.
VOBA, DAC, DSI and URL
Our intangible assets include the value of insurance and reinsurance contracts acquired (hereafter referred to as VOBA), deferred acquisition costs ("DAC") and deferred sales inducements ("DSI").
VOBA is an intangible asset that reflects the amount recorded as insurance contract liabilities less the estimated fair value of in-force contracts (“VIF”) in a life insurance company acquisition. It represents the portion of the purchase price that is allocated to the value of the rights to receive future cash flows from the business in force at the acquisition date. VOBA is a function of the VIF, current GAAP reserves, GAAP assets, and deferred tax liability. The VIF is determined by the present value of statutory distributable earnings less opening required capital. DAC consists principally of commissions and other acquisition costs that are related directly to the successful sale of new or renewal insurance contracts. Indirect or unsuccessful acquisition costs, maintenance, product development and overhead expenses are charged to expense as incurred. DSI represents up front bonus credits and persistency or vesting bonuses credited to policyholder account balances.
VOBA, DAC, and DSI are amortized on a constant level basis for the grouped contracts over the expected term of the related contracts to approximate straight-line amortization. Contracts are grouped by product type and feature and issue year into cohorts consistent with the grouping used in estimating the associated liability, where applicable. The constant level amortization bases of VOBA, DAC and DSI varies by product type. For universal life and indexed universal life ("IUL") insurance products, the constant level basis used is face amount in force. For deferred annuities (fixed indexed annuities ("FIA") and fixed rate annuities), the constant level basis used is initial premium deposit for DAC and DSI and vested account value as of the acquisition date for VOBA. For immediate annuity contracts, the VOBA balance is amortized in alignment with the Company’s accounting policy of amortizing the deferred profit liability (“DPL”). All amortization bases are adjusted by full lapses, which includes deaths, full surrenders, annuitizations and maturities, where applicable.
The constant level bases used for amortization are projected using mortality and lapse assumptions that are based on Company’s experience, industry data, and other factors and are consistent with those used for the Future Policy Benefits ("FPB"), where applicable. If those projected assumptions change in future periods, they will be reflected in the cohort level amortization basis at that time. Unexpected contract terminations, due to higher mortality and/or lapse experience than expected, are recognized in the current period as a reduction of the capitalized balances. All balances are reduced for actual experience in excess of expected experience with changes in future estimates recognized prospectively over the remaining expected grouped contract term. The impact of changes in projected assumptions and the impact of actual experience that is different from expectations both impact the amortization of these intangible assets, which is reported within Depreciation and amortization in the accompanying unaudited Condensed Consolidated Statements of Operations.
Some of our IUL policies require payment of fees or other policyholder assessments in advance for services that will be rendered over the estimated lives of the policies or contracts. These payments are established as unearned revenue liabilities (“URL”) upon receipt and included in Accounts payable and other accrued liabilities in the Condensed Consolidated Balance Sheets. URL is amortized like DAC over the estimated lives of these policies. As of March 31, 2023 and December 31, 2022, our URL balance was $190 million and $160 million, respectively
Contractholder Funds
Contractholder funds include deferred annuities (FIAs and fixed rate annuities), IULs, funding agreements and non-life contingent (“NLC”) immediate annuities (which includes NLC pension risk transfer ("PRT") annuities). The liabilities for contractholder funds for fixed rate annuities, funding agreements and NLC immediate annuities (which includes NLC PRT annuities) consist of contract account balances that accrue to the benefit of the contractholders. The liabilities for FIA and IUL policies consist of the value of the host contract plus the fair value of the indexed crediting feature of the policy, which is accounted for as an embedded derivative. The embedded derivative liability is carried at fair value in Contractholder funds in the accompanying Condensed Consolidated Balance Sheets with changes in fair value reported in Benefits and other changes in policy reserves in the accompanying Condensed Consolidated Statements of Operations. See a description of the fair value methodology used in Note C Fair Value of Financial Instruments.
Future Policy Benefits
The FPB is determined as the present value of future policy benefits and related claims expenses to be paid to or on behalf of the policyholder less the present value of future net premiums to be collected from policyholders. The FPB for traditional life policies and life-contingent immediate annuity policies (which includes life-contingent PRT annuities) are estimated using current assumptions that include discount rate, mortality and surrender/lapse terminations for traditional life insurance policies only, and expenses. The expense assumption is locked-in at contract issuance and not subsequently reviewed or updated. The initial assumptions are based on generally accepted actuarial methods and a combination of internal and industry experience. Policies are terminated through surrenders, lapses and maturities, where surrenders represent the voluntary terminations of policies by policyholders, lapses represent cancellations by us due to nonpayment of premiums, and maturities are determined by policy contract terms. Surrender assumptions are based upon policyholder behavior experience adjusted for expected future conditions.
For traditional life policies and life-contingent immediate annuity policies, contracts are grouped into cohorts by product type, legal entity, and issue year, or acquisition year for cohorts established as of the F&G acquisition date, June 1, 2020. Life-contingent PRT annuities are grouped into cohorts by deal and legal entity. At contract inception, a net premium ratio (“NPR”) is determined, which is calculated based on discounted future cash flows projected using best estimate assumptions and is capped at 100%, as net premiums cannot exceed gross premiums. Cohorts with NPRs less than 100% are not used to offset cohorts with NPRs greater than 100%.
The NPR is adjusted for changes in cash flow assumptions and for differences between actual and expected experience. We assess the appropriateness of all future cash flow assumptions, excluding the expense assumption, on a quarterly basis and perform an in-depth review of future cash flow assumptions in the third quarter of each year. Updates are made when evidence suggests a revision is necessary. Updates for actual experience, which includes actual cash flows and insurance in-force, are performed on a quarterly basis. These updated cash flows are used to calculate a revised NPR, which is used to derive an updated liability as of the beginning of the current reporting period, discounted at the original contract issuance date. The updated liability is compared with the carrying amount of the liability as of that same date before the revised NPR. The difference between these amounts is the remeasurement gain or loss, presented parenthetically within Benefits and other changes in policy reserves in the accompanying Condensed Consolidated Statements of Operations. In subsequent periods, the revised NPR, which is capped at 100%, is used to measure the FPB, subject to future revisions. If the NPR is greater than 100%, and therefore capped at 100%, the liability is increased and expensed immediately to reflect the amount necessary for net premiums to equal gross premiums. As the liability assumptions are reviewed and updated, if deemed necessary, at least annually, if conditions improve whereby the contracts are no longer expected to have net premiums in excess of gross premiums, the improvements would be captured in the remeasurement process and reflected in the accompanying unaudited Condensed Consolidated Statements of Operations in the period of improvement.
For traditional life policies and life-contingent immediate annuity policies (which includes life-contingent PRT annuities), the discount rate assumption is an equivalent single rate that is derived based on A-credit-rated fixed-income instruments with similar duration to the liability. We selected fixed-income instruments that have been A-rated by Bloomberg. In order to reflect the duration characteristics of the liability, we will use an implied forward yield curve and linear interpolation will be used for durations that have limited or no market observable points on the curve. The discount rate assumption is updated quarterly and used to remeasure the liability at the reporting date, with the resulting change reflected in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Earnings.
Deferred Profit Liability
For life-contingent immediate annuity policies (which includes life-contingent PRT annuities), gross premiums received in excess of net premiums are deferred at initial recognition as a DPL. Gross premiums are measured using assumptions consistent with those used in the measurement of the related liability for FPB, including discount rate, mortality, and expenses.
The DPL is amortized and recognized as premium revenue with the amount of expected future benefit payments, discounted using the same discount rate determined and locked-in at contract issuance that is used in the measurement of the related FPB. Interest is accreted on the balance of the DPL using this same discount rate. We periodically review and update our estimates of using the actual historical experience and updated cash flows for the DPL at the same time as the estimates of cash flows for the FPB. When cash flows are updated,
the updated estimates are used to recalculate the initial DPL at contract issuance. The recalculated DPL as of the beginning of the current reporting period is compared to the carrying amount of the DPL as of the beginning of the current reporting period, with any differences recognized as a remeasurement gain or loss, presented parenthetically within Benefits and other changes in policy reserves in the accompanying unaudited Condensed Consolidated Statements of Operations. The DPL is recorded as a component of the Future policy benefits in the accompanying Condensed Consolidated Balance Sheets.
Market Risk Benefits
MRBs are contracts or contract features that both provide protection to the contract holder from other-than-nominal capital market risk (equity, interest rate and foreign exchange risk) and expose the Company to other-than-nominal capital market risk. MRBs include certain contract features primarily on FIA products that provide minimum guarantees to policyholders, such as guaranteed minimum death benefit (“GMDB”) and guaranteed minimum withdrawal benefit (“GMWB”) riders.
MRBs are measured at fair value using an attributed fee measurement approach where attributed fees are explicit rider charges collectible from the policyholder used to cover the excess benefits, which represent expected benefits in excess of the policyholder’s account value. At contract inception, an attributed fee ratio is calculated equal to rider charges over benefits paid in excess of the account value attributable to the MRB. The attributed fee ratio remains static over the life of the MRB and is capped at 100%. Each period subsequent to contract inception, the attributed fee ratio is used to calculate the fair value of the MRB using a risk neutral valuation method and is based on current net amounts at risk, market data, internal and industry experience, and other factors. The balances are computed using assumptions including mortality, full and partial surrender, GMWB utilization, risk-free rates including non-performance spread and risk margin, market value of options and economic scenarios. Policyholder behavior assumptions are reviewed at least annually, typically in the third quarter, for any revisions. MRBs can either be in an asset or liability position and are presented separately on the Condensed Consolidated Balance Sheets as the right of setoff criteria are not met. Changes in fair value are recognized in Market risk benefits gain (losses) in the unaudited Condensed Consolidated Statements of Operations, except for the change in fair value due to a change in the instrument-specific credit risk, which is recognized in the Condensed Consolidated Statements of Comprehensive Earnings. See a description of the fair value methodology used in Note C Fair Value of Financial Instruments and Note P Market Risk Benefits.
Benefits and Other Changes in Policy Reserves
Benefit expenses for deferred annuities (FIAs and fixed rate annuities), IUL policies and funding agreements include interest credited, fixed interest and/or indexed (specific to FIA and IUL policies), to contractholder account balances. Benefit claims in excess of contract account balances, net of reinsurance recoveries, are charged to expense in the period that they are earned by the policyholder based on their selected strategy or strategies. Other changes in policy reserves include the change in the fair value of the FIA embedded derivative.
Other changes in policy reserves also include the change in reserves for life insurance products. For traditional life and life-contingent immediate annuities (which includes PRT annuities with life contingencies), policy benefit claims are charged to expense in the period that the claims are incurred, net of reinsurance recoveries. Remeasurement gains or losses on the related FPB and DPL balances are presented parenthetically within Benefits and other changes in policy reserves in the accompanying unaudited Condensed Consolidated Statements of Operations.
Impacts of adoption of ASU 2018-12 on Financial Statements
The following tables summarize the impacts of the adoption of ASU 2018-12 on our accompanying unaudited Condensed Consolidated Balance Sheet and unaudited Condensed Consolidated Statement of Operations.
Condensed Consolidated Balance Sheet
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| As Previously Reported | | Adjustments | | As adjusted |
| | | (Unaudited) | | (Unaudited) |
| (In millions) |
ASSETS |
Reinsurance recoverable, net of allowance for credit losses | $ | 5,588 | | | $ | (170) | | | $ | 5,418 | |
Goodwill | 4,642 | | | (7) | | | 4,635 | |
Prepaid expenses and other assets | 2,231 | | | (163) | | | 2,068 | |
Market risk benefits asset | — | | | 117 | | | 117 | |
Other intangible assets, net | 4,034 | | | (223) | | | 3,811 | |
Total assets | $ | 16,495 | | | $ | (446) | | | $ | 16,049 | |
LIABILITIES AND EQUITY |
Liabilities: | | | | | |
Contractholder funds | $ | 41,233 | | | $ | (390) | | | $ | 40,843 | |
Future policy benefits | 5,923 | | | (902) | | | 5,021 | |
Accounts payable and accrued liabilities | 2,352 | | | (26) | | | 2,326 | |
Market risk benefits liability | — | | | 282 | | | 282 | |
Total liabilities | $ | 49,508 | | | $ | (1,036) | | | $ | 48,472 | |
Equity: | | | | | |
Additional paid-in capital | $ | 5,876 | | | $ | (6) | | | $ | 5,870 | |
Retained earnings | 4,714 | | | 511 | | | 5,225 | |
Accumulated other comprehensive (loss) earnings | (2,862) | | | (8) | | | (2,870) | |
Non-controlling interests | 360 | | | 93 | | | 453 | |
Total equity | $ | 8,088 | | | $ | 590 | | | $ | 8,678 | |
Condensed Consolidated Statement of Operations
| | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2022 |
| As Previously Reported | | Adjustments | | As adjusted |
| (Unaudited) |
Revenues: | (In millions) |
Escrow, title-related and other fees | $ | 1,290 | | | $ | 2 | | | $ | 1,292 | |
Expenses: | | | | | |
Benefits and other changes in policy reserves | $ | 208 | | | $ | (5) | | | $ | 203 | |
Market risk benefit losses | — | | | 70 | | | 70 | |
Depreciation and amortization | 182 | | | (67) | | | 115 | |
Income tax expense | 155 | | | 1 | | | 156 | |
Net earnings attributable to Fidelity National Financial, Inc. common shareholders | $ | 397 | | | $ | 3 | | | $ | 400 | |
Earnings per share | | | | | |
Basic | | | | | |
Net earnings per share attributable to common shareholders, basic | $ | 1.41 | | | $ | 0.01 | | | $ | 1.42 | |
Diluted | | | | | |
Net earnings per share attributable to common shareholders, diluted | $ | 1.40 | | | $ | 0.01 | | | $ | 1.41 | |
Note B — Summary of Reserve for Title Claim Losses
A summary of the reserve for title claim losses follows:
| | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | | 2022 |
| (In millions) |
Beginning balance | $ | 1,810 | | | $ | 1,883 | |
| | | |
Change in insurance recoverable | — | | | (1) | |
Claim loss provision related to: | | | |
Current year | 43 | | | 84 | |
| | | |
Total title claim loss provision | 43 | | | 84 | |
Claims paid, net of recoupments related to: | | | |
Current year | (1) | | | (1) | |
Prior years | (61) | | | (53) | |
Total title claims paid, net of recoupments | (62) | | | (54) | |
Ending balance of claim loss reserve for title insurance | $ | 1,791 | | | $ | 1,912 | |
Provision for title insurance claim losses as a percentage of title insurance premiums | 4.5 | % | | 4.5 | % |
Several lawsuits have been filed by various parties against Chicago Title Company and Chicago Title Insurance Company as its principal (collectively, the “Named Companies”). Generally, plaintiffs claim they are investors who were solicited by Gina Champion-Cain through her former company, ANI Development LLC (“ANI”), or other affiliates to provide funds that purportedly were to be used for high-interest, short-term loans to parties seeking to acquire California alcoholic beverage licenses. Plaintiffs contend they were told that under California state law, alcoholic beverage license applicants are required to deposit into escrow an amount equal to the license purchase price while their applications remain pending with the State. Plaintiffs further alleged that employees of Chicago Title Company participated with Ms. Champion-Cain and her entities in a fraud scheme involving an escrow account maintained by Chicago Title Company into which some of the plaintiffs’ funds were deposited.
In connection with the alcoholic beverage license scheme, a lawsuit styled, Securities and Exchange Commission v. Gina Champion-Cain and ANI Development, LLC, was filed in the United States District Court for the Southern District of California asserting claims for securities fraud against Ms. Champion-Cain and certain of her affiliated entities. A receiver was appointed by the court to preserve the assets of the defendant affiliated entities (the “receivership entities”), pay their debts, operate the businesses and pursue any claims they may have against third-parties. Pursuant to the authority granted to her by the federal court, on January 7, 2022, a lawsuit styled, Krista Freitag v. Chicago Title Co. and Chicago Title Ins. Co., was filed in San Diego County Superior Court by the receiver on behalf of the receivership entities against the Named Companies. The receiver seeks compensatory, incidental, consequential, and punitive damages, and seeks the recovery of attorneys’ fees. In turn, the Named Companies petitioned the Federal Court to sue ANI, via the receiver, to pursue indemnity and other claims against the receivership entities as joint tortfeasors, which was granted.
On April 26, 2022, the Named Companies reached a global settlement with the receiver and several other investor claimants. As a condition of the settlement, the Named Companies and the receiver jointly sought court approval of the global settlement and entry of an order barring any claims against the Named Companies related to the alcoholic beverage license scheme. On November 23, 2022, the federal court overruled any objections by non-joining investors and entered an order approving the global settlement and barring further claims against the Named Companies (“Settlement and Bar Order”). The receiver is in receipt of the settlement payment from Chicago Title Company and will distribute the amount designated for each non-joining investor at the conclusion of any such investor’s appeal of the Settlement and Bar Order (or back to Chicago Title Company if an appeal is successful). Some of the investor claimants who objected to entry of the Settlement and Bar Order appealed the decision to the United States Court of Appeals for the Ninth Circuit by (Cases 22-56206, 22-56208, and 23-55083). Appellate briefing is expected to take place over the next several months. After filing its appeal, one of the appellants, CalPrivate Bank (Case 23-55083), entered into a settlement with the receiver that was approved by the federal court. This settlement resolves CalPrivate Bank’s objections to the Settlement and Bar Order, and its appeal has been dismissed.
The following lawsuits remain pending in the Superior Court of San Diego County for the State of California, all of which involve investor claimants who have claims against the Named Companies, objected to the settlement with the receiver, and have appealed the Settlement and Bar Order. Since any pending and future claims against the Named Companies are barred, the state court cases where plaintiffs have served a notice of appeal have been stayed pending the outcome of the appeals, and the claims against the Named Companies by non-appealing plaintiffs have been dismissed with prejudice. While they have not been consolidated into one action, they have been deemed by the court to be related and are assigned to the same judge for purposes of judicial economy.
On December 13, 2019, a lawsuit styled, Kim Funding, LLC, Kim H. Peterson, Joseph J. Cohen, and ABC Funding Strategies, LLC v. Chicago Title Co., Chicago Title Ins. Co., Thomas Schwiebert, Adelle Ducharme, and Betty Elixman, was filed in San Diego County Superior Court. Plaintiffs claim losses of more than $250 million as a result of the alleged fraud scheme, and also seek statutory, treble, and punitive damages, as well as the recovery of attorneys' fees. The Named Companies have filed a cross-complaint against Ms. Champion-Cain, and others. The Named Companies have reached a conditional settlement with the members of ABC Funding Strategies, LLC plaintiffs under confidential terms.
On July 7, 2020, a cross-claim styled, Laurie Peterson v. Chicago Title Co., Chicago Title Ins. Co., Thomas Schwiebert, Adelle Ducharme, and Betty Elixman, was filed in an existing lawsuit styled, Banc of California, National Association v. Laurie Peterson, which is pending in San Diego County Superior Court. Cross-complaint plaintiff was sued by a bank to recover in excess of $35 million that she allegedly guaranteed to repay for certain investments made by the Banc of California in the alcoholic beverage license scheme. Cross-complaint plaintiff has, in turn, sued the Named Companies in that action seeking in excess of $250 million in monetary losses as well as exemplary damages and attorneys’ fees. The Named Companies have filed a cross-complaint against Ms. Champion-Cain and others, and the Named Companies were substituted in as the Plaintiff following a settlement with the bank.
On September 3, 2020, a cross-claim styled, Kim H. Peterson Trustee of the Peterson Family Trust dated April 14 1992 v. Chicago Title Co., Chicago Title Ins. Co., Thomas Schwiebert, Adelle Ducharme, and Betty Elixman, was filed in an existing lawsuit styled, CalPrivate Bank v. Kim H. Peterson Trustee of the Peterson Family Trust dated April 14 1992, which is pending in Superior Court of San Diego County for the State of California. Cross-complaint plaintiff was sued by a bank to recover in excess of $12 million that the trustee allegedly guaranteed to repay for certain investments made by CalPrivate Bank in the alcoholic beverage license scheme. Cross-complaint plaintiff has, in turn, sued the Named Companies in that action seeking in excess of $250 million in monetary losses as well as exemplary damages and attorneys’ fees.
On November 2, 2020, a lawsuit styled, CalPrivate Bank v. Chicago Title Co. and Chicago Title Ins. Co., was also filed in the Superior Court of San Diego County for the State of California. Plaintiff claims losses in excess of $12 million based upon business loan advances made in the alcoholic beverage license scheme and seeks punitive damages and the recovery of attorneys’ fees. The Named Companies have filed a cross-complaint against Ms. Champion-Cain, and others. Given CalPrivate Bank's settlement with the receiver, this action against the Named Companies will be dismissed.
Chicago Title Company has also resolved a number of other pre-suit claims and previously-disclosed lawsuits from both individual and groups of alleged investors under confidential terms. Based on the facts and circumstances of the remaining claims, including the settlements already reached, we have recorded reserves included in our reserve for title claim losses, which we believe are adequate to cover losses related to this matter, and believe that our reserves for title claim losses are adequate.
We continually update loss reserve estimates as new information becomes known, new loss patterns emerge or as other contributing factors are considered and incorporated into the analysis of reserve for claim losses. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts of individual claims and other factors.
Due to the uncertainty inherent in the process and to the judgment used by management, the ultimate liability may be greater or less than our current reserves. If actual claims loss development varies from what is currently expected and is not offset by other factors, it is possible that additional reserve adjustments may be required in future periods in order to maintain our recorded reserve within a reasonable range of our actuary's central estimate.
Note C — Fair Value of Financial Instruments
Our measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset, or non-performance risk, which may include our own credit risk. We estimate an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market for that asset or liability in the absence of a principal market as opposed to the price that would be paid to acquire the asset or assume a liability (“entry price”). We categorize financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique, along with net asset value. The hierarchy for fair value measurement is defined as follows:
Level 1 - Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date.
Level 2 - Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads, and yield curves.
Level 3 - Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date based on the best information available in the circumstances.
Net asset value ("NAV") - Certain equity investments are measured using NAV as a practical expedient in determining fair value. In addition, our unconsolidated affiliates (primarily limited partnerships) are primarily accounted for using the equity method of accounting with fair value determined using NAV as a practical expedient. Our carrying value reflects our pro rata ownership percentage as indicated by NAV in the limited partnership financial statements, which we may adjust if we determine NAV is not calculated consistent with investment company fair value principles. The underlying investments of the limited partnerships may have significant unobservable inputs, which may include, but are not limited to, comparable multiples and weighted average cost of capital rates applied in valuation models or a discounted cash flow model. Additionally, management meets quarterly with the general partner to determine whether any credit or other market events have occurred since prior quarter financial statements to ensure any material events are properly included in current quarter valuation and investment income.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. In addition to the unobservable inputs, Level 3 fair value investments may include observable components, which are components that are actively quoted or can be validated to market-based sources.
