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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
| | | | | |
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 001-35538
The Carlyle Group Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 45-2832612 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1001 Pennsylvania Avenue, NW
Washington, DC, 20004-2505
(Address of principal executive offices) (Zip Code)
(202) 729-5626
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | CG | The Nasdaq Global Select Market |
4.625% Subordinated Notes due 2061 of Carlyle Finance L.L.C. | CGABL | The Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
| | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý
The aggregate market value of the common stock of the Registrant held by non-affiliates as of June 30, 2022 was $8,088,355,343.
The number of the Registrant’s shares of common stock outstanding as of February 8, 2023 was 364,219,014.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement relating to its 2023 annual meeting of the shareholders (the “2023 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2023 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
EXPLANATORY NOTE
The Carlyle Group Inc., a Delaware corporation, together with its subsidiaries, where applicable, the “Company,” which may also be referred to as “we,” “us” or “our,” is filing this Amendment No. 1 (the “Amendment”) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which was filed on February 9, 2023 (the “Form 10-K”), to provide financial statements for FGH Parent, L.P. (“FGH Parent,” the successor partnership to Fortitude Group Holdings, LLC), pursuant to Rule 3-09 of Regulation S-X as of and for the years ended December 31, 2022, 2021 and 2020. FGH Parent, along with its predecessor, was significant under Rule 3-09 for the year ended December 31, 2020, but not for the years ended December 31, 2021 and 2022. As a result, under Rule 3-09, we have included in this Amendment unaudited financial statements for 2022 and 2021 and audited financial statements for 2020. In accordance with Rule 3-09(b), these financial statements of FGH Parent are being filed as an amendment to the Form 10-K as Exhibits 99.1 and 99.2 included in Part IV, Item 15 of this filing.
Except as otherwise expressly noted, this Amendment does not modify or update in any way (i) the consolidated financial position, the results of operations or cash flows of the Company, or (ii) the disclosures in or exhibits to the Form 10-K; nor does it reflect events occurring after the filing of the Form 10-K. Among other things, forward-looking statements made in the Form 10-K have not been revised to reflect events that occurred or facts that became known to us after the filing of the Form 10-K, and such forward-looking statements should be read in their historical context. Furthermore, this Amendment should be read in conjunction with the Form 10-K and any subsequent filings with the U.S. Securities and Exchange Commission.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report
1. Financial Statements
| | | | | |
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP, Tysons, VA, PCAOB ID: 42) | 172 |
Consolidated Balance Sheets as of December 31, 2022 and 2021 | 175 |
Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021 and 2020 | 176 |
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020 | 177 |
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2022, 2021 and 2020 | 178 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 | 180 |
Notes to Consolidated Financial Statements | 182 |
3. Exhibits
A list of exhibits required to be filed or furnished as part of this Amendment is set forth in the Exhibit Index below.
(c) Separate financial statements of subsidiaries not consolidated and fifty percent or less owned persons
The unaudited financial statements for the years ended December 31, 2022 and 2021 and audited financial statements for the year ended December 31, 2020 of FGH Parent, L.P. included in Exhibits 99.1 and 99.2 are filed as part of Item 15 of Amendment No. 1 to the Company’s Annual Report on Form 10-K filed on March 22, 2023 and should be read in conjunction with the Company’s consolidated financial statements.
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Exhibit Index |
Exhibit No. | | Description |
| |
23.2 | | |
| | |
31.3 | | |
| | |
31.4 | | |
| | |
32.3 | | |
| | |
32.4 | | |
| | |
99.1 | | |
| | |
99.2 | | |
| | |
104 | | The cover page from The Carlyle Group Inc.’s Amendment No. 1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2022, formatted in Inline XBRL. |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 22, 2023
| | | | | | | | |
The Carlyle Group Inc. |
| |
By: | | /s/ Curtis L. Buser |
| | Name: Curtis L. Buser |
| | Title: Chief Financial Officer |
DocumentCONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-236397) and Form S-8 (No. 333-181109, No. 333-187264, No. 333-194164, No. 333-202315, No. 333-209690, No. 333-216100, No. 333-223051, No. 333-229663, No. 333-236394, No. 333-252992, No. 333-269328 and No. 333-269723) of The Carlyle Group Inc. of our reports dated November 12, 2021 relating to the consolidated financial statements of Fortitude Group Holdings, LLC, and March 10, 2023 relating to the consolidated financial statements of FGH Parent, L.P., which appear in this Form 10-K/A.