The carrying amounts and estimated fair values of our financial instruments for which the disclosure of fair values is required, including financial assets and liabilities measured and carried at fair value on a recurring basis, with the exception of investment contracts, portions of other long-term investments and debt, which are disclosed later within this footnote, was summarized according to the hierarchy previously described, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | NAV | | Fair Value | | |
Assets | (In millions) | | |
Cash and cash equivalents | $ | 2,821 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,821 | | | |
Fixed maturity securities, available-for-sale: | | | | | | | | | | | |
Asset-backed securities | — | | | 5,592 | | | 6,300 | | | — | | | 11,892 | | | |
Commercial mortgage-backed securities | — | | | 3,686 | | | 29 | | | — | | | 3,715 | | | |
Corporates | 25 | | | 14,262 | | | 1,544 | | | — | | | 15,831 | | | |
Hybrids | 97 | | | 683 | | | — | | | — | | | 780 | | | |
Municipals | — | | | 1,597 | | | 32 | | | — | | | 1,629 | | | |
Residential mortgage-backed securities | — | | | 1,657 | | | 12 | | | — | | | 1,669 | | | |
U.S. Government | 318 | | | 11 | | | — | | | — | | | 329 | | | |
Foreign Governments | — | | | 249 | | | 16 | | | — | | | 265 | | | |
Short term investments | 1,315 | | | 8 | | | 23 | | | — | | | 1,346 | | | |
Preferred securities | 285 | | | 565 | | | 1 | | | — | | | 851 | | | |
Equity securities | 681 | | | — | | | 11 | | | 42 | | | 734 | | | |
Derivative investments | — | | | 432 | | | — | | | — | | | 432 | | | |
Investment in unconsolidated affiliates | — | | | — | | | 107 | | | — | | | 107 | | | |
Reinsurance related embedded derivative, included in other assets | — | | | 260 | | | — | | | — | | | 260 | | | |
Market risk benefits asset | — | | | — | | | 106 | | | — | | | 106 | | | |
Other long-term investments | — | | | — | | | 48 | | | — | | | 48 | | | |
| | | | | | | | | | | |
Total financial assets at fair value | $ | 5,542 | | | $ | 29,002 | | | $ | 8,229 | | | $ | 42 | | | $ | 42,815 | | | |
Liabilities | | | | | | | | | | | |
| | | | | | | | | | | |
Derivatives: | | | | | | | | | | | |
FIA/ IUL embedded derivatives, included in contractholder funds | — | | | — | | | 3,569 | | | — | | | 3,569 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Market risk benefits liability | $ | — | | | $ | — | | | $ | 324 | | | $ | — | | | $ | 324 | | | |
Total financial liabilities at fair value | $ | — | | | $ | — | | | $ | 3,893 | | | $ | — | | | $ | 3,893 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | NAV | | Fair Value | | |
Assets | (In millions) | | |
Cash and cash equivalents | $ | 2,286 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,286 | | | |
Fixed maturity securities, available-for-sale: | | | | | | | | | | | |
Asset-backed securities | — | | | 5,204 | | | 6,263 | | | — | | | 11,467 | | | |
Commercial mortgage-backed securities | — | | | 3,026 | | | 37 | | | — | | | 3,063 | | | |
Corporates | 40 | | | 12,857 | | | 1,440 | | | — | | | 14,337 | | | |
Hybrids | 93 | | | 638 | | | — | | | — | | | 731 | | | |
Municipals | — | | | 1,431 | | | 29 | | | — | | | 1,460 | | | |
Residential mortgage-backed securities | — | | | 1,225 | | | 302 | | | — | | | 1,527 | | | |
U.S. Government | 260 | | | 11 | | | — | | | — | | | 271 | | | |
Foreign Governments | — | | | 223 | | | 16 | | | — | | | 239 | | | |
Short term investments | 2,590 | | | — | | | — | | | — | | | 2,590 | | | |
Preferred securities | 320 | | | 582 | | | 1 | | | — | | | 903 | | | |
Equity securities | 621 | | | — | | | 10 | | | 47 | | | 678 | | | |
| | | | | | | | | | | |
Derivative investments | — | | | 244 | | | — | | | — | | | 244 | | | |
Investment in unconsolidated affiliates | — | | | — | | | 23 | | | — | | | 23 | | | |
Reinsurance related embedded derivative, included in other assets | — | | | 279 | | | — | | | — | | | 279 | | | |
Market risk benefits asset | — | | | — | | | 117 | | | — | | | 117 | | | |
Other long-term investments | — | | | — | | | 48 | | | — | | | 48 | | | |
| | | | | | | | | | | |
Total financial assets at fair value | $ | 6,210 | | | $ | 25,720 | | | $ | 8,286 | | | $ | 47 | | | $ | 40,263 | | | |
Liabilities | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Derivatives: | | | | | | | | | | | |
FIA/ IUL embedded derivatives, included in contractholder funds | — | | | — | | | 3,115 | | | — | | | 3,115 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Market risk benefits liability | — | | | — | | | 282 | | | — | | | 282 | | | |
Total financial liabilities at fair value | $ | — | | | $ | — | | | $ | 3,397 | | | $ | — | | | $ | 3,397 | | | |
Valuation Methodologies
Cash and Cash Equivalents
The carrying amounts reported in the unaudited Condensed Consolidated Balance Sheets for these instruments approximate fair value.
Fixed Maturity Preferred and Equity Securities
We measure the fair value of our securities based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity, preferred or equity security, and we will then consistently apply the valuation methodology to measure the security’s fair value. Our fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach include third-party pricing services, independent broker quotations, or pricing matrices. We use observable and unobservable inputs in our valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. In addition, market indicators and industry and economic events are monitored and further market data will be acquired when certain thresholds are met.
For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. The significant input used in the fair value measurement of equity securities for which the market approach valuation technique is employed is yield for comparable securities. Increases or decreases in the yields would result in lower or higher, respectively, fair value measurements. For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. We believe the broker quotes are prices at which trades could be executed based on historical trades executed at broker-quoted or slightly higher prices.
We analyze the third-party valuation methodologies and related inputs to perform assessments to determine the appropriate level within the fair value hierarchy. However, we did not adjust prices received from third parties as of March 31, 2023 or December 31, 2022.
Certain equity investments are measured using NAV as a practical expedient in determining fair value.
Derivative Financial Instruments
The fair value of call options is based upon valuation pricing models, which represents what we would expect to receive or pay at the balance sheet date if we canceled the options, entered into offsetting positions, or exercised the options. Fair values for these instruments are determined internally, based on industry accepted valuation pricing models, which use market-observable inputs, including interest rates, yield curve volatilities, and other factors.
The fair value of futures contracts (specifically for FIA contracts) represents the cumulative unsettled variation margin (open trade equity, net of cash settlements), which represents what we would expect to receive or pay at the balance sheet date if we canceled the contracts or entered into offsetting positions. These contracts are classified as Level 1.
The fair value measurement of the FIA/IUL embedded derivatives included in contractholder funds is determined through a combination of market observable information and significant unobservable inputs using the option budget method. The market observable inputs are the market value of option and treasury rates. The significant unobservable inputs are the budgeted option cost (i.e., the expected cost to purchase call options in future periods to fund the equity indexed linked feature), surrender rates, mortality multiplier and non-performance spread. The mortality multiplier at March 31, 2023 was applied to the 2012 Individual Annuity mortality tables. Increases or decreases in the market value of an option in isolation would result in a higher or lower, respectively, fair value measurement. Increases or decreases in treasury rates, mortality multiplier, surrender rates, or non-performance spread in isolation would result in a lower or higher fair value measurement, respectively. Generally, a change in any one unobservable input would not directly result in a change in any other unobservable input.
The fair value of the reinsurance-related embedded derivatives in the funds withheld reinsurance agreements with Kubera Insurance (SAC) Ltd. ("Kubera") (effective October 31, 2021, this agreement was novated from Kubera to Somerset Reinsurance Ltd. ("Somerset"), a certified third-party reinsurer) and ASPIDA Life Re Ltd ("Aspida Re") are estimated based upon the fair value of the assets supporting the funds withheld from reinsurance liabilities. The fair value of the assets is based on a quoted market price of similar assets (Level 2), and therefore the fair value of the embedded derivative is based on market-observable inputs and classified as Level 2. See Note L F&G Reinsurance for further discussion on F&G reinsurance agreements.
Investments in Unconsolidated affiliates
The fair value of our investments in unconsolidated affiliates is determined using a multiple of the affiliates’ EBITDA, which is derived from market analysis of transactions involving comparable companies. The EBITDA used in this calculation is based on the affiliates’ financial information.
Short-term investments
The carrying amounts reported in the unaudited Condensed Consolidated Balance Sheets for these instruments
approximate fair value.
Other long-term investments
We hold a fund-linked note, which provides for an additional payment at maturity based on the value of an embedded derivative based on the actual return of a dedicated return fund. Fair value of the embedded derivative is based on an unobservable input, the NAV of the fund at the balance sheet date. The embedded derivative is similar to a call option on the NAV of the fund with a strike price of zero since F&G will not be required to make any additional payments at maturity of the fund-linked note in order to receive the NAV of the fund on the maturity date. A Black-Scholes model determines the NAV of the fund as the fair value of the call option regardless of the values used for the other inputs to the option pricing model. The NAV of the fund is provided by the fund manager at the end of each calendar month and represents the value an investor would receive if it withdrew its investment on the balance sheet date. Therefore, the key unobservable input used in the Black-Scholes model is the value of the fund. As the value of the fund increases or decreases, the fair value of the embedded derivative will increase or decrease. See further discussion on the available-for-sale embedded derivative in Note E Derivative Financial Instruments.
The fair value of the credit-linked note is based on a weighted average of a broker quote and a discounted cash flow analysis. The discounted cash flow approach is based on the expected portfolio cash flows and amortization schedule reflecting
investment expectations, adjusted for assumptions on the portfolio's default and recovery rates, and the note's discount rate. The fair value of the note is provided by the fund manager at the end of each quarter.
Market Risk Benefits
MRBs are measured at fair value using an attributed fee measurement approach where attributed fees are explicit rider charges collectible from the policyholder used to cover the excess benefits. The fair value is calculated using a risk neutral valuation method and is based on current net amounts at risk, market data, internal and industry experience, and other factors. The balances are computed using assumptions including mortality, full and partial surrender, rider benefit utilization, risk-free rates including non-performance spread and risk margin, market value of options and economic scenarios. Policyholder behavior assumptions are reviewed at least annually, typically in the third quarter, for any revisions. See further discussion on MRBs in Note P - Market Risk Benefits.
Quantitative information regarding significant unobservable inputs used for recurring Level 3 fair value measurements of financial instruments carried at fair value as of March 31, 2023 and December 31, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at | | Valuation Technique | | Unobservable Input(s) | | Range (Weighted average) |
| March 31, 2023 | | | |
| (In millions) | | | | March 31, 2023 |
Assets | | | | | | | |
Asset-backed securities | $ | 6,019 | | | Broker-quoted | | Offered quotes | | 54.2% - 187.27% (93.86%) |
| | | | | | | |
Asset-backed securities | 281 | | | Third-Party Valuation | | Offered quotes | | 39.43% - 102.60% (62.83%) |
Commercial mortgage-backed securities | 12 | | | Broker-quoted | | Offered quotes | | 95.34% - 101.25% (99.34%) |
Commercial mortgage-backed securities | 17 | | | Third-Party Valuation | | Offered quotes | | 73.36% - 88.60% (82.26%) |
Corporates | 682 | | | Broker-quoted | | Offered quotes | | 80.24% - 104.74% (95.90%) |
Corporates | 11 | | | Discounted Cash Flow | | Discount Rate | | 44.00% - 100.00% (75.18%) |
Corporates | 851 | | | Third-Party Valuation | | Offered quotes | | 0.00% - 105.32% (90.85%) |
| | | | | | | |
Municipals | 32 | | | Third-Party Valuation | | Offered quotes | | 104.38% - 104.38% (104.38%) |
Residential mortgage-backed securities | 8 | | | Broker-quoted | | Offered quotes | | 0.00% - 98.38% (98.18%) |
Residential mortgage-backed securities | 4 | | | Third-Party Valuation | | Offered quotes | | 94.93% |
Foreign Governments | 16 | | | Third-Party Valuation | | Offered quotes | | 99.20% - 99.44% (99.28%) |
Investment in unconsolidated affiliates | 107 | | | Market Comparable Company Analysis | | EBITDA multiple | | 5x-14x (12.1x) |
Short term investments | 23 | | | Broker-quoted | | Offered quotes | | 100.00% - 100.00% (100.00%) |
| | | | | | | |
Preferred securities | 1 | | | Discounted Cash Flow | | Discount rate | | 100.00% - 100.00% (100.00%) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Equity securities | 7 | | | Broker Quoted | | Offered quotes | | $68.50 - $68.50 ($68.50) |
Equity securities | 4 | | | Discounted Cash Flow | | Discount rate | | 11.16% - 11.16% (11.16%) |
| | | Market Comparable Company Analysis | | EBITDA multiple | | 7.8x - 7.8x (7.8x) |
Other long-term investments: | | | | | | | |
Available-for-sale embedded derivative | 25 | | | Black Scholes model | | Market value of fund | | 100.00% |
Secured borrowing receivable | 10 | | | Broker-quoted | | Offered quotes | | 100.00% - 100.00% (100.00%) |
Credit Linked Note | 13 | | | Broker-quoted | | Offered quotes | | 96.23% |
Market risk benefits asset | 106 | | | Discounted Cash Flow | | Mortality | | 100.00% - 100.00% (100.00%) |
| | | | | | | |
| | | | | Surrender rates | | 0.25% - 10.00% (5.03%) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Partial withdrawal rates | | 2.00% - 21.74% (2.49%) |
| | | | | Non-performance spread | | 0.48% - 1.42% (1.31%) |
| | | | | GMWB utilization | | 50.00% - 60.00% (50.89%) |
Total financial assets at fair value | $ | 8,229 | | | | | | | |
Liabilities | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Derivative investments: | | | | | | | |
FIA/ IUL embedded derivatives, included in contractholder funds | $ | 3,569 | | | Discounted cash flow | | Market value of option | | 0.00% - 28.31% (1.54%) |
| | | | | Swap rates | | 3.48% - 4.97% (4.23%) |
| | | | | Mortality multiplier | | 100.00% - 100.00% (100.00%) |
| | | | | Surrender rates | | 0.25% - 70.00% (6.57%) |
| | | | | Partial withdrawals | | 2.00% - 32.26% (2.74%) |
| | | | | Non-performance spread | | 0.48% - 1.42% (1.31%) |
| | | | | Option cost | | 0.07% - 5.67% (2.11%) |
| | | | | | | |
| | | | | | | |
Market risk benefits liability | 324 | | | Discounted cash flow | | Mortality | | 100.00% - 100.00% (100.00%) |
| | | | | Surrender rates | | 0.25% - 10.00% (5.03%) |
| | | | | Partial withdrawal rates | | 2.00% - 21.74% (2.49%) |
| | | | | Non-performance spread | | 0.48% - 1.42% (1.31%) |
| | | | | GMWB utilization | | 0.48% - 1.42% (50.89%) |
Total financial liabilities at fair value | $ | 3,893 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at | | Valuation Technique | | Unobservable Input(s) | | Range (Weighted average) |
| December 31, 2022 | | | |
| (In millions) | | | | December 31, 2022 |
Assets | | | | | | | |
Asset-backed securities | $ | 5,916 | | | Broker-quoted | | Offered quotes | | 52.85% - 117.17% (94.18%) |
| | | | | | | |
Asset-backed securities | 347 | | | Third-Party Valuation | | Offered quotes | | 41.43% - 210.50% (67.99%) |
| | | | | | | |
Commercial mortgage-backed securities | 20 | | | Broker-quoted | | Offered quotes | | 109.02% - 109.02% (109.02%) |
| | | | | | | |
Commercial mortgage-backed securities | 17 | | | Third-Party Valuation | | Offered quotes | | 74.66% - 88.48% (82.74%) |
Corporates | 602 | | | Broker-quoted | | Offered quotes | | 79.16% - 102.53% (94.16%) |
Corporates | 826 | | | Third-Party Evaluation | | Offered quotes | | —% - 104.96% (89.69%) |
Corporates | 12 | | | Discounted Cash Flow | | Discount Rate | | 44.00% - 100.00% (77.02%) |
| | | | | | | |
Municipals | 29 | | | Third-Party Evaluation | | Offered quotes | | 93.95% - 93.95% (93.95%) |
| | | | | | | |
| | | | | | | |
Foreign governments | 16 | | Third-Party Evaluation | | Offered quotes | | 99.78% - 102.29% (100.56%) |
Investment in unconsolidated affiliates | 23 | | | Market Comparable Company Analysis | | EBITDA multiple | | 5x-5.50x |
| | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage-backed securities | 302 | | Broker-quoted | | Offered quotes | | —% - 91.04% (86.38%) |
| | | | | | | |
| | | | | | | |
Preferred Securities | 1 | | Discounted Cash Flow | | Discount rate | | 100.00% |
Equity securities | 6 | | Broker-quoted | | Offered Quotes | | $64.25 - $64.25 ($64.25) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Equity securities | 4 | | | Discounted Cash Flow | | Discount Rate | | 11.10% - 11.10% (11.10%) |
| | | Market Comparable Company Analysis | | EBITDA multiple | | 5.6x - 5.6x (5.6x) |
Other long-term investments: | | | | | | | |
Available-for-sale embedded derivative | 23 | | | Black Scholes model | | Market value of fund | | 100.00% |
Secured borrowing receivable | 10 | | | Broker-quoted | | Offered quotes | | 100.00% - 100.00% (100.00%) |
Credit Linked Note | 15 | | | Broker-quoted | | Offered quotes | | 96.23% |
| | | | | | | |
Market risk benefits asset | 117 | | | Discounted Cash Flow | | Mortality | | 100.00% - 100.00% (100.00%) |
| | | | | Surrender rates | | 0.25% - 10.00% (4.69%) |
| | | | | Partial withdrawal rates | | 2.00% - 21.74% (2.49%) |
| | | | | Non-performance spread | | 0.48% - 1.44% (1.30%) |
| | | | | GMWB utilization | | 50.00% - 60.00% (50.94%) |
Total financial assets at fair value | $ | 8,286 | | | | | | | |
Liabilities | | | | | | | |
| | | | | | | |
| | | | | | | |
Derivative investments: | | | | | | | |
FIA/ IUL embedded derivatives, included in contractholder funds | 3,115 | | | Discounted cash flow | | Market value of option | | —% - 23.90% (87.00%) |
| | | | | Swap rates | | 3.88% - 4.73% (4.31%) |
| | | | | Mortality multiplier | | 100.00% - 100.00% (100.00%) |
| | | | | Surrender rates | | 0.25% - 70.00% (6.57%) |
| | | | | Partial withdrawals | | 2.00% - 29.41% (2.73%) |
| | | | | Non-performance spread | | 0.48% - 1.44% (1.30%) |
| | | | | Option cost | | 0.07% - 4.97% (1.89%) |
Market risk benefits liability | 282 | | | Discounted Cash Flow | | Mortality | | 100.00% - 100.00% (100.00%) |
| | | | | Surrender rates | | 0.25% - 10.00% (4.69%) |
| | | | | Partial withdrawal rates | | 2.00% - 21.74% (2.49%) |
| | | | | Non-performance spread | | 0.48% - 1.44% (1.30%) |
| | | | | GMWB utilization | | 50.00% - 60.00% (50.94%) |
| | | | | | | |
| | | | | | | |
Total financial liabilities at fair value | $ | 3,397 | | | | | | | |
The following tables summarize changes to the Company’s financial instruments carried at fair value and classified within Level 3 of the fair value hierarchy for the three months ended March 31, 2023 and 2022. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2023 |
| Balance at Beginning of Period | | | | Total Gains (Losses) | | Purchases | | Sales | | Settlements | | Net transfer In (Out) of Level 3 (a) | | Balance at End of Period | | Change in Unrealized Gains (Losses) Incl in OCI |
| | | Included in Earnings | | Included in AOCI | | | | | | |
Assets | (In millions) |
Fixed maturity securities available-for-sale: | | | | | | | | | | | | | | | | | | | |
Asset-backed securities | $ | 6,263 | | | | | $ | (8) | | | $ | 18 | | | $ | 416 | | | $ | (83) | | | $ | (235) | | | $ | (71) | | | $ | 6,300 | | | $ | 18 | |
Commercial mortgage-backed securities | 37 | | | | | — | | | 1 | | | 12 | | | — | | | — | | | (21) | | | 29 | | | 1 | |
Corporates | 1,440 | | | | | (1) | | | (23) | | | 133 | | | — | | | (5) | | | — | | | 1,544 | | | (23) | |
| | | | | | | | | | | | | | | | | | | |
Municipals | 29 | | | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 32 | | | 3 | |
Residential mortgage-backed securities | 302 | | | | | 1 | | | 8 | | | 8 | | | — | | | (8) | | | (299) | | | 12 | | | 8 | |
Foreign Governments | 16 | | | | | — | | | — | | | — | | | — | | | — | | | — | | | 16 | | | — | |
Investment in unconsolidated affiliates | 23 | | | | | — | | | — | | | 84 | | | — | | | — | | | — | | | 107 | | | — | |
Short term investments | — | | | | | — | | | — | | | 23 | | | — | | | — | | | — | | | 23 | | | — | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Preferred securities | 1 | | | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | |
Equity securities | 10 | | | | | — | | | — | | | 1 | | | — | | | — | | | — | | | 11 | | | — | |
Other long-term investments: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Available-for-sale embedded derivative | 23 | | | | | — | | | 2 | | | — | | | — | | | — | | | — | | | 25 | | | 2 | |
| | | | | | | | | | | | | | | | | | | |
Credit linked note | 15 | | | | | — | | | — | | | — | | | — | | | (2) | | | — | | | 13 | | | — | |
Secured borrowing receivable | 10 | | | | | — | | | — | | | — | | | — | | | — | | | — | | | 10 | | | — | |
Subtotal Level 3 assets at fair value | $ | 8,169 | | | | | $ | (8) | | | $ | 9 | | | $ | 677 | | | $ | (83) | | | $ | (250) | | | $ | (391) | | | $ | 8,123 | | $ | 8,123 | | $ | 9 | |
Market risk benefits asset | 117 | | | | | | | | | | | | | | | | | 106 | | | |
Total Level 3 assets at fair value | $ | 8,286 | | | | | | | | | | | | | | | | | $ | 8,229 | | | |
Liabilities | | | | | | | | | | | | | | | | | | | |
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FIA/ IUL embedded derivatives, included in contractholder funds | 3,115 | | | | | 385 | | | — | | | 96 | | | — | | | (27) | | | — | | | 3,569 | | | — | |
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Subtotal Level 3 liabilities at fair value | $ | 3,115 | | | | | $ | 385 | | | $ | — | | | $ | 96 | | | $ | — | | | $ | (27) | | | $ | — | | | $ | 3,569 | | | $ | — | |
Market risk benefits liability | 282 | | | | | | | | | | | | | | | | | 324 | | | |
Total Level 3 liabilities at fair value | $ | 3,397 | | | | | | | | | | | | | | | | | $ | 3,893 | | | |
(a) The net transfers out of Level 3 during the three months ended March 31, 2023 were exclusively to Level 2.
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| Three months ended March 31, 2022 |
| Balance at Beginning of Period | | Total Gains (Losses) | | Purchases | | Sales | | Settlements | | Net transfer In (Out) of Level 3 (a) | | Balance at End of Period | | Change in Unrealized Gains (Losses) Incl in OCI |
| | Included in Earnings | | Included in AOCI | | | | | | |
Assets | (In millions) |
Fixed maturity securities available-for-sale: | | | | | | | | | | | | | | | | | |
Asset-backed securities | $ | 3,959 | | | $ | — | | | $ | (130) | | | $ | 400 | | | $ | — | | | $ | (152) | | | $ | 84 | | | $ | 4,161 | | | $ | (138) | |
Commercial mortgage-backed securities | 35 | | | — | | | (2) | | | — | | | — | | | — | | | 7 | | | 40 | | | (2) | |
Corporates | 1,135 | | | — | | | (74) | | | 80 | | | — | | | (26) | | | 26 | | | 1,141 | | | (73) | |
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Municipals | 43 | | | — | | | (6) | | | — | | | — | | | — | | | — | | | 37 | | | (5) | |
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Foreign Governments | 18 | | | — | | | (1) | | | — | | | — | | | — | | | — | | | 17 | | | (1) | |
Investment in unconsolidated affiliates | 21 | | | — | | | — | | | — | | | — | | | — | | | — | | | 21 | | | — | |
Short term investments | 321 | | | — | | | (1) | | | 20 | | | — | | | — | | | (321) | | | 19 | | | (1) | |
Preferred securities | 2 | | | — | | | (1) | | | — | | | — | | | — | | | — | | | 1 | | | (1) | |
Equity securities | 9 | | | — | | | — | | | 1 | | | — | | | — | | | — | | | 10 | | | — | |
Other long-term investments: | | | | | | | | | | | | | | | | | |
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Available-for-sale embedded derivative | 34 | | | (4) | | | — | | | — | | | — | | | — | | | — | | | 30 | | | — | |
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Credit linked note | 23 | | | — | | | (3) | | | — | | | — | | | (1) | | | — | | | 19 | | | — | |
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Subtotal Level 3 assets at fair value | $ | 5,600 | | | $ | (4) | | | $ | (218) | | | $ | 501 | | | $ | — | | | $ | (179) | | | $ | (204) | | | $ | 5,496 | | | $ | (221) | |
Market risk benefits asset | 41 | | | | | | | | | | | | | | | 29 | | | |
Total Level 3 assets at fair value | $ | 5,641 | | | | | | | | | | | | | | | $ | 5,525 | | | |
Liabilities | | | | | | | | | | | | | | | | | |
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FIA embedded derivatives, included in contractholder funds | 3,883 | | | (584) | | | — | | | 126 | | | — | | | (30) | | | — | | | 3,395 | | | — | |
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Subtotal Level 3 liabilities at fair value | $ | 3,883 | | | $ | (584) | | | $ | — | | | $ | 126 | | | $ | — | | | $ | (30) | | | $ | — | | | $ | 3,395 | | | $ | — | |
Market risk benefits liability | 469 | | | | | | | | | | | | | | | 486 | | | |
Total Level 3 liabilities at fair value | $ | 4,352 | | | | | | | | | | | | | | | $ | 3,881 | | | |
Valuation Methodologies and Associated Inputs for Financial Instruments Not Carried at Fair Value
The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments not carried at fair value. Considerable judgment is required to develop these assumptions used to measure fair value. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments.
Mortgage Loans
The fair value of mortgage loans is established using a discounted cash flow method based on internal credit rating, maturity and future income. This yield-based approach is sourced from our third-party vendor. The internal ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt service coverage, loan-to-value, quality of tenancy, borrower, and payment record. The inputs used to measure the fair value of our mortgage loans are classified as Level 3 within the fair value hierarchy.
Investments in Unconsolidated affiliates
In our F&G segment, the fair value of Investments in unconsolidated affiliates is primarily determined using NAV as a practical expedient and are included in the NAV column in the table below. In our title segment, Investments in unconsolidated affiliates are accounted for under the equity method of accounting. In our title segment, Investments in unconsolidated affiliates were $220 million and $187 million as of March 31, 2023 and December 31, 2022, respectively.
Policy Loans (included within Other long-term investments)
Fair values for policy loans are estimated from a discounted cash flow analysis, using interest rates currently being offered for loans with similar credit risk. Loans with similar characteristics are aggregated for purposes of the calculations.
Company Owned Life Insurance
Company owned life insurance ("COLI") is a life insurance program used to finance certain employee benefit expenses. The fair value of COLI is based on net realizable value, which is generally cash surrender value. COLI is classified as Level 3 within the fair value hierarchy.
Other Invested Assets (included within Other long-term investments)
The fair value of bank loans is estimated using a discounted cash flow method with the discount rate based on weighted average cost of capital ("WACC"). This yield-based approach is sourced from a third-party vendor and the WACC establishes a market participant discount rate by determining the hypothetical capital structure for the asset should it be underwritten as of each period end. Bank loans are classified as Level 3 within the fair value hierarchy. For cost method investments, our carrying value approximates fair value. Cost method investments are classified as Level 1 within the fair value hierarchy.
Investment Contracts
Investment contracts include deferred annuities (FIAs and fixed rate annuities), indexed IULs, funding agreements, PRTs and immediate annuity contracts without life contingencies. The FIA/ IUL embedded derivatives, included in contractholder funds, are excluded as they are carried at fair value. The fair value of the FIA, fixed rate annuity and IUL contracts is based on their cash surrender value (i.e., cost the Company would incur to extinguish the liability) as these contracts are generally issued without an annuitization date. The fair value of funding agreements, PRTs and immediate annuity contracts without life contingencies is derived by calculating a new fair value interest rate using the updated yield curve and treasury spreads as of the respective reporting date. The Company is not required to, and has not, estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosures of fair value.
Other
Federal Home Loan Bank of Atlanta ("FHLB") common stock, Accounts receivable and Notes receivable are carried at cost, which approximates fair value. FHLB common stock is classified as Level 2 within the fair value hierarchy. Accounts receivable and Notes receivable are classified as Level 3 within the fair value hierarchy.
Debt
The fair value of debt, with the exception of the F&G Credit Agreement, as defined in Note O Notes Payable, is based on quoted market prices. The carrying value of the F&G Credit Agreement approximates fair value as the rates are comparable to those at which we could currently borrow under similar terms. The inputs used to measure the fair value of our outstanding debt are classified as Level 2 within the fair value hierarchy.
The following tables provide the carrying value and estimated fair value of our financial instruments that are carried on the unaudited Condensed Consolidated Balance Sheets at amounts other than fair value, summarized according to the fair value hierarchy previously described.
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| March 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | NAV | | Total Estimated Fair Value | | Carrying Amount |
Assets | (In millions) |
FHLB common stock | $ | — | | | $ | 106 | | | $ | — | | | $ | — | | | $ | 106 | | | $ | 106 | |
Commercial mortgage loans | — | | | — | | | 2,178 | | | — | | | 2,178 | | | 2,458 | |
Residential mortgage loans | — | | | — | | | 2,323 | | | — | | | 2,323 | | | 2,526 | |
Investments in unconsolidated affiliates | — | | | — | | | 4 | | | 2,558 | | | 2,562 | | | 2,562 | |
Policy loans | — | | | — | | | 55 | | | — | | | 55 | | | 55 | |
Other invested assets | 91 | | | — | | | 11 | | | — | | | 102 | | | 102 | |
Company-owned life insurance | — | | | — | | | 381 | | | — | | | 381 | | | 381 | |
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Trade and notes receivables, net of allowance | — | | | — | | | 428 | | | — | | | 428 | | | 428 | |
Total | $ | 91 | | | $ | 106 | | | $ | 5,380 | | | $ | 2,558 | | | $ | 8,135 | | | $ | 8,618 | |
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Liabilities | | | | | | | | | | | |
Investment contracts, included in contractholder funds | $ | — | | | $ | — | | | $ | 36,117 | | | $ | — | | | $ | 36,117 | | | $ | 39,809 | |
Debt | — | | | 3,308 | | | — | | | — | | | 3,308 | | | 3,696 | |
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Total | $ | — | | | $ | 3,308 | | | $ | 36,117 | | | $ | — | | | $ | 39,425 | | | $ | 43,505 | |
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| December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | NAV | | Total Estimated Fair Value | | Carrying Amount |
Assets | (In millions) |
FHLB common stock | $ | — | | | $ | 99 | | | $ | — | | | $ | — | | | $ | 99 | | | $ | 99 | |
Commercial mortgage loans | — | | | — | | | 2,083 | | | — | | | 2,083 | | | 2,406 | |
Residential mortgage loans | — | | | — | | | 1,892 | | | — | | | 1,892 | | | 2,148 | |
Investments in unconsolidated affiliates | — | | | — | | | 5 | | | 2,427 | | | 2,432 | | | 2,432 | |
Policy loans | — | | | — | | | 52 | | | — | | | 52 | | | 52 | |
Other invested assets | 93 | | | — | | | 16 | | | — | | | 109 | | | 109 | |
Company-owned life insurance | — | | | — | | | 363 | | | — | | | 363 | | | 363 | |
Trade and notes receivables, net of allowance | — | | | — | | | 467 | | | — | | | 467 | | | 467 | |
Total | $ | 93 | | | $ | 99 | | | $ | 4,878 | | | $ | 2,427 | | | $ | 7,497 | | | $ | 8,076 | |
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Liabilities | | | | | | | | | | | |
Investment contracts, included in contractholder funds | $ | — | | | $ | — | | | $ | 34,464 | | | $ | — | | | $ | 34,464 | | | $ | 38,412 | |
Debt | — | | | 2,776 | | | — | | | — | | | 2,776 | | | 3,238 | |
Total | $ | — | | | $ | 2,776 | | | $ | 34,464 | | | $ | — | | | $ | 37,240 | | | $ | 41,650 | |
For investments for which NAV is used as a practical expedient for fair value, we do not have any significant restrictions in our ability to liquidate our positions in these investments, other than obtaining general partner approval, nor do we believe it is probable that a price less than NAV would be received in the event of a liquidation.
We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting period in which the changes occur. The transfers into and out of Level 3 were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value.
Note D — Investments
Our fixed maturity securities investments have been designated as AFS, and are carried at fair value, net of allowance for expected credit losses, with unrealized gains and losses included in AOCI, net of deferred income taxes. Our preferred and equity securities investments are carried at fair value with unrealized gains and losses included in net earnings. The Company’s consolidated investments at March 31, 2023 and December 31, 2022 are summarized as follows:
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| March 31, 2023 |
| Amortized Cost | | Allowance for Expected Credit Losses | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | |
Available-for-sale securities | (In millions) | | |
Asset-backed securities | $ | 12,620 | | | $ | (10) | | | $ | 43 | | | $ | (761) | | | $ | 11,892 | | | |
Commercial mortgage-backed securities | 4,048 | | | — | | | 3 | | | (336) | | | 3,715 | | | |
Corporates | 18,426 | | | (3) | | | 64 | | | (2,656) | | | 15,831 | | | |
Hybrids | 853 | | | — | | | 9 | | | (82) | | | 780 | | | |
Municipals | 1,850 | | | — | | | 13 | | | (234) | | | 1,629 | | | |
Residential mortgage-backed securities | 1,770 | | | (7) | | | 13 | | | (107) | | | 1,669 | | | |
U.S. Government | 341 | | | — | | | — | | | (12) | | | 329 | | | |
Foreign Governments | 311 | | | — | | | 1 | | | (47) | | | 265 | | | |
Total available-for-sale securities | $ | 40,219 | | | $ | (20) | | | $ | 146 | | | $ | (4,235) | | | $ | 36,110 | | | |
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| December 31, 2022 |
| Amortized Cost | | Allowance for Expected Credit Losses | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | |
Available-for-sale securities | (In millions) | | |
Asset-backed securities | $ | 12,209 | | | $ | (8) | | | $ | 36 | | | $ | (770) | | | $ | 11,467 | | | |
Commercial mortgage-backed/asset-backed securities | 3,337 | | | (1) | | | 11 | | | (284) | | | 3,063 | | | |
Corporates | 17,396 | | | (22) | | | 32 | | | (3,069) | | | 14,337 | | | |
Hybrids | 806 | | | — | | | 9 | | | (84) | | | 731 | | | |
Municipals | 1,749 | | | — | | | 4 | | | (293) | | | 1,460 | | | |
Residential mortgage-backed securities | 1,638 | | | (8) | | | 6 | | | (109) | | | 1,527 | | | |
U.S. Government | 287 | | | — | | | — | | | (16) | | | 271 | | | |
Foreign Governments | 286 | | | — | | | — | | | (47) | | | 239 | | | |
Total available-for-sale securities | $ | 37,708 | | | $ | (39) | | | $ | 98 | | | $ | (4,672) | | | $ | 33,095 | | | |
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Securities held on deposit with various state regulatory authorities had a fair value of $18,876 million and $17,870 million at March 31, 2023 and December 31, 2022, respectively.
As of March 31, 2023 and December 31, 2022, the Company held no material investments that were non-income producing for a period greater than twelve months.
As of March 31, 2023 and December 31, 2022, the Company's accrued interest receivable balance was $413 million and $365 million, respectively. Accrued interest receivable is classified within Prepaid expenses and other assets within the unaudited Condensed Consolidated Balance Sheets.
In accordance with our FHLB agreements, the investments supporting the funding agreement liabilities are pledged as collateral to secure the FHLB funding agreement liabilities and are not available to us for general purposes. The collateral investments had a fair value of $3,830 million and $3,387 million as of March 31, 2023 and December 31, 2022, respectively.
The amortized cost and fair value of fixed maturity securities by contractual maturities, as applicable, are shown below. Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations.
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| March 31, 2023 | | December 31, 2022 |
| (In millions) | | (In millions) |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Corporates, Non-structured Hybrids, Municipal and Government securities: | | | | | | | |
Due in one year or less | $ | 586 | | | $ | 574 | | | $ | 536 | | | $ | 527 | |
Due after one year through five years | 3,921 | | | 3,745 | | | 3,288 | | | 3,089 | |
Due after five years through ten years | 2,265 | | | 2,079 | | | 2,171 | | | 1,939 | |
Due after ten years | 14,983 | | | 12,410 | | | 14,503 | | | 11,457 | |
Subtotal | 21,755 | | | 18,808 | | | 20,498 | | | 17,012 | |
Other securities, which provide for periodic payments: | | | | | | | |
Asset-backed securities | 12,620 | | | 11,892 | | | 12,209 | | | 11,467 | |
Commercial mortgage-backed securities | 4,048 | | | 3,715 | | | 3,337 | | | 3,063 | |
Structured hybrids | 26 | | | 26 | | | 26 | | | 26 | |
Residential mortgage-backed securities | 1,770 | | | 1,669 | | | 1,638 | | | 1,527 | |
Subtotal | 18,464 | | | 17,302 | | | 17,210 | | | 16,083 | |
Total fixed maturity available-for-sale securities | $ | 40,219 | | | $ | 36,110 | | | $ | 37,708 | | | $ | 33,095 | |
Allowance for Expected Credit Loss
We regularly review AFS securities for declines in fair value that we determine to be credit related. For our fixed maturity securities, we generally consider the following in determining whether our unrealized losses are credit related, and if so, the magnitude of the credit loss:
•The extent to which the fair value is less than the amortized cost basis;
•The reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening);
•The financial condition of and near-term prospects of the issuer (including issuer's current credit rating and the probability of full recovery of principal based upon the issuer's financial strength);
•Current delinquencies and nonperforming assets of underlying collateral;
•Expected future default rates;
•Collateral value by vintage, geographic region, industry concentration or property type;
•Subordination levels or other credit enhancements as of the balance sheet date as compared to origination; and
•Contractual and regulatory cash obligations and the issuer's plans to meet such obligations.
We recognize an allowance for current expected credit losses on fixed maturity securities in an unrealized loss position when it is determined, using the factors discussed above, a component of the unrealized loss is related to credit. We measure the credit loss using a discounted cash flow model that utilizes the single best estimate cash flow and the recognized credit loss is limited to the total unrealized loss on the security (i.e. the fair value floor). Cash flows are discounted using the implicit yield of bonds at their time of purchase and the current book yield for asset and mortgage backed securities as well as variable rate securities. We recognize the expected credit losses in Recognized gains and losses, net in the unaudited Condensed Consolidated Statements of Operations, with an offset for the amount of non-credit impairments recognized in AOCI. We do not measure a credit loss allowance on accrued investment income as we write-off accrued interest through Interest and investment income when collectability concerns arise.
We consider the following in determining whether write-offs of a security’s amortized cost is necessary:
• We believe amounts related to securities have become uncollectible;
• We intend to sell a security; or
• It is more likely than not that we will be required to sell a security prior to recovery.
If we intend to sell a fixed maturity security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, we will write down the security to current fair value, with a corresponding charge, net of any amount previously recognized as an allowance for expected credit loss, to Recognized gains and losses, net in the accompanying unaudited Condensed Consolidated Statements of Operations. If we do not intend to sell a fixed maturity security or it is more likely than not that we will not be required to sell a fixed maturity security before recovery of its amortized cost basis but believe amounts related to a security are uncollectible (generally based on proximity to expected credit loss), an impairment is deemed to have occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge, net of any amount previously recognized as an allowance for expected credit loss, to Recognized gains and losses, net in the accompanying unaudited Condensed Consolidated Statements of Operations. The remainder of unrealized loss is held in AOCI. As of March 31, 2023 and December 31, 2022, our allowance for expected credit losses for AFS securities was $20 million and $39 million, respectively.
Purchased credit deteriorated ("PCD") financial assets are AFS securities purchased at a discount, where part of that discount is attributable to credit. Credit loss allowances are calculated for these securities as of the date of their acquisition, with the initial allowance serving to increase amortized cost. There were no purchases of PCD AFS securities during the three months ended March 31, 2023 or 2022.
The fair value and gross unrealized losses of AFS securities, excluding securities in an unrealized loss position with an allowance for expected credit loss, aggregated by investment category and duration of fair value below amortized cost as of March 31, 2023 and December 31, 2022 were as follows:
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| March 31, 2023 |
| Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Available-for-sale securities | (In millions) |
Asset-backed securities | $ | 5,347 | | | $ | (307) | | | $ | 4,520 | | | $ | (448) | | | $ | 9,867 | | | $ | (755) | |
Commercial mortgage-backed securities | 2,249 | | | (122) | | | 1,236 | | | (214) | | | 3,485 | | | (336) | |
Corporates | 5,501 | | | (392) | | | 8,553 | | | (2,263) | | | 14,054 | | | (2,655) | |
Hybrids | 346 | | | (29) | | | 321 | | | (53) | | | 667 | | | (82) | |
Municipals | 483 | | | (37) | | | 907 | | | (196) | | | 1,390 | | | (233) | |
Residential mortgage-backed securities | 708 | | | (22) | | | 540 | | | (81) | | | 1,248 | | | (103) | |
U.S. Government | 29 | | | — | | | 206 | | | (11) | | | 235 | | | (11) | |
Foreign Government | 23 | | | (2) | | | 183 | | | (44) | | | 206 | | | (46) | |
Total available-for-sale securities | $ | 14,686 | | | $ | (911) | | | $ | 16,466 | | | $ | (3,310) | | | $ | 31,152 | | | $ | (4,221) | |
Total number of available-for-sale securities in an unrealized loss position less than twelve months | | | | | | | | | | | 2,402 | |
Total number of available-for-sale securities in an unrealized loss position twelve months or longer | | | | | | | | | | | 2,270 |
Total number of available-for-sale securities in an unrealized loss position | | | | | | | | | | | 4,672 | |
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| December 31, 2022 |
| Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Available-for-sale securities | (In millions) |
Asset-backed securities | $ | 7,001 | | | $ | (410) | | | $ | 3,727 | | | $ | (360) | | | $ | 10,728 | | | $ | (770) | |
Commercial mortgage-backed securities | 2,079 | | | (169) | | | 475 | | | (116) | | | 2,554 | | | (285) | |
Corporates | 9,913 | | | (1,735) | | | 3,523 | | | (1,330) | | | 13,436 | | | (3,065) | |
Hybrids | 628 | | | (83) | | | 3 | | | (1) | | | 631 | | | (84) | |
Municipals | 998 | | | (180) | | | 352 | | | (113) | | | 1,350 | | | (293) | |
Residential mortgage-backed securities | 992 | | | (51) | | | 184 | | | (22) | | | 1,176 | | | (73) | |
U.S. Government | 130 | | | (7) | | | 140 | | | (8) | | | 270 | | | (15) | |
Foreign Government | 119 | | | (32) | | | 59 | | | (14) | | | 178 | | | (46) | |
Total available-for-sale securities | $ | 21,860 | | | $ | (2,667) | | | $ | 8,463 | | | $ | (1,964) | | | $ | 30,323 | | | $ | (4,631) | |
Total number of available-for-sale securities in an unrealized loss position less than twelve months | | | | | | | | | | | 3,114 |
Total number of available-for-sale securities in an unrealized loss position twelve months or longer | | | | | | | | | | | 1,296 |
Total number of available-for-sale securities in an unrealized loss position | | | | | | | | | | | 4,410 | |
We determined the decrease in unrealized losses as of March 31, 2023, compared to December 31, 2022, was caused by lower treasury rates as well as spread compression. For securities in an unrealized loss position as of March 31, 2023, our allowance for expected credit loss was $20 million. We believe the unrealized loss position for which we have not recorded an allowance for expected credit loss as of March 31, 2023 was primarily attributable to interest rate increases, near-term illiquidity, and other macroeconomic uncertainties as opposed to issuer specific credit concerns.
Mortgage Loans
Our mortgage loans are collateralized by commercial and residential properties.