/s/PricewaterhouseCoopers LLP
Nashville, TN
March 22, 2023
DocumentI, Harvey M. Schwartz, certify that:
1.I have reviewed this Amendment No. 1 to the Annual Report on Form 10-K for the year ended December 31, 2022 of The Carlyle Group Inc. (the “Registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report.
| | |
Date: March 22, 2023 |
|
/s/ Harvey M. Schwartz |
Harvey M. Schwartz |
Chief Executive Officer |
The Carlyle Group Inc. |
(Principal Executive Officer) |
DocumentI, Curtis L. Buser, certify that:
1.I have reviewed this Amendment No. 1 to the Annual Report on Form 10-K for the year ended December 31, 2022 of The Carlyle Group Inc. (the “Registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report.
| | |
Date: March 22, 2023 |
|
/s/ Curtis L. Buser |
Curtis L. Buser |
Chief Financial Officer |
The Carlyle Group Inc. |
(Principal Financial Officer) |
DocumentCertification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with this Amendment No. 1 to the Annual Report of The Carlyle Group Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Harvey M. Schwartz, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| | |
|
/s/ Harvey M. Schwartz |
Harvey M. Schwartz Chief Executive Officer The Carlyle Group Inc. Date: March 22, 2023 |
|
*The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.
DocumentCertification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with this Amendment No. 1 to the Annual Report of The Carlyle Group Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Curtis L. Buser, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| | |
|
/s/ Curtis L. Buser |
Curtis L. Buser Chief Financial Officer The Carlyle Group Inc. Date: March 22, 2023 |
|
*The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.
Document
FGH Parent, L.P.
Consolidated Financial Statements
As of and for the years ended December 31, 2022 (not covered by the auditor’s report) and 2021 (not covered by the auditor’s report)
FGH Parent, L.P.
Consolidated Financial Statements
Table of Contents
| | | | | | | | | |
Consolidated Financial Statements |
| |
Consolidated Balance Sheets | |
Consolidated Statements of Income (Loss) | |
Consolidated Statements of Comprehensive Income (Loss) | |
Consolidated Statements of Changes in Owners' Equity | |
Consolidated Statements of Cash Flows | |
| | | |
Notes to Consolidated Financial Statements |
Note 1 | | Organization and Nature of Operations | |
Note 2 | | Basis of Presentation | |
Note 3 | | Summary of Significant Accounting Policies | |
Note 4 | | Acquisitions | |
Note 5 | | Significant Reinsurance Transactions | |
Note 6 | | Investments | |
Note 7 | | Derivatives | |
Note 8 | | Fair Value Measurements | |
Note 9 | | Reinsurance | |
Note 10 | | Insurance Liabilities | |
Note 11 | | Value of Business Acquired, Deferred Gains and Deferred Charge Assets | |
Note 12 | | Debt Obligations and Credit Facilities | |
Note 13 | | Contingencies and Commitments | |
Note 14 | | Income Taxes | |
Note 15 | | Related Party Transactions | |
Note 16 | | Owners' Equity | |
Note 17 | | Statutory Requirements | |
Note 18 | | Subsequent Events | |
| | | |
| |
| |
| |
| |
| |
FGH Parent, L.P.
Consolidated Balance Sheets
(in millions, except units data)
| | | | | | | | | | | |
| December 31, |
| 2022* | | 2021* |
| | | |
Assets: | | | |
Investments: | | | |
Funds withheld - directly managed, at fair value | $ | 33,003 | | | $ | 43,948 | |
Fixed maturities: | | | |
Securities, at fair value | 8,935 | | | — | |
Available for sale, at fair value (amortized cost: $2,274 and $2,271 at December 31, 2022 and 2021, respectively) | 1,687 | | | 2,266 | |
Equity securities, at fair value | 175 | | | — | |
Mortgage loans, at fair value | 334 | | | — | |
Other invested assets (includes $178 and $— of assets measured at fair value at December 31, 2022 and 2021, respectively) | 1,969 | | | 679 | |
| | | |
Short term investments | 262 | | | 293 | |
| | | |
Total investments | 46,365 | | | 47,186 | |
| | | |
Cash and cash equivalents | 2,216 | | | 995 | |
Accrued investment income | 98 | | | 13 | |
| | | |
| | | |
Income taxes | 2,636 | | | 445 | |
Deposit asset, at fair value | 607 | | | — | |
| | | |
| | | |
Reinsurance recoverables (includes $253 and $— of assets measured at fair value at December 31, 2022 and 2021, respectively) | 463 | | | — | |
Deferred charge assets | 279 | | | — | |
Funds withheld by ceding companies | 238 | | | — | |
Goodwill and other intangibles | 127 | | | — | |
| | | |
| | | |
| | | |
Other assets | 173 | | | 14 | |
Separate account assets, at fair value | 23,601 | | | — | |
| | | |
Total assets | $ | 76,803 | | | $ | 48,653 | |
*not covered by the auditor’s report
See accompanying Notes to Consolidated Financial Statements.
FGH Parent, L.P.