Commercial Mortgage Loans
Commercial mortgage loans (“CMLs”) represented approximately 6% of our total investments March 31, 2023 and December 31, 2022. The mortgage loans in our investment portfolio, are generally comprised of high quality commercial first lien and mezzanine real estate loans. Mortgage loans are primarily on income producing properties including industrial properties, retail buildings, multifamily properties and office buildings. We diversify our CML portfolio by geographic region and property type to attempt to reduce concentration risk. We continuously evaluate CMLs based on relevant current information to ensure properties are performing at a consistent and acceptable level to secure the related debt. The distribution of CMLs, gross of valuation allowances, by property type and geographic region is reflected in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Gross Carrying Value | | % of Total | | Gross Carrying Value | | % of Total |
Property Type: | (Dollars in millions) | | (Dollars in millions) |
| | | | | | | |
| | | | | | | |
Hotel | $ | 18 | | | 1 | % | | $ | 18 | | | 1 | % |
Industrial | 538 | | | 22 | % | | 520 | | | 22 | % |
Mixed Use | 12 | | | 1 | % | | 12 | | | 1 | % |
Multifamily | 1,013 | | | 41 | % | | 1,013 | | | 42 | % |
Office | 329 | | | 13 | % | | 330 | | | 14 | % |
Retail | 104 | | | 4 | % | | 105 | | | 4 | % |
Student Housing | 83 | | | 3 | % | | 83 | | | 3 | % |
Other | 373 | | | 15 | % | | 335 | | | 13 | % |
Total commercial mortgage loans, gross of valuation allowance | $ | 2,470 | | | 100 | % | | $ | 2,416 | | | 100 | % |
Allowance for expected credit loss | (12) | | | | | (10) | | | |
Total commercial mortgage loans, net of valuation allowance | $ | 2,458 | | | | | $ | 2,406 | | | |
| | | | | | | |
U.S. Region: | | | | | | | |
East North Central | $ | 177 | | | 7 | % | | $ | 151 | | | 6 | % |
East South Central | 76 | | | 3 | % | | 76 | | | 3 | % |
Middle Atlantic | 325 | | | 13 | % | | 326 | | | 13 | % |
Mountain | 354 | | | 14 | % | | 355 | | | 15 | % |
New England | 164 | | | 7 | % | | 158 | | | 7 | % |
Pacific | 700 | | | 28 | % | | 708 | | | 28 | % |
South Atlantic | 553 | | | 22 | % | | 521 | | | 22 | % |
West North Central | 4 | | | 1 | % | | 4 | | | 1 | % |
West South Central | 117 | | | 5 | % | | 117 | | | 5 | % |
| | | | | | | |
Total commercial mortgage loans, gross of valuation allowance | $ | 2,470 | | | 100 | % | | $ | 2,416 | | | 100 | % |
Allowance for expected credit loss | (12) | | | | | (10) | | | |
Total commercial mortgage loans, net of valuation allowance | $ | 2,458 | | | | | $ | 2,406 | | | |
Commercial mortgage loans segregated by risk rating exposure as of March 31, 2023 and December 31, 2022, were as follows, gross of valuation allowances:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| |
| Amortized Cost by Origination Year |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Total |
Commercial mortgages | (In millions) |
Current (less than 30 days past due) | $ | 53 | | | $ | 354 | | | $ | 1,301 | | | $ | 486 | | | $ | — | | | $ | 267 | | | $ | 2,461 | |
30-89 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
90 days or more past due | — | | | — | | | — | | | — | | | — | | | 9 | | | 9 | |
Total commercial mortgages | $ | 53 | | | $ | 354 | | | $ | 1301 | | | $ | 486 | | | $ | — | | | $ | 276 | | | $ | 2,470 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| |
| Amortized Cost by Origination Year |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
Commercial mortgages | (In millions) |
Current (less than 30 days past due) | $ | 350 | | | $ | 1,300 | | | $ | 488 | | | $ | — | | | $ | — | | | $ | 269 | | | $ | 2,407 | |
30-89 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
90 days or more past due | — | | | — | | | — | | | — | | | — | | | 9 | | | 9 | |
Total commercial mortgages | $ | 350 | | | $ | 1,300 | | | $ | 488 | | | $ | — | | | $ | — | | | $ | 278 | | | $ | 2,416 | |
Loan-to-value (“LTV”) and debt service coverage (“DSC”) ratios are measures commonly used to assess the risk and quality of mortgage loans. The LTV ratio is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. The DSC ratio, based upon the most recently received financial statements, is expressed as a percentage of the amount of a property’s net income to its debt service payments. A DSC ratio of less than 1.00 indicates that a property’s operations do not generate sufficient income to cover debt payments. We normalize our DSC ratios to a 25 year amortization period for purposes of our general loan allowance evaluation.
The following tables present the recorded investment in CMLs by LTV and DSC ratio categories and estimated fair value by the indicated loan-to-value ratios, gross of valuation allowances at March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt-Service Coverage Ratios | | Total Amount | | % of Total | | Estimated Fair Value | | % of Total |
| >1.25 | | 1.00 - 1.25 | | <1.00 | | | | | | |
March 31, 2023 | (In millions) |
LTV Ratios: | | | | | | | | | | | | | | | |
Less than 50.00% | $ | 511 | | | $ | 4 | | | $ | 11 | | | | | $ | 526 | | | 21 | % | | $ | 493 | | | 23 | % |
50.00% to 59.99% | 732 | | | — | | | — | | | | | 732 | | | 30 | % | | 653 | | | 30 | % |
60.00% to 74.99% | 1,170 | | | 8 | | | — | | | | | 1,178 | | | 48 | % | | 1,002 | | | 46 | % |
75.00% to 84.99% | — | | | 2 | | | 18 | | | | | 20 | | | 1 | % | | 17 | | | 1 | % |
Commercial mortgage loans (a) | $ | 2,413 | | | $ | 14 | | | $ | 29 | | | | | $ | 2,456 | | | 100 | % | | $ | 2,165 | | | 100 | % |
| | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | | | | |
LTV Ratios: | | | | | | | | | | | | | | | |
Less than 50.00% | $ | 511 | | | $ | 4 | | | $ | 11 | | | | | $ | 526 | | | 22 | % | | $ | 490 | | | 24 | % |
50.00% to 59.99% | 706 | | | — | | | — | | | | | 706 | | | 29 | % | | 615 | | | 30 | % |
60.00% to 74.99% | 1,154 | | | 3 | | | — | | | | | 1,157 | | | 48 | % | | 955 | | | 45 | % |
75.00% to 84.99% | — | | | — | | | 18 | | | | | 18 | | | 1 | % | | 14 | | | 1 | % |
Commercial mortgage loans (a) | $ | 2,371 | | | $ | 7 | | | $ | 29 | | | | | $ | 2,407 | | | 100 | % | | $ | 2,074 | | | 100 | % |
(a) Excludes loans under development with an amortized cost and estimated fair value of $9 million for March 31, 2023 and an amortized cost and estimated fair value of $9 million for December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| |
| Amortized Cost by Origination Year |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Total |
Commercial mortgages | (In millions) |
LTV | | | | | | | | | | | | | |
Less than 50.00% | $ | 4 | | | $ | 69 | | | $ | 120 | | | $ | 206 | | | | | $ | 127 | | | $ | 526 | |
50.00% to 59.99% | 27 | | | 149 | | | 268 | | | 158 | | | | | 130 | | | 732 | |
60.00% to 74.99% | 20 | | | 113 | | | 913 | | | 122 | | | | | 10 | | | 1,178 | |
75.00% to 84.99% | 3 | | | 9 | | | — | | | — | | | | | 8 | | | 20 | |
Total commercial mortgages (a) | $ | 54 | | | $ | 340 | | | $ | 1301 | | | $ | 486 | | | $ | — | | | $ | 275 | | | $ | 2,456 | |
Commercial mortgages | | | | | | | | | | | | | |
DSCR | | | | | | | | | | | | | |
Greater than 1.25x | $ | 47 | | | $ | 328 | | | $ | 1,301 | | | $ | 486 | | | | | $ | 251 | | | $ | 2,413 | |
1.00x - 1.25x | 7 | | | 3 | | | — | | | — | | | | | 4 | | | 14 | |
Less than 1.00x | — | | | 9 | | | — | | | — | | | | | 20 | | | 29 | |
Total commercial mortgages (a) | $ | 54 | | | $ | 340 | | | $ | 1301 | | | $ | 486 | | | $ | — | | | $ | 275 | | | $ | 2,456 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| |
| Amortized Cost by Origination Year |
| 2022 | | 2021 | | 2020 | | 2019 | | 2017 | | Prior | | Total |
Commercial mortgages | (In millions) |
LTV | | | | | | | | | | | | | |
Less than 50.00% | $ | 70 | | | $ | 120 | | | $ | 207 | | | $ | — | | | $ | — | | | $ | 129 | | | $ | 526 | |
50.00% to 59.99% | 149 | | | 268 | | | 158 | | | — | | | — | | | 131 | | | 706 | |
60.00% to 74.99% | 113 | | | 912 | | | 123 | | | — | | | — | | | 9 | | | 1,157 | |
75.00% to 84.99% | 9 | | | — | | | — | | | — | | | — | | | 9 | | | 18 | |
Total commercial mortgages (a) | $ | 341 | | | $ | 1,300 | | | $ | 488 | | | $ | — | | | $ | — | | | $ | 278 | | | $ | 2,407 | |
Commercial mortgages | | | | | | | | | | | | | |
DSCR | | | | | | | | | | | | | |
Greater than 1.25x | $ | 329 | | | $ | 1,300 | | | $ | 488 | | | $ | — | | | $ | — | | | $ | 254 | | | $ | 2,371 | |
1.00x - 1.25x | 3 | | | — | | | — | | | — | | | — | | | 4 | | | 7 | |
Less than 1.00x | 9 | | | — | | | — | | | — | | | — | | | 20 | | | 29 | |
Total commercial mortgages (a) | $ | 341 | | | $ | 1,300 | | | $ | 488 | | | $ | — | | | $ | — | | | $ | 278 | | | $ | 2,407 | |
(a) Excludes loans under development with an amortized cost and estimated fair value of $9 million for March 31, 2023 and an amortized cost and estimated fair value of $9 million for December 31, 2022.
We recognize a mortgage loan as delinquent when payments on the loan are greater than 30 days past due. At March 31, 2023 and December 31, 2022, we had one CML that was delinquent in principal or interest payments as shown in the risk rating exposure table above.
Residential Mortgage Loans
Residential mortgage loans (“RMLs”) represented approximately 6% and 5% of our total investments as of March 31, 2023 and December 31, 2022, respectively. Our RMLs are closed end, amortizing loans and 100% of the properties are located in the United States. We diversify our RML portfolio by state to attempt to reduce concentration risk. The distribution of RMLs by state with highest-to-lowest concentration are reflected in the following tables, gross of valuation allowances:
| | | | | | | | | | | |
| March 31, 2023 |
| (Dollars in millions) |
U.S. State: | Amortized Cost | | % of Total |
Florida | $ | 236 | | | 9 | % |
Texas | 181 | | | 7 | % |
New Jersey | 167 | | | 6 | % |
California | 157 | | | 6 | % |
New York | 155 | | | 6 | % |
All other states (a) | 1,678 | | | 66 | % |
Total residential mortgage loans | $ | 2,574 | | | 100 | % |
(a)The individual concentration of each state is equal to or less than 5% as of March 31, 2023.
| | | | | | | | | | | |
| December 31, 2022 |
| (Dollars in millions) |
U.S. State: | Amortized Cost | | % of Total |
Florida | $ | 324 | | | 15 | % |
Texas | 215 | | | 10 | % |
New Jersey | 172 | | | 8 | % |
Pennsylvania | 153 | | | 7 | % |
California | 139 | | | 6 | % |
New York | 138 | | | 6 | % |
Georgia | 125 | | | 6 | % |
All other states (a) | 914 | | | 42 | % |
Total residential mortgage loans | $ | 2,180 | | | 100 | % |
(a)The individual concentration of each state is equal to or less than 5% as of December 31, 2022.
RMLs have a primary credit quality indicator of either a performing or nonperforming loan. We define non-performing RMLs as those that are 90 or more days past due or in non-accrual status, which is assessed monthly. The credit quality of RMLs as of March 31, 2023 and December 31, 2022, was as follows :
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (Dollars in millions) | | (Dollars in millions) |
Performance indicators: | Amortized Cost | | % of Total | | Amortized Cost | | % of Total |
Performing | $ | 2,511 | | | 98 | % | | $ | 2,118 | | | 97 | % |
Non-performing | 63 | | | 2 | % | | 62 | | | 3 | % |
Total residential mortgage loans, gross of valuation allowance | $ | 2,574 | | | 100 | % | | $ | 2,180 | | | 100 | % |
Allowance for expected loan loss | (48) | | | — | % | | (32) | | | — | % |
Total residential mortgage loans, net of valuation allowance | $ | 2,526 | | | 100 | % | | $ | 2,148 | | | 100 | % |
RMLs segregated by risk rating exposure as of March 31, 2023 and December 31, 2022, were as follows, gross of valuation allowances:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| |
| Amortized Cost by Origination Year |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Total |
Residential mortgages | (In millions) |
Current (less than 30 days past due) | $ | 35 | | | $ | 950 | | | $ | 889 | | | $ | 209 | | | $ | 199 | | | $ | 209 | | | $ | 2,491 | |
30-89 days past due | — | | | 3 | | | 8 | | | 3 | | | 4 | | | 2 | | | 20 | |
90 days or more past due | — | | | 3 | | | 18 | | | 13 | | | 28 | | | 1 | | | 63 | |
Total residential mortgages | $ | 35 | | | $ | 956 | | | $ | 915 | | | $ | 225 | | | $ | 231 | | | $ | 212 | | | $ | 2,574 | |
| | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| |
| Amortized Cost by Origination Year |
| (In millions) |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
Residential mortgages | (In millions) |
Current (less than 30 days past due) | $ | 766 | | | $ | 884 | | | $ | 214 | | | $ | 185 | | | $ | 23 | | | $ | 33 | | | $ | 2,105 | |
30-89 days past due | 2 | | | 7 | | | — | | | 4 | | | — | | | — | | | 13 | |
90 days or more past due | 3 | | | 9 | | | 15 | | | 34 | | | 1 | | | — | | | 62 | |
Total residential mortgages | $ | 771 | | | $ | 900 | | | $ | 229 | | | $ | 223 | | | $ | 24 | | | $ | 33 | | | $ | 2,180 | |
| | | | | | | | | | | | | |
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| | | | | | | | | | | | | |
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| | | | | | | | | | | | | |
Non-accrual loans by amortized cost as of March 31, 2023 and December 31, 2022, were as follows: | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Amortized cost of loans on non-accrual | (In millions) |
Residential mortgage: | $ | 63 | | | $ | 62 | |
Commercial mortgage: | 9 | | | 9 | |
Total non-accrual mortgages | $ | 72 | | | $ | 71 | |
Immaterial interest income was recognized on non-accrual financing receivables for the three months ended March 31, 2023 and March 31, 2022.It is our policy to cease to accrue interest on loans that are delinquent for 90 days or more. 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 90 days or more delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. As of March 31, 2023 and December 31, 2022, we had $72 million and $71 million, respectively, of RMLs that were over 90 days past due, of which $32 million and $38 million were in the process of foreclosure as of March 31, 2023 and December 31, 2022, respectively.
Allowance for Expected Credit Loss
We estimate expected credit losses for our commercial and residential mortgage loan portfolios using a probability of default/loss given default model. Significant inputs to this model include, where applicable, the loans' current performance, underlying collateral type, location, contractual life, LTV, DSC and Debt to Income or FICO. The model projects losses using a two year reasonable and supportable forecast and then reverts over a three year period to market-wide historical loss experience. Changes in our allowance for expected credit losses on mortgage loans are recognized in Recognized gains and losses, net in the accompanying unaudited Condensed Consolidated Statements of Earnings.
The allowances for our mortgage loan portfolio are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, 2023 | | |
| | | | | | | (In millions) | | | | | | |
| | | | | |
| | | | | | | Residential Mortgage | | Commercial Mortgage | | Total | | | | | | |
Beginning Balance | | | | | | | $ | 32 | | | $ | 10 | | | $ | 42 | | | | | | | |
Provision for loan losses | | | | | | | 16 | | | 2 | | | 18 | | | | | | | |
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Ending Balance | | | | | | | $ | 48 | | | $ | 12 | | | $ | 60 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, 2022 | | |
| | | | | | | (In millions) | | | | | | |
| | | | | |
| | | | | | | Residential Mortgage | | Commercial Mortgage | | Total | | | | | | |
Beginning Balance | | | | | | | $ | 25 | | | $ | 6 | | | $ | 31 | | | | | | | |
Provision for loan losses | | | | | | | 1 | | | — | | | 1 | | | | | | | |
| | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | |
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Ending Balance | | | | | | | $ | 26 | | | $ | 6 | | | $ | 32 | | | | | | | |
An allowance for expected credit loss is not measured on accrued interest income for CMLs as we have a process to write-off interest on loans that enter into non-accrual status (90 days or more past due). Allowances for expected credit losses are measured on accrued interest income for RMLs and were immaterial as of March 31, 2023 and March 31, 2022.
Interest and Investment Income
The major sources of Interest and investment income reported on the accompanying unaudited Condensed Consolidated Statements of Operations were as follows:
| | | | | | | | | | | | | | | |
| Three months ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
| (In millions) | | | | |
Fixed maturity securities, available-for-sale | $ | 447 | | | $ | 332 | | | | | |
Equity securities | 8 | | | 8 | | | | | |
Preferred securities | 13 | | | 15 | | | | | |
Mortgage loans | 51 | | | 39 | | | | | |
| | | | | | | |
Invested cash and short-term investments | 33 | | | 5 | | | | | |
| | | | | | | |
Limited partnerships | 57 | | | 113 | | | | | |
Tax deferred property exchange income | 45 | | | 3 | | | | | |
Other investments | 19 | | | 9 | | | | | |
Gross investment income | 673 | | | 524 | | | | | |
Investment expense | (62) | | | (46) | | | | | |
Interest and investment income | $ | 611 | | | $ | 478 | | | | | |
Recognized Gains and Losses, net
Details underlying Recognized gains and losses, net reported on the accompanying unaudited Condensed Consolidated Statements of Operations were as follows:
| | | | | | | | | | | | | | | |
| Three months ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
| (In millions) | | | | |
Net realized losses on fixed maturity available-for-sale securities | $ | (50) | | | $ | (36) | | | | | |
Net realized/unrealized gains (losses) on equity securities (1) | 33 | | | (148) | | | | | |
Net realized/unrealized losses on preferred securities (2) | (10) | | | (91) | | | | | |
Realized losses on other invested assets | (5) | | | (1) | | | | | |
Change in allowance for expected credit losses | (4) | | | (4) | | | | | |
Derivatives and embedded derivatives: | | | | | | | |
Realized (losses) gains on certain derivative instruments | (89) | | | 50 | | | | | |
Unrealized gains (losses) on certain derivative instruments | 147 | | | (358) | | | | | |
Change in fair value of reinsurance related embedded derivatives (3) | (19) | | | 122 | | | | | |
Change in fair value of other derivatives and embedded derivatives | 2 | | | (3) | | | | | |
Realized gains (losses) on derivatives and embedded derivatives | 41 | | | (189) | | | | | |
Recognized gains and losses, net | $ | 5 | | | $ | (469) | | | | | |
(1) Includes net valuation losses of $46 million and $166 million for the three months ended March 31, 2023 and 2022, respectively.
(2) Includes net valuation losses of $35 million and $90 million for the three months ended March 31, 2023 and 2022, respectively.
(3) Change in fair value of reinsurance related embedded derivatives is due to activity related to the reinsurance treaties with Kubera (novated from Kubera to Somerset effective October 31, 2021) and Aspida Re.
Recognized gains and losses, net is shown net of amounts attributable to certain funds withheld reinsurance agreements which is passed along to the reinsurer in accordance with the terms of these agreements. Recognized (losses) gains attributable to these agreements, and thus excluded from the totals in the table above, was $(22) million and $128 million for the three months ended March 31, 2023 and March 31, 2022, respectively.
The proceeds from the sale of fixed-maturity securities and the gross gains and losses associated with those transactions were as follows:
| | | | | | | | | | | | | | | |
| Three months ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
| (In millions) | | | | |
Proceeds | $ | 489 | | | $ | 1,052 | | | | | |
Gross gains | 1 | | | 3 | | | | | |
Gross losses | (51) | | | (39) | | | | | |
Unconsolidated Variable Interest Entities
We own investments in variable interest entities ("VIEs") that are not consolidated within our financial statements. A VIE is an entity that does not have sufficient equity to finance its own activities without additional financial support, where investors lack certain characteristics of a controlling financial interest, or where the entity is structured with non-substantive voting rights. VIEs are consolidated by their ‘primary beneficiary’, a designation given to an entity that receives both the benefits from the VIE as well as the substantive power to make its key economic decisions. While we participate in the benefits from VIEs in which we invest, but do not consolidate, the substantive power to make the key economic decisions for each respective VIE resides with entities not under our common control. It is for this reason that we are not considered the primary beneficiary for the VIE investments that are not consolidated.
We invest in various limited partnerships and limited liability companies primarily as a passive investor. These investments are primarily in credit funds with a bias towards current income, real assets, or private equity. Limited partnership and limited liability company interests are accounted for under the equity method and are included in Investments in unconsolidated affiliates on our unaudited Condensed Consolidated Balance Sheets. In addition, we invest in structured investments, which may be VIEs, but for which we are not the
primary beneficiary. These structured investments typically invest in fixed income investments and are managed by third parties and include asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities included in Fixed maturity securities available for sale on our unaudited Condensed Consolidated Balance Sheets.
Our maximum exposure to loss with respect to these VIEs is limited to the investment carrying amounts reported in our unaudited Condensed Consolidated Balance Sheets for limited partnerships and the amortized costs of our fixed maturity securities, in addition to any required unfunded commitments (also refer to Note F Commitments and Contingencies).
The following table summarizes the carrying value and the maximum loss exposure of our unconsolidated VIEs as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (In millions) | | (In millions) |
| Carrying Value | | Maximum Loss Exposure | | Carrying Value | | Maximum Loss Exposure |
Investment in limited partnerships | $ | 2,558 | | | $ | 4,268 | | | $ | 2,427 | | | $ | 4,030 | |
Fixed maturity securities | 16,890 | | | 18,590 | | | 15,680 | | | 17,404 | |
Total unconsolidated VIE investments | $ | 19,448 | | | $ | 22,858 | | | $ | 18,107 | | | $ | 21,434 | |
Concentrations
Our underlying investment concentrations that exceed 10% of shareholders equity are as follows:
| | | | | | | |
| March 31, 2023 | | |
| (In millions) | | |
Blackstone Wave Asset Holdco (1) | $ | 760 | | | |
| | | |
(1) Represents a special purpose vehicle that holds investments in numerous limited partnership investments whose underlying investments are further diversified by holding interest in multiple individual investments and industries. | | |
Note E — Derivative Financial Instruments
The carrying amounts of derivative instruments, including derivative instruments embedded in FIA/IUL contracts, and reinsurance is as follows:
| | | | | | | | | | | | | |
| March 31, 2023 | | | | December 31, 2022 |
Assets: | (In millions) |
Derivative investments: | | | | | |
Call options | $ | 432 | | | | | $ | 244 | |
| | | | | |
| | | | | |
Other long-term investments: | | | | | |
Other embedded derivatives | 25 | | | | | 23 | |
Prepaid expenses and other assets: | | | | | |
Reinsurance related embedded derivatives | 260 | | | | | 279 | |
| $ | 717 | | | | | $ | 546 | |
| | | | | | | | | | | | | |
Liabilities: | | | | | |
Contractholder funds: | | | | | |
FIA/ IUL embedded derivatives | $ | 3,569 | | | $ | 3,115 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| $ | 3,569 | | | $ | 3,115 | | | |
The change in fair value of derivative instruments in the accompanying unaudited Condensed Consolidated Statements of Operations is as follows:
| | | | | | | | | | | | | | | | | |
| | | Three months ended |
| | | | | March 31, 2023 | | March 31, 2022 |
Recognized gains and losses, net | | | | | (In millions) |
Net investment gains (losses): | | | | | | | |
Call options | | | | | $ | 55 | | | $ | (314) | |
Futures contracts | | | | | 5 | | | 3 | |
Foreign currency forwards | | | | | (1) | | | 3 | |
Other derivatives and embedded derivatives | | | | | 1 | | | (3) | |
Reinsurance related embedded derivatives | | | | | (19) | | | 122 | |
Total net investment gains (losses) | | | | | $ | 41 | | | $ | (189) | |
| | | | | | | |
Benefits and other changes in policy reserves: | | | | | | | |
FIA/ IUL embedded derivatives (decrease) increase | | | | | $ | 454 | | | $ | (488) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Additional Disclosures
FIA/IUL Embedded Derivative, Call Options and Futures
We have FIA and IUL contracts that permit the holder to elect an interest rate return or an equity index linked component, where interest credited to the contracts is linked to the performance of various equity indices, primarily the S&P 500 Index. This feature represents an embedded derivative under GAAP. The FIA/IUL embedded derivatives are valued at fair value and included in the liability for Contractholder funds in the accompanying unaudited Condensed Consolidated Balance Sheets with changes in fair value included as a component of Benefits and other changes in policy reserves in the unaudited Condensed Consolidated Statements of Operations. See a description of the fair value methodology used in Note C Fair Value of Financial Instruments.