Consolidated Balance Sheets (continued)
(in millions, except units data)
| | | | | | | | | | | |
| December 31, |
| 2022* | | 2021* |
| | | |
Liabilities and Equity | | | |
Liabilities: | | | |
Future policy benefits for life insurance and annuity contracts | $ | 26,995 | | | $ | 27,771 | |
Policyholder contract deposits | 12,146 | | | 7,055 | |
Insurance liabilities, at fair value | 5,546 | | | — | |
Value of business acquired | 3,824 | | | 4,053 | |
Liability for unpaid losses and loss adjustment expenses | 3,613 | | | 3,310 | |
Collateral deposit liability | 181 | | | 188 | |
Long-term debt | 745 | | | 243 | |
Reinsurance payable | 796 | | | 609 | |
Deferred gain from reinsurance contracts | 699 | | | 731 | |
| | | |
| | | |
| | | |
Loaned securities and repurchase agreements | 417 | | | — | |
Derivative liabilities | 200 | | | — | |
Other liabilities | 334 | | | 75 | |
| | | |
Separate account liabilities | 23,601 | | | — | |
| | | |
Total liabilities | 79,097 | | | 44,035 | |
| | | |
Contingencies and commitments (Note 13) | | | |
| | | |
Equity: | | | |
| | | |
| | | |
Owners' equity - 1,560,036 and 1,000,000 units issued and outstanding at December 31, 2022 and 2021, respectively | 4,234 | | | 3,185 | |
Retained earnings (deficit) | (6,179) | | | 1,438 | |
Accumulated other comprehensive loss | (349) | | | (5) | |
| | | |
Total equity (deficit) | (2,294) | | | 4,618 | |
| | | |
Total liabilities and equity | $ | 76,803 | | | $ | 48,653 | |
*not covered by the auditor’s report
See accompanying Notes to Consolidated Financial Statements.
FGH Parent, L.P.
Consolidated Statements of Income (Loss)
(in millions)
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022* | | 2021* |
| | | |
Revenues: | | | |
Premiums | $ | 244 | | | $ | 280 | |
Policy charges and fee income | 449 | | | 76 | |
Net investment income | 2,093 | | | 2,049 | |
Change in fair value of funds withheld | (8,688) | | | (1,303) | |
Investment gains (losses) | (3,113) | | | 64 | |
Foreign exchange gains | 32 | | | 23 | |
Asset management and service fees | 71 | | | — | |
Other revenues | 87 | | | — | |
| | | |
| | | |
Total revenues | (8,825) | | | 1,189 | |
| | | |
Benefits, losses and expenses: | | | |
| | | |
| | | |
Policyholder benefits and changes in fair value of insurance liabilities | (112) | | | 1,060 | |
Interest credited to policyholder account balances | 321 | | | 194 | |
General operating and other expenses | 538 | | | 196 | |
Interest expense | 31 | | | 12 | |
| | | |
Total benefits, losses and expenses | 778 | | | 1,462 | |
| | | |
Loss before income tax benefit | (9,603) | | | (273) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Income tax benefit | (1,986) | | | (61) | |
| | | |
Net loss | $ | (7,617) | | | $ | (212) | |
*not covered by the auditor’s report
See accompanying Notes to Consolidated Financial Statements.
FGH Parent, L.P.
Consolidated Statements of Comprehensive Income (Loss)
(in millions)
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022* | | 2021* |
| | | |
Net loss | $ | (7,617) | | | $ | (212) | |
| | | |
Other comprehensive loss, before tax: | | | |
Change in unrealized losses of fixed maturity securities, available for sale | (576) | | | (124) | |
Change in own-credit risk related to insurance liabilities | 140 | | | — | |
| | | |
Total other comprehensive loss, before tax | (436) | | | (124) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Income tax benefit related to other comprehensive loss | 92 | | | 26 | |
| | | |
Total other comprehensive loss, net of tax | (344) | | | (98) | |
| | | |
Comprehensive loss | $ | (7,961) | | | $ | (310) | |
*not covered by the auditor’s report
See accompanying Notes to Consolidated Financial Statements.
FGH Parent, L.P.
Consolidated Statements of Changes in Owners' Equity
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, 2022* and 2021* |
| | | | | Accumulated | | |
| | | | | Other | | Total |
| Owners' | | Retained | | Comprehensive | | Owners' |
| Equity | | Earnings (Deficit) | | Income (Loss) | | Equity (Deficit) |
| | | | | | | |
Balance, December 31, 2020 | $ | 3,185 | | | $ | 1,650 | | | $ | 93 | | | $ | 4,928 | |
| | | | | | | |
Net loss | — | | | (212) | | | — | | | (212) | |
| | | | | | | |
Other comprehensive loss | — | | | — | | | (98) | | | (98) | |
| | | | | | | |
Balance, December 31, 2021 | 3,185 | | | 1,438 | | | (5) | | | 4,618 | |
Contributed capital | 1,049 | | | — | | | — | | | 1,049 | |
Net loss | — | | | (7,617) | | | — | | | (7,617) | |
| | | | | | | |
Other comprehensive loss | — | | | — | | | (344) | | | (344) | |
| | | | | | | |
Balance, December 31, 2022 | $ | 4,234 | | | $ | (6,179) | | | $ | (349) | | | $ | (2,294) | |
*not covered by the auditor’s report
See accompanying Notes to Consolidated Financial Statements.