We purchase derivatives consisting of a combination of call options and futures contracts (specifically for FIA contracts) on the applicable market indices to fund the index credits due to FIA/IUL contractholders. The call options are one, two, three, and five year options purchased to match the funding requirements of the underlying policies. On the respective anniversary dates of the indexed policies, the index used to compute the interest credit is reset and we purchase new call options to fund the next index credit. We manage the cost of these purchases through the terms of our FIA/IUL contracts, which permit us to change caps, spreads or participation rates, subject to guaranteed minimums, on each contract’s anniversary date. The change in the fair
value of the call options and futures contracts is generally designed to offset the portion of the change in the fair value of the FIA/IUL embedded derivatives related to index performance through the current credit period. The call options and futures contracts are marked to fair value with the change in fair value included as a component of Recognized gains and losses, net, in the accompanying unaudited Condensed Consolidated Statements of Operations. The change in fair value of the call options and futures contracts includes the gains and losses recognized at the expiration of the instrument term or upon early termination and the changes in fair value of open positions.
Other market exposures are hedged periodically depending on market conditions and our risk tolerance. Our FIA/IUL hedging strategy economically hedges the equity returns and exposes us to the risk that unhedged market exposures result in divergence between changes in the fair value of the liabilities and the hedging assets. We use a variety of techniques, including direct estimation of market sensitivities, to monitor this risk daily. We intend to continue to adjust the hedging strategy as market conditions and our risk tolerance changes.
Reinsurance Related Embedded Derivatives
F&G entered into a reinsurance agreement with Kubera effective December 31, 2018, to cede certain fixed rate and deferred annuity business, including MYGA, on a coinsurance funds withheld basis, net of applicable existing reinsurance. Effective October 31, 2021, this agreement was novated from Kubera to Somerset, a certified third-party reinsurer. Additionally, F&G entered into a reinsurance agreement with Aspida Re effective January 1, 2021, and amended in August 2021 and September 2022, to cede a quota share of MYGA business on a coinsurance funds withheld basis. Fair value movements in the funds withheld balances associated with these arrangements creates an obligation for F&G to pay Somerset and Aspida Re at a later date, which results in embedded derivatives. These embedded derivatives are considered total return swaps with contractual returns that are attributable to the assets and liabilities associated with the reinsurance arrangements. The fair value of the total return swap is based on the change in fair value of the underlying assets held in the funds withheld portfolio. Investment results for the assets that support the coinsurance with funds withheld reinsurance arrangements, including gains and losses from sales, were passed directly to the reinsurers pursuant to contractual terms of the reinsurance arrangements. The reinsurance related embedded derivatives are reported in Prepaid expenses and other assets if in a net gain position, or Accounts payable and accrued liabilities, if in a net loss position, on the unaudited Condensed Consolidated Balance Sheets and the related gains or losses are reported in Recognized gains and losses, net on the unaudited Condensed Consolidated Statements of Operations.
Credit Risk
We are exposed to credit loss in the event of non-performance by our counterparties on the call options and reflect assumptions regarding this non-performance risk in the fair value of the call options. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts less collateral held. We maintain a policy of requiring all derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement.
Information regarding our exposure to credit loss on the call options we hold is presented in the following tables.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2023 |
| | | (In millions) |
Counterparty | Credit Rating (Fitch/Moody's/S&P) (1) | | Notional Amount | | Fair Value | | Collateral | | Net Credit Risk |
Merrill Lynch | AA/*/A+ | | $ | 3,834 | | | $ | 44 | | | $ | — | | | $ | 44 | |
| | | | | | | | | |
Morgan Stanley | */Aa3/A+ | | 2,038 | | | 22 | | | 24 | | | — | |
Barclay's Bank | A+/A1/A | | 5,939 | | | 106 | | | 95 | | | 11 | |
Canadian Imperial Bank of Commerce | AA/Aa2/A+ | | 6,006 | | | 129 | | | 113 | | | 16 | |
Wells Fargo | A+/A1/BBB+ | | 1,270 | | | 31 | | | 29 | | | 2 | |
Goldman Sachs | A/A2/BBB+ | | 1,178 | | | 16 | | | 14 | | | 2 | |
Credit Suisse | BBB+/A3/A- | | 672 | | | 7 | | | 7 | | | — | |
Truist | A+/A2/A | | 2,204 | | | 60 | | | 54 | | | 6 | |
Citibank | A+/Aa3/A+ | | 1,207 | | | 17 | | | 15 | | | 2 | |
Total | | | $ | 24,348 | | | $ | 432 | | | $ | 351 | | | $ | 83 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| | | (In millions) |
Counterparty | Credit Rating (Fitch/Moody's/S&P) (1) | | Notional Amount | | Fair Value | | Collateral | | Net Credit Risk |
Merrill Lynch | AA/*/A+ | | $ | 3,563 | | | $ | 23 | | | $ | — | | | $ | 23 | |
| | | | | | | | | |
Morgan Stanley | */Aa3/A+ | | 1,699 | | | 14 | | | 19 | | | — | |
Barclay's Bank | A+/A1/A | | 6,049 | | | 65 | | | 59 | | | 6 | |
Canadian Imperial Bank of Commerce | AA/Aa2/A+ | | 5,169 | | | 68 | | | 64 | | | 4 | |
Wells Fargo | A+/A1/BBB+ | | 1,361 | | | 17 | | | 17 | | | — | |
Goldman Sachs | A/A2/BBB+ | | 1,133 | | | 9 | | | 10 | | | — | |
Credit Suisse | BBB+/A3/A- | | 1,039 | | | 5 | | | 5 | | | — | |
Truist | A+/A2/A | | 2,489 | | | 35 | | | 36 | | | — | |
Citibank | A+/Aa3/A+ | | 795 | | | 8 | | | 9 | | | — | |
Total | | | $ | 23,297 | | | $ | 244 | | | $ | 219 | | | $ | 33 | |
(a)An * represents credit ratings that were not available.
Collateral Agreements
We are required to maintain minimum ratings as a matter of routine practice as part of our over-the-counter derivative agreements on ISDA forms. Under some ISDA agreements, we have agreed to maintain certain financial strength ratings. A downgrade below these levels provides the counterparty under the agreement the right to terminate the open option contracts between the parties, at which time any amounts payable by us or the counterparty would be dependent on the market value of the underlying option contracts. Our current rating does not allow any counterparty the right to terminate ISDA agreements. In certain transactions, both us and the counterparty have entered into a collateral support agreement requiring either party to post collateral when the net exposures exceed pre-determined thresholds. For all counterparties, except Merrill Lynch, this threshold is set to zero. As of March 31, 2023 and December 31, 2022, counterparties posted $351 million and $219 million, respectively, of collateral of which $290 million and $178 million, respectively, is included in Cash and cash equivalents with an associated payable for this collateral included in Accounts
payable and accrued liabilities on the unaudited Condensed Consolidated Balance Sheets. Accordingly, the maximum amount of loss due to credit risk that we would incur if parties to the call options failed completely to perform according to the terms of the contracts was $83 million at March 31, 2023 and $33 million at December 31, 2022.
We are required to pay counterparties the effective federal funds rate each day for cash collateral posted to F&G for daily mark to market margin changes. We reinvest derivative cash collateral to reduce the interest cost. Cash collateral is invested in overnight investment sweep products, which are included in Cash and cash equivalents in the accompanying unaudited Condensed Consolidated Balance Sheets.
We held 404 and 409 futures contracts at March 31, 2023 and December 31, 2022, respectively. The fair value of the futures contracts represents the cumulative unsettled variation margin (open trade equity, net of cash settlements). We provide cash collateral to the counterparties for the initial and variation margin on the futures contracts, which is included in Cash and cash equivalents in the accompanying unaudited Condensed Consolidated Balance Sheets. The amount of cash collateral held by the counterparties for such contracts was $4 million and $3 million at March 31, 2023 and December 31, 2022, respectively.
Note F — Commitments and Contingencies
Legal and Regulatory Contingencies
In the ordinary course of business, we are involved in various pending and threatened litigation matters related to our operations, some of which include claims for punitive or exemplary damages. With respect to our title insurance operations, this customary litigation includes but is not limited to a wide variety of cases arising out of or related to title and escrow claims, for which we make provisions through our loss reserves. See Note B Summary of Reserve for Title Claim Losses for further discussion. Additionally, like other companies, our ordinary course litigation includes a number of class action and purported class action lawsuits, which make allegations related to aspects of our operations. We believe that no actions, other than the matters discussed below, if any, depart from customary litigation incidental to our business.
We review lawsuits and other legal and regulatory matters (collectively “legal proceedings”) on an ongoing basis when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, management bases its decision on its assessment of the ultimate outcome assuming all appeals have been exhausted. For legal proceedings in which it has been determined that a loss is both probable and reasonably estimable, a liability based on known facts and that represents our best estimate has been recorded. Our accrual for legal and regulatory matters was $8 million and $12 million as of March 31, 2023 and December 31, 2022, respectively. None of the amounts we have currently recorded are considered to be material to our financial condition individually or in the aggregate. Actual losses may materially differ from the amounts recorded and the ultimate outcome of our pending legal proceedings is generally not yet determinable. While some of these matters could be material to our operating results or cash flows for any particular period if an unfavorable outcome results, at present we do not believe that the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on our financial condition.
In August 2020, a lawsuit styled, In the Matter of FGL Holdings, was filed in the Grand Court of the Cayman Islands related to FNF's acquisition of F&G where dissenting shareholders, Kingfishers LP, Kingstown 1740 Fund LP, Kingstown Partners II LP, Kingstown Partners Master Ltd., and Ktown LP, asserted statutory appraisal rights relative to their ownership of 12,000,000 shares of F&G stock. They sought a judicial determination of the fair value of their shares of F&G stock as of the date of valuation under the law of the Cayman Islands, together with interest. On September 5, 2022 the Grand Court of the Cayman Islands decided in favor of F&G. Kingstown Capital Management LP failed to appeal, and its appeal period expired on October 20, 2022. On April 19, 2023 the Grand Court of the Cayman Islands determined that the dissenting shareholders should pay F&G's Cayman Islands legal expenses relating to the lawsuit, by way of interim payment of $4 million with the balance to be determined after assessment. We are attempting to collect reimbursement of these expenses.
From time to time we receive inquiries and requests for information from state insurance departments, attorneys general and other regulatory agencies about various matters relating to our business. Sometimes these take the form of civil investigative demands or subpoenas. We cooperate with all such inquiries and we have responded to or are currently responding to inquiries from multiple governmental agencies. Also, regulators and courts have been dealing with issues arising from foreclosures and related processes and documentation. Various governmental entities are studying the title insurance product, market, pricing, and business practices,
and potential regulatory and legislative changes, which may materially affect our business and operations. From time to time, we are assessed fines for violations of regulations or other matters or enter into settlements with such authorities, which may require us to pay fines or claims or take other actions. We do not anticipate such fines and settlements, either individually or in the aggregate, will have a material adverse effect on our financial condition.
F&G Commitments
In our F&G segment, we have unfunded investment commitments as of March 31, 2023 based upon the timing of when investments are executed compared to when the actual investments are funded, as some investments require that funding occur over a period of months or years. A summary of unfunded commitments by invested asset class as of March 31, 2023 is included below:
| | | | | | |
| March 31, 2023 | |
Asset Type | (In millions) | |
Unconsolidated VIEs: | | |
Limited partnerships | $ | 1,710 | | |
Whole loans | 743 | | |
Fixed maturity securities, ABS | 212 | | |
Direct Lending | 1,000 | | |
Other fixed maturity securities, AFS | 28 | | |
Commercial mortgage loans | 29 | | |
| | |
Other assets | 142 | | |
Residential mortgage loans | 1 | | |
Committed amounts included in liabilities | 1 | | |
Total | $ | 3,866 | | |
Note G — Dividends
On May 3, 2023, our Board of Directors declared cash dividends of $0.45 per share, payable on June 30, 2023, to FNF common shareholders of record as of June 16, 2023.
Note H — Segment Information
Summarized financial information concerning our reportable segments is shown in the following tables.
As of and for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Title | | F&G | | Corporate and Other | | Total |
| (In millions) |
Title premiums | $ | 978 | | | $ | — | | | $ | — | | | $ | 978 | |
Other revenues | 471 | | | 365 | | | 44 | | | 880 | |
Revenues from external customers | 1,449 | | | 365 | | | 44 | | | 1,858 | |
Interest and investment income, including recognized gains and losses, net | 103 | | | 504 | | | 9 | | | 616 | |
Total revenues | 1,552 | | | 869 | | | 53 | | | 2,474 | |
Depreciation and amortization | 37 | | | 90 | | | 7 | | | 134 | |
Interest expense | — | | | 22 | | | 20 | | | 42 | |
Earnings (loss) from continuing operations before income taxes and equity in earnings (loss) of unconsolidated affiliates | 157 | | | (203) | | | (28) | | | (74) | |
Income tax expense (benefit) | 27 | | | (8) | | | (5) | | | 14 | |
Earnings (loss) from continuing operations before equity in earnings (loss) of unconsolidated affiliates | 130 | | | (195) | | | (23) | | | (88) | |
Equity in loss of unconsolidated affiliates | — | | | — | | | — | | | — | |
Net earnings (loss) from continuing operations | $ | 130 | | | $ | (195) | | | $ | (23) | | | $ | (88) | |
Assets | $ | 8,017 | | | $ | 59,395 | | | $ | 2,242 | | | $ | 69,654 | |
Goodwill | 2,766 | | | 1,749 | | | 276 | | | 4,791 | |
As of and for the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Title | | F&G | | Corporate and Other | | Total |
| (In millions) |
Title premiums | $ | 1,866 | | | $ | — | | | $ | — | | | $ | 1,866 | |
Other revenues | 665 | | | 596 | | | 31 | | | 1,292 | |
Revenues from external customers | 2,531 | | | 596 | | | 31 | | | 3,158 | |
Interest and investment income, including recognized gains and losses, net | (148) | | | 154 | | | 3 | | | 9 | |
Total revenues | 2,383 | | | 750 | | | 34 | | | 3,167 | |
Depreciation and amortization | 33 | | | 76 | | | 6 | | | 115 | |
Interest expense | — | | | 8 | | | 22 | | | 30 | |
Earnings (loss) from continuing operations before income taxes and equity in earnings of unconsolidated affiliates | 249 | | | 345 | | | (38) | | | 556 | |
Income tax expense (benefit) | 57 | | | 106 | | | (7) | | | 156 | |
Earnings (loss) from continuing operations before equity in earnings (loss) of unconsolidated affiliates | 192 | | | 239 | | | (31) | | | 400 | |
Equity in earnings of unconsolidated affiliates | 2 | | | — | | | — | | | 2 | |
Net earnings (loss) from continuing operations | $ | 194 | | | $ | 239 | | | $ | (31) | | | $ | 402 | |
Assets | $ | 9,478 | | | $ | 49,277 | | | $ | 2,271 | | | $ | 61,026 | |
Goodwill | 2,517 | | | 1,749 | | | 266 | | | 4,532 | |
The activities in our segments include the following:
•Title. This segment consists of the operations of our title insurance underwriters and related businesses. This segment provides core title insurance and escrow and other title-related services including loan sub-servicing, valuations, default services, and home warranty products.
•F&G. This segment primarily consists of the operations of our annuities and life insurance related businesses. This segment issues a broad portfolio of annuity and life products, including deferred annuities (FIA and fixed rate annuities), immediate annuities and IUL. This segment also provides funding agreements and PRT solutions.
•Corporate and Other. This segment consists of the operations of the parent holding company, our real estate technology subsidiaries and our remaining real estate brokerage businesses. This segment also includes certain other unallocated corporate overhead expenses and eliminations of revenues and expenses between it and our Title segment.
Note I — Supplemental Cash Flow Information
The following supplemental cash flow information is provided with respect to certain cash payment and non-cash investing and financing activities:
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| | 2023 | | 2022 |
Cash paid for: | | (In millions) |
Interest | | $ | 34 | | | $ | 36 | |
Income taxes | | 6 | | | 9 | |
Deferred sales inducements | | 29 | | | 16 | |
Non-cash investing and financing activities: | | | | |
| | | | |
Change in proceeds of sales of investments available for sale receivable in period | | 41 | | | 81 | |
Change in purchases of investments available for sale payable in period | | 78 | | | 277 | |
| | | | |
Lease liabilities recognized in exchange for lease right-of-use assets | | 9 | | | 15 | |
Remeasurement of lease liabilities | | 19 | | | 15 | |
Liabilities assumed in connection with acquisitions | | | | |
Fair value of assets acquired | | 276 | | | 27 | |
Less: Total Purchase price | | 273 | | | 20 | |
Liabilities and noncontrolling interests assumed | | $ | 3 | | | $ | 7 | |
| | | | |
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| | | | |
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Note J — Revenue Recognition
Disaggregation of Revenue
Our revenue consists of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three months ended March 31, | | |
| | | | | | 2023 | | 2022 | | | | |
Revenue Stream | | Income Statement Classification | | Segment | | Total Revenue |
Revenue from insurance contracts: | | | | | | (In millions) |
Direct title insurance premiums | | Direct title insurance premiums | | Title | | $ | 428 | | | $ | 767 | | | | | |
Agency title insurance premiums | | Agency title insurance premiums | | Title | | 550 | | | 1,099 | | | | | |
Life insurance premiums, insurance and investment product fees, and other | | Escrow, title-related and other fees | | F&G | | 365 | | | 596 | | | | | |
Home warranty | | Escrow, title-related and other fees | | Title | | 30 | | | 34 | | | | | |
Total revenue from insurance contracts | | | | | | 1,373 | | | 2,496 | | | | | |
Revenue from contracts with customers: | | | | | | | | | | | | |
Escrow fees | | Escrow, title-related and other fees | | Title | | 160 | | | 265 | | | | | |
Other title-related fees and income | | Escrow, title-related and other fees | | Title | | 146 | | | 196 | | | | | |
ServiceLink, excluding title premiums, escrow fees, and subservicing fees | | Escrow, title-related and other fees | | Title | | 75 | | | 94 | | | | | |
| | | | | | | | | | | | |
Real estate technology | | Escrow, title-related and other fees | | Corporate and other | | 37 | | | 38 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total revenue from contracts with customers | | | | | | 418 | | | 593 | | | | | |
Other revenue: | | | | | | | | | | | | |
Loan subservicing revenue | | Escrow, title-related and other fees | | Title | | 60 | | | 76 | | | | | |
Other | | Escrow, title-related and other fees | | Corporate and other | | 7 | | | (7) | | | | | |
Interest and investment income | | Interest and investment income | | Various | | 611 | | | 478 | | | | | |
Recognized gains and losses, net | | Recognized gains and losses, net | | Various | | 5 | | | (469) | | | | | |
Total revenues | | Total revenues | | | | $ | 2,474 | | | $ | 3,167 | | | | | |
Our Direct title insurance premiums are recognized as revenue at the time of closing of the underlying transaction as the earnings process is then considered complete. Regulation of title insurance rates varies by state. Premiums are charged to customers based on rates predetermined in coordination with each states' respective Department of Insurance. Cash associated with such revenue is typically collected at closing of the underlying real estate transaction. Premium revenues from agency title operations are recognized when the underlying title order and transaction closing, if applicable, are complete.
Revenues from our home warranty business are generated from contracts with customers to provide warranty for major home appliances. Substantially all of our home warranty contracts are one year in length and revenue is recognized ratably over the term of the contract.
Escrow fees and other title-related fees and income in our Title segment are closely related to Direct title insurance premiums and are primarily associated with managing the closing of real estate transactions, including the processing of funds on behalf of the transaction participants, gathering and recording the required closing documents, providing notary and home inspection services, and other real estate or title-related activities. Revenue is primarily recognized upon closing of the underlying real estate transaction or completion of services. Cash associated with such revenue is typically collected at closing.
Revenues from ServiceLink, excluding its title premiums, escrow fees and loan subservicing fees primarily include revenues from real estate appraisal services and foreclosure processing and facilitation services. Revenues from real estate appraisal services are recognized when all appraisal work is complete, a final report is issued to the client and the client is billed. Revenues from foreclosure processing and facilitation services are primarily recognized upon completion of the services and when billing to the client is complete.
Life insurance premiums in our F&G segment reflect premiums for life-contingent PRT, traditional life insurance products and life-contingent immediate annuity products, which are recognized as revenue when due from the policyholder. We have ceded the majority of our traditional life business to unaffiliated third party reinsurers. While the base contract has been reinsured, we continue to retain the return of premium rider. Insurance and investment product fees and other consist primarily of the cost of insurance on IUL policies, URL on IUL policies, policy rider fees primarily on FIA policies and surrender charges assessed against policy withdrawals in excess of the policyholder's allowable penalty-free amounts.
Premium and annuity deposit collections for FIA, fixed rate annuities, immediate annuities and PRT without life contingency, and amounts received for funding agreements are reported in the financial statements as deposit liabilities (i.e., contractholder funds) instead of as sales or revenues. Similarly, cash payments to customers are reported as decreases in the liability for contractholder funds and not as expenses. Sources of revenues for products accounted for as deposit liabilities include net investment income, surrender, cost of insurance and other charges deducted from contractholder funds, and net realized gains (losses) on investments. Components of expenses for products accounted for as deposit liabilities are interest-sensitive and index product benefits (primarily interest credited to account balances or the hedging cost of providing index credits to the policyholder), amortization of VOBA, DAC, and DSI, other operating costs and expenses, and income taxes.
Real estate technology revenues are primarily comprised of subscription fees for use of software provided to real estate professionals. Subscriptions are only offered on a month-by-month basis and fees are billed monthly. Revenue is recognized in the month services are provided.