| | | | | | | | | | | |
FGH Parent, L.P. Consolidated Statements of Cash Flows |
(in millions) |
| | | |
| Year Ended December 31, |
| 2022* | | 2021* |
Cash flows provided by (used in) operating activities | | | |
Net loss | $ | (7,617) | | | $ | (212) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
Amortization of value of business acquired | (229) | | | (238) | |
Amortization of deferred gain (charge) from reinsurance contracts | 51 | | | 14 | |
Investment (gains) losses | 2,059 | | | (76) | |
Deferred income tax benefit | (2,122) | | | (351) | |
Net foreign exchange gains (losses) | (32) | | | — | |
Other | (57) | | | 18 | |
Changes in operating assets and liabilities: | | | |
Funds withheld - directly managed | 10,838 | | | 1,604 | |
Future policy benefits for life insurance and annuity contracts | (669) | | | (614) | |
Policyholder contract deposits | (256) | | | (337) | |
Insurance liabilities, at fair value | (7,750) | | | — | |
Deposit asset, at fair value | 1,989 | | | — | |
Liability for unpaid losses and loss adjustment expenses | 171 | | | (283) | |
Deferred gain from reinsurance contracts | 111 | | | 167 | |
Deferred charge assets | (126) | | | — | |
| | | |
Income taxes | 295 | | | (117) | |
Reinsurance payable | (5) | | | 28 | |
Reinsurance recoverable | 4,711 | | | — | |
Funds withheld by ceding companies | (238) | | | — | |
Derivatives, net | (276) | | | — | |
Other, net | 47 | | | — | |
Net cash provided by (used in) operating activities | 895 | | | (397) | |
| | | |
Cash flows provided by (used in) investing activities | | | |
Proceeds from the sale, maturities, and prepayments of: | | | |
Fixed maturities, securities at fair value | 6,524 | | | — | |
| | | |
Fixed maturities, available for sale | 488 | | | 2,710 | |
Mortgage loans | 6 | | | — | |
Other invested assets | 199 | | | 112 | |
Short term investments | 731 | | | 69 | |
Purchases of: | | | |
Fixed maturities, securities at fair value | (10,983) | | | — | |
Fixed maturities, available for sale | (374) | | | (987) | |
Equity securities | (11) | | | — | |
Mortgage loans | (341) | | | — | |
Other invested assets | (1,194) | | | (390) | |
Short term investments | (371) | | | (315) | |
Acquisitions, net of cash acquired (Note 4) | (217) | | | — | |
Other, net | (2) | | | — | |
Net cash provided by (used in) investing activities | (5,545) | | | 1,199 | |
| | | |
| | | | | | | | | | | |
FGH Parent, L.P. Consolidated Statements of Cash Flows (continued) |
(in millions) |
| | | |
| Year Ended December 31, |
| 2022* | | 2021* |
| | | |
Cash flows provided by (used in) financing activities | | | |
Net proceeds from issuance of debt obligations | 850 | | 247 | |
Repayment of debt obligations | (350) | | | (242) | |
| | | |
Capital contributions | 1,049 | | | — | |
Cash collateral for loaned securities | (99) | | | — | |
Deposits received for investment-type policyholder contract deposits | 4,643 | | | — | |
Withdrawals from investment-type policyholder contract deposits | (417) | | | — | |
Drafts outstanding | (7) | | | — | |
Repurchase agreements | 300 | | | — | |
Net cash provided by financing activities | 5,969 | | | 5 | |
| | | |
Effect of foreign exchange rate changes on cash and cash equivalents | (98) | | | — | |
| | | |
Net increase in cash and cash equivalents | 1,221 | | | 807 | |
Cash and cash equivalents at the beginning of the period | 995 | | | 188 | |
| | | |
Cash and cash equivalents at the end of the period | $ | 2,216 | | | $ | 995 | |
| | | | | | | | | | | |
Supplemental Disclosures of Cash Flow Information | 2022* | | 2021* |
| | | |
Cash paid during the period for: | | | |
Interest | $ | 18 | | | $ | 7 | |
Taxes, net of refunds | $ | 67 | | | $ | 407 | |
| | | |
Non-cash transactions: | | | |
Premiums and deposits on policies reinsured through funds withheld arrangements | $ | 271 | | | $ | 280 | |
Claims, withdrawals and surrenders on policies reinsured through funds withheld arrangements | $ | 2,634 | | | $ | 2,566 | |
| | | |
| | | |
| | | |
Receipt of securities from funds withheld arrangements | $ | 789 | | | $ | 660 | |
*not covered by the auditor’s report
In addition, during the year ended December 31, 2022, we had novations related to variable-indexed annuities under the reinsurance agreement with Pruco Life Insurance Company, a subsidiary of Prudential Financial, Inc., that resulted in non-cash transactions of $4,635 million of investments with a corresponding offset of ($4,635) million related to the modified coinsurance payable, which is presented on a net basis with the reinsurance recoverables in the consolidated statements of cash flows and consolidated balance sheets. Refer to Note 9.
See accompanying Notes to Consolidated Financial Statements.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
1. Organization and Nature of Operations
FGH Parent, L.P. ("FGP") is a Bermuda limited partnership and is the ultimate group holding entity of the following wholly owned direct and indirect subsidiaries:
•Fortitude Group Holdings, LLC ("FGH"), a direct subsidiary of FGP, is a holding company formed under the laws of the State of Delaware, United States of America. The direct and indirect subsidiaries of FGH include:
•Fortitude Reinsurance Company Ltd. ("FRL"), a direct subsidiary of FGH, is a Bermuda domiciled company. FRL is registered under the Insurance Act 1978 and related regulations, as amended (the "Bermuda Insurance Act") as a Class 4 and Class E composite reinsurance company and is primarily a reinsurer of general insurance and life insurance run-off business. On January 1, 2022, the Texas Department of Insurance granted FRL authority to operate as a Reciprocal Jurisdiction Reinsurer.
◦Fortitude Re Investments, LLC ("FRI"), an investment holding company organized in the State of Delaware, United States of America, is a wholly owned subsidiary of FRL.
◦Grove Funding II, Inc. ("Grove Funding II"), an investment holding company organized in the State of Delaware, United States of America, is a wholly owned subsidiary of FRI.
•Fortitude Group Services, Inc. ("FGS"), a direct subsidiary of FGH, is a management services company incorporated in the State of Delaware, United States of America.
•Fortitude Life & Annuity Solutions, Inc. ("FLAS"), a direct subsidiary of FGH, is a licensed third party administrator for life and annuity business domiciled in the state of Nevada which was acquired by the Company on January 1, 2022. FLAS is incorporated in the state of Delaware. Refer to Note 4 for additional information regarding the acquisition of FLAS.
•Fortitude P&C Solutions, Inc. ("FPCS"), a direct subsidiary of FGH, is a licensed third party administrator for property and casualty business domiciled in the state of Illinois which was acquired by the Company on January 1, 2022. FPCS is incorporated in the state of Delaware. Refer to Note 4 for additional information regarding the acquisition of FPCS.
•Fortitude US Reinsurance Company ("FRC"), previously named Rx Life Insurance Company ("Rx Life"), was acquired by the Company on January 3, 2022 from Heritage Life Insurance Company. FRC, a direct subsidiary of FGH, is a life and annuity corporation domiciled in the state of Arizona and widely licensed throughout the U.S. Refer to Note 4 for additional information regarding the acquisition of FRC.
•Fortitude Life Insurance & Annuity Company ("FLIAC"), previously named Prudential Annuities Life Assurance Corporation ("PALAC"), was acquired by the Company on April 1, 2022 from Prudential Financial, Inc. ("Prudential Financial"). FLIAC, a direct subsidiary of FGH, is a life and annuity corporation domiciled in the state of Arizona and widely licensed throughout the U.S. Refer to Note 4 for additional information regarding the acquisition of FLIAC.
◦Grove Funding I, Inc. ("Grove Funding I"), an investment holding company organized in the State of Delaware, United States of America, is a wholly owned subsidiary of FLIAC.
•Fortitude Casualty Insurance Company ("FCIC"), previously named Plans’ Liability Insurance Company ("PLIC"), was acquired by the Company on May 12, 2022. FCIC, a direct subsidiary of FGH, is an Ohio domiciled property and casualty insurer which is widely licensed in the U.S. Refer to Note 4 for additional information regarding the acquisition of FCIC.
•Fortitude International Ltd. ("FIL"), a direct subsidiary of FGP, is a Bermuda domiciled holding company. The direct and indirect subsidiaries of FIL include:
•Fortitude International Group Holdings ("FIGH"), a direct subsidiary of FIL, is a holding company domiciled in the United Kingdom.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
◦Fortitude International Reinsurance Ltd. ("FIRL"), a direct subsidiary of FIGH, is a Bermuda exempted company, which was incorporated on November 18, 2021. FIRL was registered with effect from January 1, 2022 under the Bermuda Insurance Act as a Class 4 and Class E composite reinsurance company.
◦Fortitude International Group Services Ltd. ("FIGS"), a direct subsidiary of FIGH, is a management services company formed under the laws of Bermuda.
The Company is owned by Carlyle FRL, L.P. ("Carlyle FRL"), an investment fund advised by an affiliate of The Carlyle Group Inc. ("Carlyle"), an SEC-registered global investment firm, T&D United Capital Co., Ltd. ("T&D"), a wholly-owned subsidiary of T&D Holdings, Inc., a listed Japanese insurance group, and AIG, an SEC-registered company, which owned interests in the Company of 71.28%, 25.93% and 2.79%, respectively, as of December 31, 2022 and 71.5%, 25.0% and 3.5%, respectively, as of December 31, 2021.
Unless the context indicates otherwise, the terms ”the Company” “we” “us” or “our” refers to the consolidated group of FGH Parent, L.P. and subsidiaries.
2. Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). All material intercompany transactions have been eliminated.