Loan subservicing revenues are generated by certain subsidiaries of ServiceLink and are associated with the servicing of mortgage loans on behalf of its customers. Revenue is recognized when the underlying work is performed and billed. Loan subservicing revenues are subject to the recognition requirements of ASC Topic 860.
Interest and investment income consists primarily of interest payments received on fixed maturity security holdings and dividends received on equity and preferred security holdings along with the investment income of limited partnerships.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, primarily related to revenue from our home warranty business, and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Contract Balances
The following table provides information about trade receivables and deferred revenue:
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| March 31, 2023 | | December 31, 2022 |
| (In millions) |
Trade receivables | $ | 309 | | | $ | 349 | |
Deferred revenue (contract liabilities) | 285 | | | 271 | |
Deferred revenue is recorded primarily for our home warranty contracts. Revenues from home warranty products are recognized over the life of the policy, which is primarily one year. The unrecognized portion is recorded as deferred revenue in Accounts payable and other accrued liabilities in the unaudited Condensed Consolidated Balance Sheets. During the three months ended March 31, 2023 and March 31, 2022, we recognized $32 million and $38 million of revenue, respectively, which was included in deferred revenue at the beginning of the respective period.
Note K —Value of Business Acquired, Deferred Acquisition Costs and Deferred Sales Inducements
The following table reconciles to Other intangible assets, net, on the unaudited Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022.
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| | March 31, 2023 | | December 31, 2022 |
| | |
| | (In millions) |
VOBA | | $ | 1,572 | | | $ | 1,615 | |
DAC | | 1,676 | | | 1,411 | |
DSI | | 225 | | | 200 | |
Value of distribution asset | | 97 | | | 100 | |
Computer software | | 65 | | | 61 | |
Definite lived trademarks, tradenames, and other | | 21 | | | 22 | |
Indefinite lived tradenames and other | | 21 | | | 20 | |
Total Other intangible assets, net | | $ | 3,677 | | | $ | 3,429 | |
The following tables roll forward VOBA by product for the three months ended March 31, 2023 and March 31, 2022.
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| FIA | | Fixed Rate Annuities | | Immediate Annuities | | Universal Life | | Traditional Life | | | | | | | Total |
| |
| (In millions) |
Balance at January 1, 2023 | $ | 1,166 | | | $ | 32 | | | $ | 201 | | | $ | 143 | | | $ | 73 | | | | | | | | $ | 1,615 | |
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Amortization | (36) | | | (1) | | | (3) | | | (2) | | | (1) | | | | | | | | (43) | |
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Balance at March 31, 2023 | $ | 1,130 | | | $ | 31 | | | $ | 198 | | | $ | 141 | | | $ | 72 | | | | | | | | $ | 1,572 | |
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| FIA | | Fixed Rate Annuities | | Immediate Annuities | | Universal Life | | Traditional Life | | | | | | | Total |
| |
| (In millions) |
Balance at January 1, 2022 | $ | 1,314 | | | $ | 39 | | | $ | 212 | | | $ | 153 | | | $ | 25 | | | | | | | | $ | 1,743 | |
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Amortization | (38) | | | (2) | | | (3) | | | (3) | | | (1) | | | | | | | | (47) | |
Shadow Premium Deficiency Testing (“PDT”) | — | | | — | | | — | | | — | | | 53 | | | | | | | | 53 | |
Balance at March 31, 2022 | $ | 1,276 | | | $ | 37 | | | $ | 209 | | | $ | 150 | | | $ | 77 | | | | | | | | $ | 1,749 | |
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The following table presents a reconciliation of VOBA to the table above, which is included in Other intangible assets, net in the unaudited Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
| | (In millions) |
FIA | | $ | 1,130 | | | $ | 1,166 | |
Fixed Rate Annuities | | 31 | | | 32 | |
Immediate Annuities | | 198 | | | 201 | |
Universal Life | | 141 | | | 143 | |
Traditional Life | | 72 | | | 73 | |
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Total | | $ | 1,572 | | | $ | 1,615 | |
The following tables roll forward DAC for the three months ended March 31, 2023 and March 31, 2022.
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| FIA | | Fixed Rate Annuities | | Universal Life | | Total (a) |
| |
| (In millions) |
Balance at January 1, 2023 | $ | 971 | | | $ | 83 | | | $ | 348 | | | $ | 1,402 | |
Capitalization | 113 | | | 52 | | | 56 | | | 221 | |
Amortization | (22) | | | (5) | | | (8) | | | (35) | |
Reinsurance related adjustments | — | | | 79 | | | — | | | 79 | |
Balance at March 31, 2023 | $ | 1,062 | | | $ | 209 | | | $ | 396 | | | $ | 1,667 | |
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| FIA | | Fixed Rate Annuities | | Universal Life | | Total (a) |
| |
| (In millions) |
Balance at January 1, 2022 | $ | 564 | | | $ | 38 | | | $ | 173 | | | $ | 775 | |
Capitalization | 98 | | | 8 | | | 47 | | | 153 | |
Amortization | (13) | | | (2) | | | (4) | | | (19) | |
Balance at March 31, 2022 | $ | 649 | | | $ | 44 | | | $ | 216 | | | $ | 909 | |
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(a) Excludes insignificant amounts of DAC related to Funding Agreement Backed Note (“FABN”)
The following table presents a reconciliation of DAC to the table above, which is included in Other intangible assets, net in the unaudited Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 :
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
| | (In millions) |
FIA | | $ | 1,062 | | | $ | 971 | |
Fixed Rate Annuities | | 209 | | | 83 | |
| | | | |
Universal Life | | 396 | | | 348 | |
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Funding Agreements | | 9 | | | 9 | |
Total | | $ | 1,676 | | | $ | 1,411 | |
The following tables roll forward DSI for the three months ended March 31, 2023 and March 31, 2022:
| | | | | | | | | | | |
| FIA | | Total |
| |
| (In millions) |
Balance at January 1, 2023 | $ | 200 | | | $ | 200 | |
Capitalization | 29 | | | 29 | |
Amortization | (4) | | | (4) | |
Balance at March 31, 2023 | $ | 225 | | | $ | 225 | |
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| FIA | | Total |
| |
| (In millions) |
Balance at January 1, 2022 | $ | 127 | | | $ | 127 | |
Capitalization | 16 | | | 16 | |
Amortization | (3) | | | (3) | |
Balance at March 31, 2022 | $ | 140 | | | $ | 140 | |
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The following table presents a reconciliation of DSI to the table above, which is included in Other intangible assets, net in the unaudited Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022:
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| | March 31, 2023 | | December 31, 2022 |
| | |
| | (In millions) |
FIA | | $ | 225 | | | $ | 200 | |
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Total | | $ | 225 | | | $ | 200 | |
The cash flow assumptions used to amortize VOBA and DAC were consistent with the assumptions used to estimate the FPB for life contingent immediate annuity and PRT contracts, and will be reviewed and unlocked, if applicable, in the same period as those balances. For nonparticipating traditional life contracts, the VOBA amortization is straight-line, without the use of cash flow assumptions. For FIA contracts, the cash flow assumptions used to amortize VOBA, DAC, and DSI were consistent with the assumptions used to estimate the value of the embedded derivative and MRBs, and will be reviewed and unlocked, if applicable, in the same period as those balances. For fixed rate annuities and IUL the cash flow assumptions used to amortize VOBA, DAC and DSI reflect the company’s best estimates for policyholder behavior, consistent with the development of assumptions for FIA, immediate annuity, and PRT.
We review cash flow assumptions annually, generally in the third quarter. In 2022, F&G undertook a review of all significant assumptions and revised GMWB utilization for our deferred annuity contracts (FIA and fixed rate annuities) to reflect internal and industry experience in the first several contract years.
For the in-force liabilities as of March 31, 2023, the estimated amortization expense for VOBA in future fiscal periods is as follows:
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| Estimated Amortization Expense |
Fiscal Year | (In millions) |
2023 | $ | 122 | |
2024 | 151 | |
2025 | 139 | |
2026 | 128 | |
2027 | 117 | |
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Thereafter | 915 | |
Note L — F&G Reinsurance
F&G reinsures portions of its policy risks with other insurance companies. The use of indemnity reinsurance does not discharge an insurer from liability on the insurance ceded. The insurer is required to pay in full the amount of its insurance liability regardless of whether it is entitled to or able to receive payment from the reinsurer. The portion of risks exceeding the Company's retention limit is reinsured. The Company primarily seeks reinsurance coverage in order to limit its exposure to mortality losses and enhance capital management. The Company follows reinsurance accounting when there is adequate risk transfer or deposit accounting if there is inadequate risk transfer. If the underlying policy being reinsured is an investment contract, the effects of the agreement are accounted for as a separate investment contract.
The effects of reinsurance on net premiums earned and net benefits incurred (benefits paid and reserve changes) for the three months ended March 31, 2023 and March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
| Net Premiums Earned | | Net Benefits Incurred | | Net Premiums Earned | | Net Benefits Incurred | | | | | | | | |
| (In millions) | | | | | | | | |
Direct | $ | 301 | | | $ | 872 | | | $ | 567 | | | $ | 505 | | | | | | | | | |
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Ceded | (26) | | | (60) | | | (32) | | | (302) | | | | | | | | | |
Net | $ | 275 | | | $ | 812 | | | $ | 535 | | | $ | 203 | | | | | | | | | |
Amounts payable or recoverable for reinsurance on paid and unpaid claims are not subject to periodic or maximum limits. F&G did not write off any significant reinsurance balances during the three months ended March 31, 2023 and March 31, 2022. F&G did not commute any ceded reinsurance treaties during the three months ended March 31, 2023 and March 31, 2022.
F&G estimates expected credit losses on reinsurance recoverables using a probability of default/loss given default model. Significant inputs to the model include the reinsurer's credit risk, expected timing of recovery, industry-wide historical default experience, senior unsecured bond recovery rates, and credit enhancement features. The expected credit loss reserves were as follows:
| | | | | | | | | | | | | | | | | |
| | | Three months ended |
| | | | | March 31, 2023 | | March 31, 2022 |
| | | | | (In millions) |
Balance at Beginning of Period | | | | | $ | (10) | | | $ | (20) | |
Changes in the expected credit loss reserve | | | | | 1 | | | — | |
Balance at End of Period | | | | | $ | (9) | | | $ | (20) | |
No policies issued by F&G have been reinsured with any foreign company, which is controlled, either directly or indirectly, by a party not primarily engaged in the business of insurance.
F&G has not entered into any reinsurance agreements in which the reinsurer may unilaterally cancel any reinsurance for reasons other than non-payment of premiums or other similar credit issues.
Aspida Reinsurance Transaction. F&G executed a Funds Withheld Coinsurance Agreement with Aspida Re, a Bermuda reinsurer. In accordance with the terms of this agreement, F&G cedes to the reinsurer, on a fifty percent (50%) funds withheld coinsurance basis, certain multiyear guaranteed annuity business written effective January 1, 2021. The agreement was originally executed January 15, 2021 and amended in August 2021 and September 2022. For reinsured policies issued prior to September 1, 2022, the policies are ceded on a fifty percent (50%) quota share basis. For reinsured policies issued on or after September 1, 2022, the policies are ceded on a seventy-five percent (75%) quota share basis, capped at $350 million cession per month. For the month of March 2023 only, the premiums cap increased to $450 million. As the policies ceded to Aspida are investment contracts, there is no significant insurance risk present and; therefore, the effects of this agreement are accounted for as a separate investment contract.
There have been no other significant changes to reinsurance contracts for the three months ended March 31, 2023.
Concentration of Reinsurance Risk
The Company has a significant concentration of reinsurance risk with third party reinsurers, Aspida Re, Wilton Reassurance Company (“Wilton Re”), and Somerset that could have a material impact on our financial position in the event that any of these reinsurers fails to perform its obligations under the various reinsurance treaties. Aspida Re has an A- issuer credit rating from AM Best as of March 31, 2023, and the risk of non-performance is further mitigated through the funds withheld arrangement. Wilton Re has an A+ issuer credit rating from AM Best and an A issuer credit rating from Fitch as of March 31, 2023. Somerset has an A- issuer credit rating from AM Best and a BBB+ issuer credit rating from S&P as of March 31, 2023, and the risk of non-performance is further mitigated through the funds withheld arrangement. On March 31, 2023, the net amounts recoverable from Aspida Re, Wilton Re, and Somerset were $4,073 million, $1,184 million, and $553 million, respectively. We monitor both the financial condition of individual reinsurers and risk concentration arising from similar activities and economic characteristics of reinsurers to attempt to reduce the risk of default by such reinsurers. We believe that all amounts due from Aspida Re, Wilton Re, and Somerset for periodic treaty settlements are collectible as of March 31, 2023.
There have been no other material changes in the reinsurance and the intercompany reinsurance agreements described in our Form 10-K for the year ended December 31, 2022.
Note M — F&G Insurance Subsidiary Financial Information and Regulatory Matters
Our U.S. insurance subsidiaries, Fidelity & Guaranty Life Insurance Company ("FGL Insurance"), Fidelity & Guaranty Life Insurance Company of New York ("FGL NY Insurance"), and Raven Reinsurance Company ("Raven Re"), file financial statements with state insurance regulatory authorities and the National Association of Insurance Commissioners (“NAIC”) that are prepared in accordance with Statutory Accounting Principles (“SAP”) prescribed or permitted by such authorities, which may vary materially from GAAP. Prescribed SAP includes the Accounting Practices and Procedures Manual of the NAIC as well as state laws, regulations and administrative rules. Permitted SAP encompasses all accounting practices not so prescribed. The principal differences between SAP financial statements and financial statements prepared in accordance with GAAP are that SAP financial statements do not reflect VOBA, DAC, and DSI, some bond portfolios may be carried at amortized cost, assets and liabilities are presented net of reinsurance, contractholder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted. Accordingly, SAP operating results and SAP capital and surplus may differ substantially from amounts reported in the GAAP basis financial statements for comparable items.
F&G Cayman Re Ltd and F&G Life Re Ltd (Bermuda) file financial statements with their respective regulators that are based on U.S. GAAP.
FGL Insurance applies Iowa-prescribed accounting practices that permit Iowa-domiciled insurers to report equity call options used to economically hedge FIA index credits at amortized cost for statutory accounting purposes and to calculate FIA statutory reserves such that index credit returns will be included in the reserve only after crediting to the annuity contract. This resulted in a $3 million and $152 million decrease to statutory capital and surplus at March 31, 2023 and December 31, 2022, respectively.
FGL Insurance’s statutory carrying value of Raven Re reflects the effect of permitted practices Raven Re received to treat the available amount of a letter of credit as an admitted asset, which increased Raven Re’s statutory capital and surplus by $200 million and $200 million at March 31, 2023 and December 31, 2022, respectively.
Raven Re is also permitted to follow Iowa prescribed statutory accounting practice for its reserves on reinsurance assumed from FGL Insurance. Without such permitted statutory accounting practices, Raven Re’s statutory capital and surplus (deficit) and its risk-based capital would fall below the minimum regulatory requirements. The letter of credit facility is collateralized by NAIC 1 rated debt securities. If the permitted practice was revoked, the letter of credit could be replaced by the collateral assets with Nomura’s consent. FGL Insurance’s statutory carrying value of Raven Re was $93 million and $121 million at March 31, 2023 and December 31, 2022, respectively.
As of March 31, 2023, FGL NY Insurance did not follow any prescribed or permitted statutory accounting practices that differ from the NAIC's statutory accounting practices.
The prescribed and permitted statutory accounting practices have no impact on our unaudited Condensed Consolidated Financial Statements, which are prepared in accordance with GAAP.
Note N — Acquisitions
TitlePoint
On January 1, 2023, we completed our previously announced acquisition of TitlePoint for $224 million in cash, subject to a customary working capital adjustment.
The acquisition was accounted for as a business combination under FASB Accounting Standards Codification Topic 805, Business Combinations ("Topic 805"). The purchase price has been allocated to TitlePoint's assets acquired based on their fair values as of the acquisition date. Goodwill has been recorded based on the amount that the purchase price exceeds the fair value of the net assets acquired. Goodwill consists primarily of intangible assets that do not qualify for separate recognition. The goodwill recorded is expected to be deductible for tax purposes. In connection with the acquisition, we recorded preliminary fair value estimates for goodwill, other intangible assets and other assets of $146 million, $73 million and $5 million, respectively, as of March 31, 2023.
The gross carrying value and weighted average estimated useful lives of Other intangible assets acquired in the TitlePoint acquisition consist of the following:
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| Gross Carrying Value | | Weighted Average Estimated Useful Life (in years) |
| | | |
Other intangible assets: | (In millions) | | |
| | | |
Customer relationships | $ | 9 | | | 10 |
Trade name | 4 | | | 10 |
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Software | 60 | | | 7 |
Total Other intangible assets | $ | 73 | | | |
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AllFirst
On August 9, 2022, we acquired approximately 74% of the outstanding equity of AllFirst Title Insurance Agency ("AllFirst") for approximately $130 million in cash consideration. On December 19, 2022, we purchased an additional 6% of the outstanding equity of AllFirst for approximately $10 million in cash consideration.
The acquisition was accounted for as a business combination under Topic 805. The purchase price has been allocated to AllFirst's assets acquired and liabilities assumed based on their fair values as of acquisition date. Goodwill has been recorded based on the amount that the purchase price exceeds the fair value of the net assets acquired. Goodwill consists primarily of intangible assets that do not qualify for separate recognition. The goodwill recorded is expected to be deductible for tax purposes. We completed our assessment of the fair value of assets acquired and liabilities assumed within the one-year period from the date of the acquisition. We recorded fair value amounts as of the acquisition date for goodwill, other intangibles, other assets, other liabilities and non-controlling interest of $104 million, $55 million, $40 million, $18 million and $46 million, respectively.
The gross carrying value and weighted average estimated useful lives of Other intangible assets acquired in the AllFirst acquisition consist of the following:
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| Gross Carrying Value | | Weighted Average Estimated Useful Life (in years) |
| | | |
Other intangible assets: | (In millions) | | |
| | | |
Customer relationships | $ | 46 | | | 10 |
Trade name | 7 | | | 10 |
Non-compete agreements | 1 | | | 5 |
Software | 1 | | | 2 |
Total Other intangible assets | $ | 55 | | | |
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Note O — Notes Payable
Notes payable consists of the following:
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | (In millions) |
4.50% Notes, net of discount | | $ | 445 | | | $ | 445 | |
3.40% Notes, net of discount | | 644 | | | 644 | |
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2.45% Notes, net of discount | | 594 | | | 594 | |
3.20% Notes, net of discount | | 444 | | | 444 | |
Revolving Credit Facility | | (3) | | | (3) | |
F&G Credit Agreement | | 511 | | | 547 | |
7.40% F&G Notes | | 494 | | | — | |
5.50% F&G Notes | | 567 | | | 567 | |
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| | $ | 3,696 | | | $ | 3,238 | |
On January 13, 2023, F&G completed its issuance and sale of $500 million aggregate amount of its 7.40% F&G Notes, pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The 7.40% F&G Notes are the senior unsecured, unsubordinated obligations of F&G and are guaranteed on an unsecured, unsubordinated basis by each of F&G's subsidiaries that are guarantors of its obligations under the F&G Credit Agreement (the “Guarantors”). The interest rate payable on the 7.40% F&G Notes will be subject to adjustment from time to time if either S&P or Fitch (or a substitute rating agency therefor) downgrades (or downgrades and subsequently upgrades) the credit ratings assigned to the 7.40% F&G Notes. F&G intends to use the net proceeds from the offering for general corporate purposes, including to support the growth of assets under management and for F&G's future liquidity requirements.
On November 22, 2022, F&G entered into a Credit Agreement (the "F&G Credit Agreement") with certain lenders (the "Lenders") and Bank of America, N.A. as administrative agent (the "Administrative Agent"), swing line lender and issuing bank, pursuant to which the Lenders have made available to F&G an unsecured revolving credit facility (the "F&G Credit Facility") in an aggregate principal amount of $550 million to be used for working capital and general corporate purposes.
The F&G Credit Agreement matures the earlier to occur of November 22, 2025 or 91 days prior to May 1, 2025, the stated maturity date of the 5.50% F&G Notes, unless the principal amount of the 5.50% F&G Notes is $150 million or less at such time, the 5.50% F&G Notes have been redeemed or defeased in full, and any refinancing Indebtedness incurred in connection therewith matures at least 91 days after the date that is 3 years from the Effective Date, as defined in the F&G Credit Agreement, or certain other conditions are met. Revolving loans under the F&G Credit Agreement generally bear interest at a variable rate based on either (i) the base rate (which is the highest of (a) one-half of one percent in excess of the federal funds rate, (b) the Administrative Agent’s “prime rate”, or (c) the sum of one percent plus Term The Secured Overnight Financing Rate (“SOFR”) plus a margin of between 30.0 and 80.0 basis points depending on the non-credit-enhanced, senior unsecured long-term debt ratings of F&G or (ii) Term SOFR plus a margin of between 130.0 and 180.0 basis points depending on the non-credit-enhanced, senior unsecured long-term debt ratings of F&G. On February 21, 2023, F&G amended F&G Credit Agreement with the Lenders and the Administrative Agent, swing line lender and issuing bank. The amendment of the F&G Credit Agreement increased the aggregate principal amount of commitments under the F&G Credit Facility by $115 million to $665 million.
On September 17, 2021, we completed our underwritten public offering of $450 million aggregate principal amount of our 3.20% Notes, pursuant to our registration statement on Form S-3 ASR (File No. 333-239002) and the related prospectus supplement. The net proceeds from the registered offering of the 3.20% Notes were approximately $443 million, after deducting underwriting discounts, commissions and offering expenses. We plan to use the net proceeds from the offering for general corporate purposes.
On October 29, 2020, we entered into the Fifth Restated Credit Agreement for our Amended Revolving Credit Facility with Bank of America, N.A., as administrative agent and the other agents party thereto. Among other changes, the Fifth Restated Credit Agreement amends the Fourth Restated Credit Agreement to extend the maturity date from April 27, 2022 to October 29, 2025. The material terms of the Fourth Restated Credit Agreement are set forth in our Annual Report on Form 10-K for the year ended December 31, 2019. As of
March 31, 2023, there was no principal outstanding, $3 million of unamortized debt issuance costs, and $800 million of available borrowing capacity under the Revolving Credit Facility.
On September 15, 2020, we completed our underwritten public offering of $600 million aggregate principal amount of our 2.45% Notes due March 15, 2031 (the "2.45% Notes") pursuant to an effective registration statement filed with the SEC. The net proceeds from the registered offering of the 2.45% Notes were approximately $593 million, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the offering (i) to repay all our $260 million outstanding indebtedness under the Term Loan, and (ii) for general corporate purposes.
On June 12, 2020, we completed our underwritten public offering of $650 million aggregate principal amount of the 3.40% Notes due June 15, 2030 (the “3.40% Notes”) pursuant to an effective registration statement filed with the SEC. The net proceeds from the registered offering of the 3.40% Notes were approximately $642 million, after deducting underwriting discounts, and commissions and offering expenses. We used the net proceeds from the offering (i) to repay $640 million of the outstanding principal amount under the Term Loan, and (ii) for general corporate purposes.
On June 1, 2020, as a result of the F&G acquisition, we assumed $550 million aggregate principal amount of 5.50% senior notes due 2025 (the "5.50% F&G Notes"), originally issued on April 20, 2018 at 99.5% of face value for proceeds of $547 million.
On August 13, 2018, we completed an offering of $450 million in aggregate principal amount of 4.50% notes due August 2028 (the "4.50% Notes"), pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The 4.50% Notes were priced at 99.252% of par to yield 4.594% annual interest. We pay interest on the 4.50% Notes semi-annually on the 15th of February and August, beginning February 15, 2019. The 4.50% Notes contain customary covenants and events of default for investment grade public debt, which primarily relate to failure to make principal or interest payments. On May 16, 2019, we completed an offering to exchange the 4.50% Notes for substantially identical notes registered pursuant to Rule 424 under the Securities Act of 1933 (the "4.50% Notes Exchange"). There were no material changes to the terms of the 4.50% Notes as a result of the 4.50% Notes Exchange and all holders of the 4.50% Notes accepted the offer to exchange.
Gross principal maturities of notes payable at March 31, 2023 are as follows:
| | | | | |
| (In millions) |
2023 (remaining) | $ | 515 | |
2024 | — | |
2025 | 550 | |
2026 | — | |
2027 | — | |
Thereafter | 2,650 | |
| $ | 3,715 | |
Note P — Market Risk Benefits
The following table presents the balances of and changes in MRBs associated with FIAs and fixed rate annuities for the three months ended March 31, 2023 and the years ended December 31, 2022 and December 31, 2021:
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| March 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| FIA | | Fixed rate annuities | | FIA | | Fixed rate annuities | | FIA | | Fixed rate annuities |
| (Dollars in millions) |
Balance, beginning of period | $ | 164 | | | $ | 1 | | | $ | 426 | | | $ | 2 | | | $ | 478 | | | $ | 1 | |
| | | | | | | | | | | |
Balance, beginning of period, before effect of changes in the instrument-specific credit risk | $ | 104 | | | $ | 1 | | | $ | 280 | | | $ | 1 | | | $ | 320 | | | $ | 1 | |
Issuances and benefit payments | (4) | | | — | | | (21) | | | — | | | (9) | | | — | |
Attributed fees collected and interest accrual | 30 | | | — | | | 107 | | | 1 | | | 99 | | | 1 | |
Actual policyholder behavior different from expected | 7 | | | — | | | 43 | | | — | | | (22) | | | — | |
Changes in assumptions and other | 1 | | | — | | | (76) | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Effects of market related movements | 26 | | | — | | | (231) | | | (1) | | | (108) | | | — | |
Balance, end of period, before effect of changes in the instrument-specific credit risk | $ | 164 | | | $ | 1 | | | $ | 102 | | | $ | 1 | | | $ | 280 | | | $ | 2 | |
Effect of changes in the instrument-specific credit risk | 53 | | | — | | | 62 | | | — | | | 146 | | | — | |
Balance, end of period | $ | 217 | | | $ | 1 | | | $ | 164 | | | $ | 1 | | | $ | 426 | | | $ | 2 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Weighted-average attained age of policyholders weighted by total AV (years) | 68.49 | | 72.64 | | 68.59 | | 72.88 | | 68.95 | | 73.10 |
Weighted-average attained age of policyholders weighted by Unlocked MRB (years) | 78.33 | | 77.73 | | 80.84 | | 77.56 | | 68.77 | | 73.72 |
Net amount at risk | $ | 1,031 | | | $ | 3 | | | $ | 952 | | | $ | 3 | | | $ | 1,304 | | | $ | 4 | |
The following table reconciles MRBs by amounts in an asset position and amounts in a liability position to the MRB amounts in the accompanying unaudited Condensed Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Asset | | Liability | | Net | | Asset | | Liability | | Net | | Asset | | Liability | | Net |
| (In millions) |
FIA | $ | 106 | | | $ | 323 | | | $ | 217 | | | $ | 117 | | | $ | 281 | | | $ | 164 | | | $ | 41 | | | $ | 467 | | | $ | 426 | |
Fixed rate annuities | — | | | 1 | | | 1 | | | — | | | 1 | | | 1 | | | — | | | 2 | | | 2 | |
Total | $ | 106 | | | $ | 324 | | | $ | 218 | | | $ | 117 | | | $ | 282 | | | $ | 165 | | | $ | 41 | | | $ | 469 | | | $ | 428 | |
In the first quarter of 2023, the following notable changes were made to the inputs to the fair value estimates of MRB calculations:
•Risk-free rates decreased slightly, leading to an increase in the MRB associated with FIA and fixed rate annuities.
•Decreases in the equity market related projections resulted in an increase in the net amount of risk associated with FIAs, leading to an increase in the value of the associated MRBs.
•F&G’s credit spread increased, leading to a corresponding decrease in the MRBs associated with both FIA and fixed rate annuities.
In 2022, the following notable changes were made to the inputs to the fair value estimates of MRB calculations:
•Risk-free rates increased moderately, leading to a decrease in the MRBs associated with both FIA and fixed rate annuities.
•Increases in the equity markets resulted in a decrease in the net amount at risk associated with FIA and fixed rate annuities, leading to a decrease in the value of the associated MRBs.
•Volatility indices decreased, leading to a decrease in the MRBs associated with both FIA and fixed rate annuities.
•Cash flow assumptions for mortality and full and partial surrenders were unchanged during the annual third quarter review. The GMWB utilization assumption was revised in the second quarter of 2022 to reflect additional internal and industry experience for the first several contract years. This assumption update led to a decrease in the MRBs.
•F&G’s credit spread increased during the year, leading to a corresponding decrease in the MRBs value. Credit spreads on the block of business remain lower than the at-issue or at-purchase credit spreads, but the level has decreased since the beginning of 2022.
In 2021, the following notable changes were made to the inputs to the fair value estimates of MRB calculations:
• Risk-free rates increased moderately, leading to a decrease in the MRBs associated with both FIA and fixed rate annuities.
•Increases in the equity markets resulted in a decrease in the net amount at risk associated with FIA and fixed rate annuities, leading to a decrease in the value of the associated MRBs.
Note Q — Contractholder Funds
The following tables summarize balances of and changes in contractholder funds’ account balances:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| FIA | | Fixed rate annuities | | Universal Life | | FABN (b) | | FHLB (b) |
| (Dollars in millions) |
Balance, beginning of year | $ | 24,766 | | | $ | 9,358 | | | $ | 2,112 | | | $ | 2,613 | | | $ | 1,982 | |
Issuances | 1,186 | | | 1,522 | | | 49 | | | — | | | 256 | |
Premiums received | 25 | | | 1 | | | 87 | | | — | | | — | |
Policy charges (a) | (42) | | | — | | | (60) | | | — | | | — | |
Surrenders and withdrawals | (403) | | | (257) | | | (21) | | | — | | | — | |
Benefit payments | (121) | | | (59) | | | (10) | | | (15) | | | (110) | |
| | | | | | | | | |
Interest credited | 21 | | | 81 | | | 5 | | | 13 | | | 11 | |
Other | 23 | | | (1) | | | — | | | — | | | — | |
Balance, end of year | $ | 25,455 | | | $ | 10,645 | | | $ | 2,162 | | | $ | 2,611 | | | $ | 2,139 | |
Embedded derivative adjustment (c) | (12) | | | — | | | 45 | | | — | | | — | |
Gross Liability, end of period | $ | 25,443 | | | $ | 10,645 | | | $ | 2,207 | | | $ | 2,611 | | | $ | 2,139 | |
Less: Reinsurance | (17) | | | (4,691) | | | (933) | | | — | | | — | |
Net Liability, after Reinsurance | $ | 25,426 | | | $ | 5,954 | | | $ | 1,274 | | | $ | 2,611 | | | $ | 2,139 | |
| | | | | | | | | |
Weighted-average crediting rate | 0.33 | % | | — | % | | 1.00 | % | | N/A | | N/A |
Net amount at risk (d) | N/A | | N/A | | 49,426 | | | N/A | | N/A |
Cash surrender value | 23,726 | | | 9,929 | | | 1,724 | | | N/A | | N/A |
(a) Contracts included in the contractholder funds are generally charged a premium and/or monthly assessments on the basis of the account balance.
(b) FABN and FHLB are considered funding agreements that are investment contracts which follow the interest method of accounting, and therefore are not subject to ASU 2018-12 disclosure requirements. However, the Company has elected to present the liability for these agreements within the disaggregated roll forward as we believe it will provide meaningful information for users of the financials.
(c) The embedded derivative adjustment reconciles the account balance to the gross GAAP liability and represents the combination of the host contract and the fair value of the embedded derivatives.
(d) For those guarantees of benefits that are payable in the event of death, the net amount at risk is generally defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| FIA | | Fixed rate annuities | | Universal Life | | FABN (b) | | FHLB (b) |
| (Dollars in millions) |
Balance, beginning of year | 21,997 | | | 6,367 | | | 1,907 | | | 1,904 | | | 1,543 | |
Issuances | 4,462 | | | 3,758 | | | 167 | | | 700 | | | 1,192 | |
Premiums received | 106 | | | 3 | | | 295 | | | — | | | — | |
Policy charges (a) | (166) | | | (1) | | | (209) | | | — | | | — | |
Surrenders and withdrawals | (1,322) | | | (797) | | | (74) | | | — | | | — | |
Benefit payments | (485) | | | (192) | | | (22) | | | (35) | | | (789) | |
| | | | | | | | | |
Interest credited | 198 | | | 220 | | | 48 | | | 45 | | | 36 | |
Other | (24) | | | — | | | — | | | (1) | | | — | |
Balance, end of year | $ | 24,766 | | | $ | 9,358 | | | $ | 2,112 | | | $ | 2,613 | | | $ | 1,982 | |
Embedded derivative adjustment (c) | (343) | | | — | | | 15 | | | — | | | — | |
Gross Liability, end of period | $ | 24,423 | | | $ | 9,358 | | | $ | 2,127 | | | $ | 2,613 | | | $ | 1,982 | |
Less: Reinsurance | (17) | | | (3,723) | | | (947) | | | — | | | — | |
Net Liability, after Reinsurance | $ | 24,406 | | | $ | 5,635 | | | $ | 1,180 | | | $ | 2,613 | | | $ | 1,982 | |
| | | | | | | | | |
Weighted-average crediting rate | 0.85 | % | | — | | | 2.39 | % | | N/A | | N/A |
Net amount at risk (d) | N/A | | N/A | | 53,348 | | | N/A | | N/A |
Cash surrender value | 188 | | | 5,992 | | | 1,698 | | | N/A | | N/A |
(a) Contracts included in the contractholder funds are generally charged a premium and/or monthly assessments on the basis of the account balance.
(b) FABN and FHLB are considered funding agreements that are investment contracts which follow the interest method of accounting, and therefore are not subject to ASU 2018-12 disclosure requirements. However, the Company has elected to present the liability for these agreements within the disaggregated roll forward as we believe it will provide meaningful information for users of the financials.
(c) The embedded derivative adjustment reconciles the account balance to the gross GAAP liability and represents the combination of the host contract and the fair value of the embedded derivatives.
(d) For those guarantees of benefits that are payable in the event of death, the net amount at risk is generally defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| FIA | | Fixed rate annuities | | Universal Life | | FABN (b) | | FHLB (b) |
| (In millions) |
Balance, beginning of year | $ | 18,703 | | | $ | 5,142 | | | $ | 1,696 | | | $ | — | | | $ | 1,203 | |
Issuances | 4,400 | | | 1,743 | | | 114 | | | 1,899 | | | 759 | |
Premiums received | 103 | | | 3 | | | 233 | | | — | | | — | |
Policy charges (a) | (148) | | | (1) | | | (167) | | | — | | | — | |
Surrenders and withdrawals | (1,303) | | | (543) | | | (68) | | | — | | | — | |
Benefit payments | (440) | | | (145) | | | (19) | | | (7) | | | (447) | |
| | | | | | | | | |
Interest credited | 686 | | | 167 | | | 118 | | | 12 | | | 30 | |
Other | (4) | | | 1 | | | — | | | — | | | (2) | |
Balance, end of year | $ | 21,997 | | | $ | 6,367 | | | $ | 1,907 | | | $ | 1,904 | | | $ | 1,543 | |
Embedded derivative adjustment (c) | 603 | | | — | | | 74 | | | — | | | — | |
Gross Liability, end of period | $ | 22,600 | | | $ | 6,367 | | | $ | 1,981 | | | $ | 1,904 | | | $ | 1,543 | |
Less: Reinsurance | (17) | | | (1,692) | | | (984) | | | — | | | — | |
Net Liability, after Reinsurance | $ | 22,583 | | | $ | 4,675 | | | $ | 997 | | | $ | 1,904 | | | $ | 1,543 | |
| | | | | | | | | |
Weighted-average crediting rate | 3.43 | % | | — | | | 6.77 | % | | N/A | | N/A |
Net amount at risk (d) | N/A | | N/A | | 41,326 | | | N/A | | N/A |
Cash surrender value | 20,455 | | | 5,992 | | | 1,572 | | | N/A | | N/A |
(a) Contracts included in the contractholder funds are generally charged a premium and/or monthly assessments on the basis of the account balance.
(b) FABN and FHLB are considered funding agreements that are investment contracts which follow the interest method of accounting, and therefore are not subject to ASU 2018-12 disclosure requirements. However, the Company has elected to present the liability for these agreements within the disaggregated roll forward as we believe it will provide meaningful information for users of the financials.
(c) The embedded derivative adjustment reconciles the account balance to the gross GAAP liability and represents the combination of the host contract and the fair value of the embedded derivatives.
(d) For those guarantees of benefits that are payable in the event of death, the net amount at risk is generally defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date.
The following table reconciles contractholder funds’ account balances to the contractholder funds liability in the accompanying unaudited Condensed Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| (In millions) |
FIA | $ | 25,443 | | | $ | 24,423 | | | $ | 22,600 | |
Fixed rate annuities | 10,645 | | | 9,358 | | | 6,367 | |
Immediate annuities | 326 | | | 332 | | | 352 | |
Universal life | 2,207 | | | 2,127 | | | 1,981 | |
Traditional life | 5 | | | 5 | | | 5 | |
Funding Agreement-FABN | 2,611 | | | 2,613 | | | 1,904 | |
FHLB | 2,139 | | | 1,982 | | | 1,543 | |
PRT | 3 | | | 3 | | | 1 | |
Total | $ | 43,379 | | | $ | 40,843 | | | $ | 34,753 | |
The following tables present the account values by range of guaranteed minimum crediting rates and the related range of difference, in basis points, between rates being credited to policyholders and the respective guaranteed minimums:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| At Guaranteed Minimum | | 1 Basis Point-50 Basis Points Above | | 51 Basis Points-150 Basis Points Above | | Greater Than 150 Basis Points Above | | Total |
FIA | (In millions) |
0.00%-1.50% | $ | 23,348 | | | $ | 806 | | | $ | 406 | | | $ | 370 | | | $ | 24,930 | |
1.51%-2.50% | 149 | | | — | | | 1 | | | — | | | 150 | |
Greater than 2.50% | 373 | | | — | | | 2 | | | — | | | 375 | |
Total | $ | 23,870 | | | $ | 806 | | | $ | 409 | | | $ | 370 | | | $ | 25,455 | |
| | | | | | | | | |
Fixed Rate Annuities | | | | | | | | | |
0.00%-1.50% | $ | 12 | | | $ | 31 | | | $ | 1,867 | | | $ | 7,522 | | | $ | 9,432 | |
1.51%-2.50% | 8 | | | 13 | | | 28 | | | 187 | | | 236 | |
Greater than 2.50% | 962 | | | 3 | | | 4 | | | 8 | | | 977 | |
Total | $ | 982 | | | $ | 47 | | | $ | 1,899 | | | $ | 7,717 | | | $ | 10,645 | |
| | | | | | | | | |
Universal Life | | | | | | | | | |
0.00%-1.50% | $ | 1,752 | | | $ | 4 | | | $ | — | | | $ | 18 | | | $ | 1,774 | |
1.51%-2.50% | — | | | — | | | — | | | — | | | — | |
Greater than 2.50% | 344 | | | 43 | | | 1 | | | — | | | 388 | |
Total | $ | 2,096 | | | $ | 47 | | | $ | 1 | | | $ | 18 | | | $ | 2,162 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| At Guaranteed Minimum | | 1 Basis Point-50 Basis Points Above | | 51 Basis Points-150 Basis Points Above | | Greater Than 150 Basis Points Above | | Total |
FIA | (In millions) |
0.00%-1.50% | $ | 22,848 | | | $ | 801 | | | $ | 410 | | | $ | 151 | | | $ | 24,210 | |
1.51%-2.50% | 162 | | | — | | | 1 | | | — | | | 163 | |
Greater than 2.50% | 390 | | | — | | | 3 | | | — | | | 393 | |
Total | $ | 23,400 | | | $ | 801 | | | $ | 414 | | | $ | 151 | | | $ | 24,766 | |
| | | | | | | | | |
Fixed Rate Annuities | | | | | | | | | |
0.00%-1.50% | $ | 10 | | | $ | 32 | | | $ | 1,871 | | | $ | 6,379 | | | $ | 8,292 | |
1.51%-2.50% | 9 | | | 14 | | | 30 | | | 1 | | | 54 | |
Greater than 2.50% | 997 | | | 4 | | | 4 | | | 7 | | | 1,012 | |
Total | $ | 1,016 | | | $ | 50 | | | $ | 1,905 | | | $ | 6,387 | | | $ | 9,358 | |
| | | | | | | | | |
Universal Life | | | | | | | | | |
0.00%-1.50% | $ | 1,701 | | | $ | 3 | | | $ | — | | | $ | 17 | | | $ | 1,721 | |
1.51%-2.50% | — | | | — | | | — | | | — | | | — | |
Greater than 2.50% | 346 | | | 44 | | | 1 | | | — | | | 391 | |
Total | $ | 2,047 | | | $ | 47 | | | $ | 1 | | | $ | 17 | | | $ | 2,112 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| At Guaranteed Minimum | | 1 Basis Point-50 Basis Points Above | | 51 Basis Points-150 Basis Points Above | | Greater Than 150 Basis Points Above | | Total |
FIA | (In millions) |
0.00%-1.50% | $ | 20,162 | | | $ | 803 | | | $ | 388 | | | $ | — | | | $ | 21,353 | |
1.51%-2.50% | 171 | | | 11 | | | 25 | | | — | | | 207 | |
Greater than 2.50% | 431 | | | 3 | | | 3 | | | — | | | 437 | |
Total | $ | 20,764 | | | $ | 817 | | | $ | 416 | | | $ | — | | | $ | 21,997 | |
| | | | | | | | | |
Fixed Rate Annuities | | | | | | | | | |
0.00%-1.50% | $ | 2 | | | $ | 28 | | | $ | 1,928 | | | $ | 3,219 | | | $ | 5,177 | |
1.51%-2.50% | 9 | | | 15 | | | 37 | | | 1 | | | 62 | |
Greater than 2.50% | 954 | | | 142 | | | 25 | | | 7 | | | 1,128 | |
Total | $ | 965 | | | $ | 185 | | | $ | 1,990 | | | $ | 3,227 | | | $ | 6,367 | |
| | | | | | | | | |
Universal Life | | | | | | | | | |
0.00%-1.50% | $ | 1,486 | | | $ | 2 | | | $ | — | | | $ | 13 | | | $ | 1,501 | |
1.51%-2.50% | — | | | — | | | — | | | — | | | — | |
Greater than 2.50% | 359 | | | 46 | | | 1 | | | — | | | 406 | |
Total | $ | 1,845 | | | $ | 48 | | | $ | 1 | | | $ | 13 | | | $ | 1,907 | |
Note R — Future Policy Benefits
The following table summarizes balances and changes in the present value of expected net premiums and the present value of the expected FPB for nonparticipating traditional contracts:
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | December 31, 2021 |
Expected net premiums | | (Dollars in millions) |
Balance, beginning of year | | $ | 797 | | | $ | 1,020 | | | $ | 1,152 | |
Beginning balance of original discount rate | | 974 | | | 1,045 | | | 1,131 | |
| | | | | | |
Effect of actual variances from expected experience | | 3 | | | 33 | | | 25 | |
Balance adjusted for variances from expectation | | 977 | | | 1,078 | | | 1,156 | |
| | | | | | |
Interest accrual | | 5 | | | 20 | | | 22 | |
Net premiums collected | | (30) | | | (124) | | | (133) | |
| | | | | | |
Ending Balance at original discount rate | | 952 | | | 974 | | | 1,045 | |
Effect of changes in discount rate assumptions | | (158) | | | (177) | | | (25) | |
Balance, end of year | | $ | 794 | | | $ | 797 | | | $ | 1,020 | |
| | | | | | |
Expected FPB | | | | | | |
Balance, beginning of year | | $ | 2,151 | | | $ | 2,772 | | | $ | 3,105 | |
Beginning balance of original discount rate | | 2,665 | | | 2,806 | | | 2,995 | |
| | | | | | |
Effect of actual variances from expected experience | | (7) | | | 13 | | | (14) | |
Balance adjusted for variances from expectation | | 2,658 | | | $ | 2,819 | | | $ | 2,981 | |
| | | | | | |
Interest accrual | | 14 | | | 59 | | | 62 | |
Benefits payments | | (48) | | | (213) | | | (237) | |
| | | | | | |
Ending Balance at original discount rate | | 2,624 | | | $ | 2,665 | | | $ | 2,806 | |
Effect of changes in discount rate assumptions | | (448) | | | (514) | | | (34) | |
Balance, end of year | | $ | 2,176 | | | $ | 2,151 | | | $ | 2,772 | |
| | | | | | |
Net liability for future policy benefits | | $ | 1,382 | | | $ | 1,354 | | | $ | 1,752 | |
Less: Reinsurance recoverable | | 510 | | | 515 | | | 670 | |
Net liability for future policy benefits, after reinsurance recoverable | | $ | 872 | | | $ | 839 | | | $ | 1,082 | |
| | | | | | |
Weighted-average duration of liability for future policyholder benefits (years) | | 7.53 | | 7.58 | | 8.54 |
The following tables summarize balances and changes in the present value of the expected FPB for limited-payment contracts:
| | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Immediate annuities | | PRT |
| | (Dollars in millions) |
Balance, beginning of year | | $ | 1,429 | | | $ | 2,165 | |
Beginning balance of original discount rate | | 1,858 | | | 2,475 | |
Effect of changes in cash flow assumptions | | — | | | (1) | |
Effect of actual variances from expected experience | | (7) | | | (3) | |
Balance adjusted for variances from expectation | | 1,851 | | | 2,471 | |
Issuances | | 5 | | | 268 | |
Interest accrual | | 16 | | | 23 | |
Benefits payments | | (31) | | | (55) | |
| | | | |
Ending Balance at original discount rate | | 1,841 | | | 2,707 | |
Effect of changes in discount rate assumptions | | (389) | | | (251) | |
Balance, end of year | | $ | 1,452 | | | $ | 2,456 | |
| | | | |
Net liability for future policy benefits | | $ | 1,452 | | | $ | 2,456 | |
Less: Reinsurance recoverable | | 204 | | | — | |
Net liability for future policy benefits, after reinsurance recoverable | | $ | 1,248 | | | $ | 2,456 | |
| | | | |
Weighted-average duration of liability for future policyholder benefits (years) | | 12.18 | | 8.07 |
| | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Immediate annuities | | PRT |
| | (Dollars in millions) |
Balance, beginning of year | | $ | 1,954 | | | $ | 1,148 | |
Beginning balance of original discount rate | | 1,935 | | | 1,151 | |
Effect of changes in cash flow assumptions | | — | | | (20) | |
Effect of actual variances from expected experience | | (26) | | | 2 | |
Balance adjusted for variances from expectation | | $ | 1,909 | | | $ | 1,133 | |
Issuances | | 26 | | | 1,418 | |
Interest accrual | | 60 | | | 50 | |
Benefits payments | | (137) | | | (126) | |
| | | | |
Ending Balance at original discount rate | | $ | 1,858 | | | $ | 2,475 | |
Effect of changes in discount rate assumptions | | (429) | | | (310) | |
Balance, end of year | | $ | 1,429 | | | $ | 2,165 | |
| | | | |
Net liability for future policy benefits | | $ | 1,429 | | | $ | 2,165 | |
Less: Reinsurance recoverable | | 218 | | | — | |
Net liability for future policy benefits, after reinsurance recoverable | | $ | 1,211 | | | $ | 2,165 | |
| | | | |
Weighted-average duration of liability for future policyholder benefits (years) | | 11.76 | | 8.09 |
| | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Immediate annuities | | PRT |
| | (Dollars in millions) |
Balance, beginning of year | | $ | 2,153 | | | $ | — | |
Beginning balance of original discount rate | | 2,040 | | | — | |
| | | | |
Effect of actual variances from expected experience | | (47) | | | — | |
Balance adjusted for variances from expectation | | $ | 1,993 | | | $ | — | |
Issuances | | 18 | | | 1,155 | |
Interest accrual | | 60 | | | 2 | |
Benefits payments | | (136) | | | (6) | |
| | | | |
Ending Balance at original discount rate | | $ | 1,935 | | | $ | 1,151 | |
Effect of changes in discount rate assumptions | | 19 | | | (3) | |
Balance, end of year | | $ | 1,954 | | | $ | 1,148 | |
| | | | |
Net liability for future policy benefits | | $ | 1,954 | | | $ | 1,148 | |
Less: Reinsurance recoverable | | 293 | | | — | |
Net liability for future policy benefits, after reinsurance recoverable | | $ | 1,661 | | | $ | 1,148 | |
| | | | |
Weighted-average duration of liability for future policyholder benefits (years) | | 13.61 | | 8.75 |
The following tables summarize balances and changes in the liability for DPL for limited-payment contracts:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| | Immediate annuities | | PRT | | Immediate annuities | | PRT | | Immediate annuities | | PRT |
| | | | (In millions) | | |
Balance, beginning of year | | $ | 69 | | | $ | 4 | | | $ | 57 | | | $ | 7 | | | $ | 22 | | | $ | — | |
Effect of modeling changes | | 4 | | | — | | | — | | | — | | | — | | | — | |
Effect of changes in cash flow assumptions | | — | | | — | | | — | | | (2) | | | — | | | — | |
Effect of actual variances from expected experience | | 4 | | | — | | | 16 | | | — | | | 39 | | | — | |
Balance adjusted for variances from expectation | | 77 | | | 4 | | | 73 | | | 5 | | | 61 | | | — | |
Issuances | | 1 | | | — | | | 1 | | | — | | | $ | — | | | $ | 7 | |
Interest accrual | | 1 | | | — | | | 2 | | | — | | | 2 | | | — | |
Amortization | | (2) | | | — | | | (7) | | | (1) | | | (6) | | | — | |
Balance, end of year | | $ | 77 | | | $ | 4 | | | $ | 69 | | | $ | 4 | | | $ | 57 | | | $ | 7 | |
The following table reconciles the net FPB to the FPB in the unaudited Condensed Consolidated Balance Sheets. The DPL for Immediate Annuities and PRT is presented together with the FPB in the unaudited Condensed Consolidated Balance Sheets and has been included as a reconciling item in the table below:
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| | (In millions) |
Traditional Life | | $ | 1,382 | | | $ | 1,354 | | | $ | 1,752 | |
Immediate annuities | | 1,452 | | | 1,429 | | | 1,954 | |
PRT | | 2,456 | | | 2,165 | | | 1,148 | |
Immediate annuities DPL | | 77 | | | 69 | | | 57 | |
PRT DPL | | 4 | | | 4 | | | 7 | |
Total | | $ | 5,371 | | | $ | 5,021 | | | $ | 4,918 | |
The following table provides the amount of undiscounted and discounted expected gross premiums and expected future benefits and expenses for nonparticipating traditional and limited-payment contracts:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Undiscounted | | Discounted |
| | March 31, 2023 | | March 31, 2022 | | March 31, 2023 | | March 31, 2022 |
Traditional Life | | (In millions) |
Expected future benefit payments | | $ | 3,073 | | | $ | 3,265 | | | $ | 2,155 | | | $ | 2,734 | |
Expected future gross premiums | | 1,142 | | | 1,289 | | | 839 | | | 1,129 | |
Immediate annuities | | | | | | | | |
Expected future benefit payments | | $ | 3,402 | | | $ | 3,545 | | | $ | 1,452 | | | $ | 1,923 | |
Expected future gross premiums | | — | | | — | | | — | | | — | |
PRT | | | | | | | | |
Expected future benefit payments | | $ | 3,916 | | | $ | 2,289 | | | $ | 2,708 | | | $ | 1,665 | |
Expected future gross premiums | | — | | | — | | | — | | | — | |
The following table summarizes the amount of revenue and interest related to nonparticipating traditional and limited-payment contracts recognized in the unaudited Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Premiums (a) | | Interest Expense (b) |
| | March 31, 2023 | | March 31, 2022 | | March 31, 2023 | | March 31, 2022 |
| | (In millions) |
Traditional Life | | $ | 32 | | | $ | 36 | | | $ | 9 | | | $ | 10 | |
Immediate annuities | | 6 | | | 7 | | | 16 | | | 15 | |
PRT | | 263 | | | 525 | | | 23 | | | 7 | |
Total | | $ | 301 | | | $ | 568 | | | $ | 48 | | | $ | 32 | |
(a) Included in Life insurance premiums and other fees on the Condensed Consolidated Statements of Operations.