In December 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-12 Definition of a Public Business Entity which provides a single definition of the term 'public business entity'. The definition within ASU 2013-12 includes a business entity that is required to file or furnish financial statements with the U.S. Securities and Exchange Commission ("SEC"), including when financial statements are included in another entity's filing. As of December 31, 2019 and until June 2, 2020, 19.9% of the membership units of the FGH were owned directly by TC Group Cayman Investment Holdings, L.P. Subsequent to June 2, 2020 and through December 31, 2020, 19.9% of the membership units of FGP were owned indirectly by Carlyle, through Carlyle’s interest in Carlyle FRL. Carlyle is required under SEC Regulation S-X, Rule 3-09 ("Rule 3-09"), Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Person, to file the Company's consolidated financial statements for the years ended December 31, 2022 and 2021 on an unaudited basis and for the periods from January 1, 2020 to June 1, 2020 and June 2, 2020 to December 31, 2020 on an audited basis within its Form 10-K for the year ended December 31, 2022.
The Company's consolidated financial statements and related disclosures have therefore been prepared in accordance with the Company's designation as a public business entity. As the Company is a public business entity solely because of the application of Rule 3-09, it is not required to adopt forthcoming accounting standards on the effective date applicable to SEC filers. Further, the Company is not required to apply existing accounting standards applicable only to public entities, including those set forth in ASC 280, Segment Reporting.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions when applying accounting policies that often involve a significant degree of judgment. The Company's accounting policies that are most dependent on the application of estimates and assumptions are those related to the determination of:
•Fair value measurements of investments including derivatives and our interest in funds withheld;
•Valuation of future policy benefits liabilities, including timing and extent of loss recognition, and insurance liabilities, at fair value;
•Estimates of liability for unpaid losses and loss adjustment expenses;
•Estimates of the remaining life of the underlying contracts, which is used as the basis for amortizing the value of business acquired ("VOBA"), deferred gains and deferred charge assets from long duration reinsurance contracts;
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
•Estimates of the timing and amount of future cash flows, which is used as a basis for amortizing the deferred gains and deferred charge assets from the short duration reinsurance contracts;
•Estimates with respect to income taxes, including the valuation and recoverability of deferred income tax assets; and
•Estimates with respect to goodwill and other intangible assets and any related impairment.
Additional details regarding these and other estimates and assumptions are included within the significant accounting policies and the related disclosures that follow. These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, the Company's consolidated financial condition, results of operations and cash flows could be materially affected.
Business Risks and Uncertainties
Our operations are influenced by many factors, including but not limited to, general economic conditions, regulatory changes, market risks normally associated with investments, the financial condition of our cedants and risks impacting insurance liabilities.
The Company is regulated by various state, federal and international regulatory authorities where it is licensed to do business. Future changes in regulatory requirements could have an unanticipated impact on the Company.
Liquidity, interest rate, foreign exchange and credit spread risks are all market risks. Liquidity risk is the risk that the Company's financial condition will be adversely affected by the inability or perceived inability to meet short-term cash, collateral or other obligations. Interest rate risk can arise from a mismatch in the interest rate exposure of assets compared to liabilities. Changes in interest rates can affect the valuation of fixed maturity securities, financial liabilities, insurance contracts and derivative contracts. Foreign exchange risk can arise from a mismatch in the foreign currency exposure of assets compared to liabilities. Changes in foreign exchange rates can affect the valuation of non-U.S. dollar denominated assets and liabilities. Credit spreads measure an instrument’s risk premium or yield relative to that of a comparable duration, default-free instrument. Changes in credit spreads can affect the valuation of fixed maturity securities, including but not limited to corporate bonds, asset-backed securities, mortgage-backed securities, credit derivatives and derivative credit valuation adjustments.
Market risk is monitored and managed using an asset-liability management framework. For both assets and liabilities, market risk exposures are measured in terms of sensitivities to changes in the relevant risk factors. In addition, the Company performs stress testing on these market risk factors to capture concentration risks to a single market risk factor change as well as simultaneous multiple market risk factor changes, to understand the net impact on exposure from impacts on both assets and liabilities.
The Company's insurance liabilities are exposed to policyholder behavior risk and mortality/longevity risk. Longevity risk is the risk of a change in value of a policy or benefit as a result of actual mortality experience being lower than the expected mortality assumed at the time of underwriting. The Company manages this risk through ongoing monitoring and assessment of such experience relative to underlying assumptions, which include those relative to mortality and morbidity.
Reclassifications
Certain prior period amounts have been reclassified to conform to the 2022 presentation.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
3. Summary of Significant Accounting Policies
The following summarizes our significant accounting policies.
Fair value option
The fair value option ("FVO") provides entities with an alternative to use fair value as the initial and subsequent accounting measurement attribute for assets and liabilities that meet the definition of a financial asset or liability. The decision to elect the FVO is determined on an instrument by instrument basis and is applied to an entire instrument. The decision is irrevocable once elected. We have made this election as it improves our operational efficiency and better aligns the recognition and measurement of certain investments and other assets and liabilities associated with those investments. Refer to the investments, reinsurance and insurance liabilities sections below and Notes 6 -10 for more information on the Company's FVO elections.