(b Included in Benefits and other changes in policy reserves (Remeasurement gains (losses) (a)) on the Condensed Consolidated Statements of Operations.
The following table presents the weighted-average interest rate:
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | December 31, 2021 |
Traditional Life | | | | | | |
Interest accretion rate | | 2.33 | % | | 2.32 | % | | 2.29 | % |
Current discount rate | | 4.96 | % | | 5.37 | % | | 2.41 | % |
Immediate annuities | | | | | | |
Interest accretion rate | | 3.11 | % | | 3.07 | % | | 3.04 | % |
Current discount rate | | 5.02 | % | | 5.21 | % | | 3.07 | % |
PRT | | | | | | |
Interest accretion rate | | 3.82 | % | | 3.20 | % | | 1.20 | % |
Current discount rate | | 5.08 | % | | 5.40 | % | | 2.79 | % |
The following tables summarize the actual experience and expected experience for mortality and lapses of the FPB:
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Traditional Life | | Immediate annuities | | PRT |
Mortality | | | | | | |
Actual experience | | 1.4 | % | | 3.2 | % | | 2.7 | % |
Expected experience | | 1.4 | % | | 1.7 | % | | 2.1 | % |
Lapses | | | | | | |
Actual experience | | 0.1 | % | | — | % | | — | % |
Expected experience | | 0.2 | % | | — | % | | — | % |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Traditional Life | | Immediate annuities | | PRT |
Mortality | | | | | | |
Actual experience | | 1.5 | % | | 3.0 | % | | 1.9 | % |
Expected experience | | 1.3 | % | | 1.9 | % | | 2.5 | % |
Lapses | | | | | | |
Actual experience | | — | % | | — | % | | — | % |
Expected experience | | 0.3 | % | | — | % | | — | % |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Traditional Life | | Immediate annuities | | PRT |
Mortality | | | | | | |
Actual experience | | 1.7 | % | | 4.2 | % | | — | % |
Expected experience | | 1.3 | % | | 2.0 | % | | — | % |
Lapses | | | | | | |
Actual experience | | 0.1 | % | | — | % | | — | % |
Expected experience | | 0.3 | % | | — | % | | — | % |
The following table provides additional information for periods in which a cohort has an NPR > 100% (and; therefore, capped at 100%) (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | Cohort X | | Description | | Cohort X | | Description |
Net Premium Ratio before capping | | 101 | % | | Term with ROP Non-NY Cohort | | 100 | % | | Term with ROP Non-NY Cohort |
Reserves before NP Ratio capping | | $ | 1,208 | | | Term with ROP Non-NY Cohort | | $ | 1,172 | | | Term with ROP Non-NY Cohort |
Reserves after NP Ratio capping | | $ | 1,211 | | | Term with ROP Non-NY Cohort | | $ | 1,173 | | | Term with ROP Non-NY Cohort |
Loss Expense | | $ | 2 | | | Term with ROP Non-NY Cohort | | $ | — | | | Term with ROP Non-NY Cohort |
F&G realized actual-to-expected experience variances and made changes to assumptions during the three months ended March 31, 2023 and the year ended December 31, 2022 as follows:
Traditional life
Significant assumption inputs to the calculation of the FPB for traditional life include mortality, lapses (including lapses due to nonpayment of premium and surrenders for cash surrender value), and discount rates (both accretion and current). We review the cash flow assumptions annually, typically in the third quarter. Market data that underlies current discount rates was updated in the first quarter of 2023 from that utilized in 2022 resulting in decreased discount rates that drove a material increase to the FPB.
In 2022, F&G similarly undertook a review in the third quarter of the significant cash flow assumptions and did not make any changes to mortality or lapses.
Market data that underlies current discount rates was updated from 2021 and increased significantly year-over-year, resulting in a material decrease to the FPB. Impacts to expected net premiums and expected future policy benefits due to discount rate changes in 2022 can be observed in the FPB roll forward tables at December 31, 2022.
Immediate annuities (life contingent)
Significant assumption inputs to the calculation of the FPB for immediate annuities (life contingent) include mortality and discount rates (both accretion and current). We review the cash flow assumptions annually, typically in the third quarter. Market data that underlies current discount rates was updated in the first quarter of 2023 from that utilized in 2022, resulting in decreased discount rates that drove a material increase to the FPB.
In 2022, F&G similarly undertook a review of the significant cash flow assumptions and did not make any changes to mortality. Market data that underlies current discount rates was updated from 2021 and increased significantly year-over-year, resulting in a material decrease to the FPB. Impacts to expected future policy
benefits due to assumption changes in 2022 can be observed in the FPB roll forward tables at December 31, 2022.
PRT (life contingent)
Significant assumption inputs to the calculation of the FPB for PRT (life contingent) include mortality and discount rates (both accretion and current). We review the cash flow assumptions annually, typically in the third quarter. Market data that underlies current discount rates was updated in the first quarter of 2023 from 2022 resulting in decreased discount rates that drove a material increase to the FPB.
In 2022, F&G similarly undertook a review of the significant cash flow assumption and did not make any changes to mortality. Market data that underlies current discount rates was updated from 2021 and increased significantly year-over-year, resulting in a material decrease to the FPB. Impacts to expected future policy benefits due to assumption changes in 2022 can be observed in the FPB roll forward tables at December 31, 2022.
Premium deficiency testing
F&G conducts annual premium deficiency testing for its long-duration contracts except for the FPB for nonparticipating traditional and limited-payment contracts. F&G also conducts annual premium deficiency testing for the VOBA of all long-duration contracts. Premium deficiency testing is performed by reviewing assumptions used to calculate the insurance liabilities and determining whether the sum of the existing contract liabilities and the present value of future gross premiums is sufficient to cover the present value of future benefits to be paid to or on behalf of policyholders and settlement costs and recover unamortized present value of future profits. Anticipated investment income, based on F&G’s experience, is considered when performing premium deficiency testing for long-duration contracts. During 2023 and 2022, F&G was not required to establish any additional liabilities as a result of premium deficiency testing.
Note S — ASU 2018-12 Transition
We adopted ASU 2018-12 on January 1, 2023 with a transition date of January 1, 2021, or the beginning of the earliest period that will be presented in the annual December 31, 2023 Consolidated Financial Statements. We elected to adopt ASU 2018-12 using the full retrospective transition method and balances for FPB, DAC and balances amortized on a basis consistent with DAC (VOBA, DSI, and URL), and MRBs were adjusted to conform to ASU 2018-12 starting as of the F&G acquisition date, June 1, 2020. No hindsight was used for the full retrospective adoption of MRBs. As a result of adoption, the Company recorded a cumulative-effect adjustment, which increased opening 2021 retained earnings by $73 million, net of tax.
The following table summarizes the balance of and changes in the FPB on January 1, 2021 due to adoption of ASU 2018-12:
| | | | | | | | | | | | | | | | | |
| Immediate annuities | | Traditional Life | | Total (3) |
| (In millions) |
Balance, December 31, 2020 | $ | 1,861 | | | $ | 2,144 | | | $ | 4,005 | |
| | | | | |
| | | | | |
Cumulative effect of retrospective adoption (1) | 201 | | | (279) | | | (78) | |
Effect of remeasurement of liability at current discount rate (2) | 113 | | | 88 | | | 201 | |
Balance, January 1, 2021 | $ | 2,175 | | | $ | 1,953 | | | $ | 4,128 | |
Less: Reinsurance Recoverable | 322 | | | 793 | | | 1,115 | |
Balance, January 1, 2021, net of reinsurance | $ | 1,853 | | | $ | 1,160 | | | $ | 3,013 | |
| | | | | |
(1) Adjustments for the cumulative effect of adoption of the new measurement guidance under the full retrospective method for contract issue years from the FNF Acquisition Date through December 31, 2020, net of the effects of any change in the DPL. |
(2) The remeasurement of the liability at the current discount rate is reflected as an adjustment to opening AOCI upon the adoption of ASU 2018-12. |
(3) PRT was not written as of the transition date, January 1, 2021, and as a result is not presented in the transition adjustment roll forward. |
The following table summarizes the balance of and changes in VOBA on January 1, 2021 due to adoption of ASU 2018-12:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| FIA | | Fixed rate annuities | | Immediate annuities | | Universal Life | | Traditional Life | | Total |
| (In millions) |
Balance, December 31, 2020 | $ | 1,208 | | | $ | 15 | | | $ | 86 | | | $ | 139 | | | $ | 18 | | | $ | 1,466 | |
Adjustment for reversal of AOCI adjustments (1) | 208 | | | 24 | | | — | | | 29 | | | 22 | | | 283 | |
Cumulative effect of retrospective adoption (2) | (14) | | | 7 | | | (5) | | | (9) | | | (1) | | | (22) | |
Transition opening balance adjustment | 69 | | | 2 | | | 144 | | | 5 | | | 43 | | | 263 | |
Balance, January 1, 2021 | $ | 1,471 | | | $ | 48 | | | $ | 225 | | | $ | 164 | | | $ | 82 | | | $ | 1,990 | |
| | | | | | | | | | | |
(1) Prior period "shadow" adjustments in AOCI have been reversed upon the adoption of ASU 2018-12 from opening AOCI. |
(2) Adjustments for the cumulative effect of adoption of the simplified amortization methodology under the full retrospective method for contract issue years from the FNF acquisition date through December 31, 2020 |
(3) Adjustments for the change in VOBA due to the full retrospective adjustment of carrying amounts of acquired contracts as of the FNF Acquisition Date due to the adoption of ASU 2018-12. |
The following table summarizes the balance of and changes in DAC on January 1, 2021 due to adoption of ASU 2018-12:
| | | | | | | | | | | | | | | | | | | | | | | |
| FIA | | Fixed rate annuities | | Universal Life | | Total |
| (In millions) |
Balance, December 31, 2020 | $ | 167 | | | $ | 14 | | | $ | 41 | | | $ | 222 | |
Adjustment for reversal of AOCI adjustments (1) | 15 | | | 2 | | | 8 | | | 25 | |
Cumulative effect of retrospective adoption (2) | (1) | | | — | | | (1) | | | (2) | |
Balance, January 1, 2021 | $ | 181 | | | $ | 16 | | | $ | 48 | | | $ | 245 | |
| | | | | | | |
(1) Prior period "shadow" adjustments in AOCI have been reversed upon the adoption of ASU 2018-12 from opening AOCI. |
(2) Adjustments for the cumulative effect of adoption of the simplified amortization methodology under the full retrospective method for contract issue years from the FNF acquisition date through December 31, 2020. |
The following table summarizes the balance of and changes in DSI on January 1, 2021 due to adoption of ASU 2018-12:
| | | | | | | | | | | | | | | |
| FIA | | | | | | Total |
| (In millions) |
Balance, December 31, 2020 | $ | 36 | | | | | | | $ | 36 | |
Adjustment for reversal of AOCI adjustments (1) | 5 | | | | | | | 5 | |
Cumulative effect of retrospective adoption (2) | 4 | | | | | | | 4 | |
Balance, January 1, 2021 | $ | 45 | | | | | | | $ | 45 | |
| | | | | | | |
(1) Prior period "shadow" adjustments in AOCI have been reversed upon the adoption of ASU 2018-12 from opening AOCI. |
(2) Adjustments for the cumulative effect of adoption of the simplified amortization methodology under the full retrospective method for contract issue years from the FNF acquisition date through December 31, 2020. |
The following table summarizes the balance of and changes in URL on January 1, 2021 due to adoption of ASU 2018-12:
| | | | | | | | | | | | | | | | | |
| | | | | Universal Life | | Total |
| | | | | (In millions) |
Balance, December 31, 2020 | | | | | $ | 2 | | | $ | 2 | |
Adjustment for reversal of AOCI adjustments (1) | | | | | 25 | | | 25 | |
Cumulative effect of retrospective adoption (2) | | | | | 2 | | | 2 | |
Balance, January 1, 2021 | | | | | $ | 29 | | | $ | 29 | |
| | | | | | | |
(1) Prior period "shadow" adjustments in AOCI have been reversed upon the adoption of ASU 2018-12 from opening AOCI. |
(2) Adjustments for the cumulative effect of adoption of the simplified amortization methodology under the full retrospective method for contract issue years from the FNF acquisition date through December 31, 2020. |
The following table summarizes the balance of and changes in the asset and liability position of MRBs on January 1, 2021 due to adoption of ASU 2018-12:
| | | | | | | | | | | | | | | | | |
| FIA | | Fixed rate annuities | | Total |
| (In millions) |
Balance, December 31, 2020 - Carrying amount of MRBs under prior guidance (1) | $ | 531 | | | $ | — | | | $ | 531 | |
Adjustment for reversal of AOCI adjustments (2) | (116) | | | — | | | (116) | |
Cumulative effect of the changes in the instrument-specific credit risk between the original contract issuance date and the transition date (3) | 159 | | | — | | | 159 | |
Remaining cumulative difference (exclusive of the instrument specific credit risk change) between June 1, 2020 carrying amount and fair value measurement for the MRBs (4) | (96) | | | 1 | | | (95) | |
Balance, January 1, 2021 - Market risk benefits at fair value | $ | 478 | | | $ | 1 | | | $ | 479 | |
Less: Reinsurance Recoverable | — | | | — | | | — | |
Balance, January 1, 2021, net of reinsurance | $ | 478 | | | $ | 1 | | | $ | 479 | |
| | | | | |
(1) The pre-adoption balance as of December 31, 2020 balance for MRBs represents the contract features that meet the definition of an MRB under ASU 2018-12 and the related carrying amount of those features prior to the ASU. Those contract features were previously accounted for at fair value as a derivative or embedded derivative under ASC 815 or as an additional liability for annuitization benefits or death or other insurance benefits under ASC 944. |
(2) Prior period "shadow" adjustments in AOCI have been reversed upon the adoption of ASU 2018-12 from opening AOCI. |
(3) The cumulative effective of the change in instrument-specific credit risk between the FNF Acquisition Date or, if later, the original contract issuance date and the transition date to ASU 2018-12, which is recorded as an adjustment to opening AOCI. |
(4) The cumulative difference (exclusive of instrument-specific credit risk change) between the pre-adoption carrying amount and the fair value measurement for MRBs is recorded as an adjustment to opening retained earnings. |
The following table presents the effect of transition adjustments on Equity on January 1, 2021 due to the adoption of ASU 2018-12:
| | | | | | | | | | | |
| January 1, 2021 |
| Retained Earnings | | AOCI |
| (In millions) |
Contractholder funds | $ | 100 | | | $ | 115 | |
MRB | 29 | | | (159) | |
FPB | (15) | | | (159) | |
VOBA | (21) | | | 233 | |
DAC | (1) | | | 5 | |
Increase to Equity, gross of tax | $ | 92 | | | $ | 35 | |
Tax impact | 19 | | 9 |
Increase to Equity, net of tax | $ | 73 | | | $ | 26 | |
For MRBs, the transition adjustment reflected within the unaudited Condensed Consolidated Statements of Comprehensive Earnings relates to the cumulative effect of changes in the instrument-specific credit risk between contract issue date and transition date. The remaining difference between the fair value and carrying amount of the MRBs at transition, excluding the amounts recorded in the unaudited Condensed Consolidated Statements of Comprehensive Earnings, was recorded as an adjustment to Retained Earnings as of the transition date.
For the FPB, the net transition adjustment is primarily related to the difference in the discount rate used pre-transition and the discount rate at January 1, 2021, partially offset by the removal of provisions for adverse deviation from the cash flow assumptions used in the FPB calculation. At transition, we did not identify any instances, at the cohort level, where net premiums exceeded gross premiums.
Before the adoption of ASU 2018-12, VOBA was amortized consistent with DAC, which was amortized over the lives of the policies in relation to the expected emergence of estimated gross profits (“EGPs”). Based on our historical practice of using consistent amortization methods for VOBA and DAC, we elected to change the amortization method for VOBA associated with fixed rate annuities, FIAs, and IUL/Universal Life products to maintain consistency with the amortization method for DAC. At transition, VOBA associated with these product types is amortized on a constant level basis for the grouped contracts over the expected term of the related contracts to approximate straight-line amortization. Additionally, at transition, shadow adjustments previously recorded in the unaudited Condensed Consolidated Statements of Comprehensive Earnings, consistent with the historic amortization of DAC, have been removed.
For DAC, DSI and URL, we removed shadow adjustments previously recorded in the unaudited Condensed Consolidated Statements of Comprehensive Earnings for the impact of unrealized gains and losses that were included in the pre-transition expected gross profits amortization calculation as of the transition date.