Investments
Funds withheld - directly managed: We have elected the FVO on the entirety of our funds withheld - directly managed portfolio. Funds withheld - directly managed represents a reinsurance receivable collateralized by segregated portfolios of investments maintained by the ceding companies. While the investments maintained in the funds withheld - directly managed are legally owned by the ceding companies, the investments are separately identified from their general accounts and, pursuant to our contractual terms with those ceding companies, all realized and unrealized gains and losses and net investment income on the investments accrue to us. The Company is entitled to all economic rights and obligations on the collateral as if the Company held the investments directly. We have therefore elected to present funds withheld - directly managed within the total investments subheading on the consolidated balance sheets.
The Company has elected to report the net investment income and investment gains (losses) arising from the underlying investments maintained within the funds withheld - directly managed account in the same financial statement line that such investment income would have been recorded had the Company held the investments directly.
The change in fair value of funds withheld - directly managed, excluding alternative investments, is presented separately within the consolidated statements of income (loss). The change in fair value of alternative investments collateralizing the funds withheld - directly managed is recorded within net investment income.
Some of the reinsurance agreements contain an embedded derivative because the ceding companies are paying an interest rate attributable to the returns on the portfolio of investments which collateralize the reinsurance receivable that is not associated with the ceding companies own credit risk. The fair value of embedded derivatives in the reinsurance agreements is included in funds withheld - directly managed in the consolidated balance sheets. As the funds withheld - directly managed assets are settled on a quarterly basis, the fair value of the embedded derivatives are equal to the unrealized gain or loss on the segregated investment portfolio.
Fixed maturity securities: Fixed maturity securities classified as available for sale ("AFS") are carried at fair value. Unrealized gains and losses from AFS securities are reported as a separate component of accumulated other comprehensive income (loss) ("AOCI"), net of deferred income taxes. We have elected the FVO for certain securities within our fixed maturity securities portfolio. Realized and unrealized gains and losses on FVO securities are reported in investment gains (losses) on the consolidated statements of income (loss).
Investments in fixed maturity securities are recorded on a trade-date basis, with any unsettled trades recorded in other assets or other liabilities on the consolidated balance sheets. Interest income related to fixed maturity securities, including amortization of premium and accretion of discount, are included in net investment income under the effective yield method. Prepayment premiums are also included in net investment income.
Interest income is recognized using the effective yield method and reflects amortization of premium and accretion of discount. Premiums and discounts arising from the purchase of bonds classified as available for sale are treated as yield adjustments over their estimated holding periods, until maturity, or call date, if applicable. For investments in
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
certain structured securities, recognized yields are updated based on current information regarding the timing and amount of expected undiscounted future cash flows. For high credit quality structured securities, effective yields are recalculated based on actual payments received and updated prepayment expectations, and the amortized cost is adjusted to the amount that would have existed had the new effective yield been applied since acquisition with a corresponding charge or credit to net investment income. For structured securities that are not of high credit quality, the structured securities yields are based on expected cash flows which take into account both expected credit losses and prepayments.
Equity securities, at fair value: We have elected the FVO on the entirety of our equity securities portfolio. Accordingly, realized and unrealized gains and losses on these investments are reported in investment gains (losses) on the consolidated statements of income (loss). Dividend income is reported on the ex-dividend date.
Mortgage loans, at fair value: We have elected the FVO on our entire portfolio of residential and commercial mortgage loans. Realized and unrealized gains and losses on these investments are reported in Investment gains (losses).
Private equity funds, limited partnerships and limited liability companies (“LPs/LLCs”): LPs/LLCs interests are accounted for using either the equity method of accounting, or at fair value if we elect the FVO. LPs/LLCs are recorded within other invested assets on the consolidated balance sheets. The Company uses the net asset value ("NAV"), a permitted practical expedient, as an estimate of fair value when the fair value is not readily available for our LPs/LLCs. The carrying value of these investments is written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. In applying the equity method (including assessment for other-than-temporary impairment ("OTTI"), the Company uses financial information provided by the investee, generally on a one to three-month lag. Changes in fair value of other invested assets are reported in net investment income.
Policy loans: The investments represent funds loaned to policyholders up to the cash surrender value of the associated insurance policies and are carried at the unpaid principal balances due to the Company from the policyholders. Policy loans are recorded within other invested assets on the consolidated balance sheets. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies.
Derivative instruments: Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, values of securities or commodities, credit spreads, market volatility, expected returns, and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior and non-performance risk (“NPR”) used in valuation models. Derivative financial instruments generally used by the Company include swaps, futures, forwards and options and may be exchange-traded or contracted in the over-the-counter (“OTC”) market. Certain of the Company's OTC derivatives are cleared and settled through central clearing counterparties, while others are bilateral contracts between two counterparties. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models.
Derivatives are used to manage the interest rate and currency characteristics of assets or liabilities. Additionally, derivatives may be used to reduce exposure to interest rate, credit, foreign currency and equity risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred.
The Company designates all derivatives as a derivative that does not qualify for hedge accounting. Accordingly, all realized and unrealized changes in fair value of derivatives are recorded in current earnings within investment gains (losses) or foreign exchange gains on the consolidated statements of income (loss). Cash flows from derivatives are reported in the operating activities section in the consolidated statements of cash flows.
Derivatives are recorded either as assets, within other invested assets, or as liabilities, within derivative liabilities. The Company nets the fair value of all derivative financial instruments with counterparties for which a master netting arrangement has been executed.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
Short-term investments: These investments primarily consist of highly liquid debt instruments with a maturity of twelve months or less and greater than three months when purchased. These investments are generally carried at fair value or amortized cost that approximates fair value and include certain money market investments, funds managed similar to regulated money market funds, short-term debt securities issued by government sponsored entities and other highly liquid debt instruments.
As a result of the acquisitions made in 2022 (Note 4), and to conform to the 2022 presentation, the Company made a policy election to change its prior accounting policy to include only certain money market investments. The revised accounting policy is a more preferable approach and consistent with the prescribed guidance in ASC 230.
The Company assessed the retrospective application of the above accounting policy change and determined that the impacts were limited to updates to the prior year consolidated balance sheet (reclassification from short-term investments to cash equivalents) and the consolidated statement of cash flows, which also included reclassification from the purchases of and proceeds from short term investments to cash and cash equivalents. The cash and cash equivalents at the beginning of the period reflects increases of $925 million and $1 million as of December 31, 2021 and January 1, 2021, respectively.
OTTI: On a quarterly basis, the Company reviews its AFS portfolio for potential other-than-temporary impairments which would require that affected securities be written down to an adjusted cost basis with the amount of the write-down recorded as part of investment gains (losses) in the consolidated statements of income (loss). The Company reviewed its AFS investment portfolio for market value changes to identify changes caused by issuer credit deterioration, changes in market interest rates and changes in economic conditions. If this review indicated a decline in fair value that was other-than-temporary, the Company’s carrying amount in the investment is reduced to its estimated fair value as an OTTI. In accordance with GAAP guidance the estimated credit versus non-credit components of the OTTI would be bifurcated. The credit component would be recorded in earnings and result in the establishment of a new cost basis for the security. The non-credit component would be reclassified as unrealized loss in other comprehensive income. The Company would not recognize impairment of securities due to changing of interest rates or market dislocations unless the Company had the intent to sell the securities prior to recovery or maturity.
The Company considers a number of factors in determining whether the impairment was other-than-temporary. These may include, but are not limited to: 1) actions taken by rating agencies; 2) default by the issuer; 3) the significance of the decline in fair value; 4) the intent and ability to hold the investment until recovery; 5) the time period during which the decline had occurred; 6) an economic analysis of the issuer’s industry; and 7) the financial strength, liquidity, and recoverability of the issuer. Management performs a security-by-security review in evaluating the need for any other-than-temporary impairments. Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures considered.
Cash and Cash equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, certain money market investments, funds managed similar to regulated money market funds, other debt instruments with maturities of three months or less when purchased and receivables related to securities purchased under agreements to resell (see also securities sold under agreements to purchase below).
Accrued investment income
Accrued investment income primarily includes accruals of interest and dividend income from investments that have been earned but not yet received.
Reinsurance
We assume short duration and long duration insurance and investment contracts under funds withheld, coinsurance and modified-coinsurance funds withheld arrangements. Certain of the Company's long duration insurance and investment contracts are also ceded to third-party reinsurers. We follow reinsurance accounting for assumed and ceded transactions that provide indemnification against loss or liability relating to insurance risk (risk transfer). To
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
meet risk transfer requirements, a reinsurance agreement must include both insurance risk consisting of both underwriting and timing risks, and a reasonable possibility of a significant loss. The mortality and timing risks related to certain life blocks of business, such as whole life, universal life-type, and pension risk transfer annuities with life contingencies were transferred to us and are subject to reinsurance accounting. The remaining blocks of life business, such as fixed annuities and structured settlements without life contingencies, lacked mortality risks, and thus could not achieve risk transfer. Accordingly, these reinsured contracts are subject to deposit accounting, rather than reinsurance accounting. The general insurance lines of business qualify to be accounted for as retroactive reinsurance.
Revenues, benefits, losses and expenses are recorded net of amounts ceded to reinsurers. Reinsurance recoverables, including ceded claim and insurance liabilities and contractual balances due from ceding companies, are recognized as assets and are determined using assumptions consistent with those of the underlying policies other than certain reinsurance recoverables which we have elected the fair value option as discussed below. Reinsurance payables include unpaid claims which are based upon estimates of payments to be made for claims incurred whether reported or unreported and net settlements due to ceding companies and reinsurers.
We have elected the fair value option for certain of our reinsurance ceded balances, which are as follows:
Reinsurance recoverables: We have elected the fair option on certain reinsurance recoverables which are recorded to match the associated insurance liabilities, which are recorded at fair value. Accordingly, the fair value of the reinsurance recoverables for which we have elected the FVO, is determined by the fair value calculation of our insurance liabilities. See discussion regarding the significant accounting policies of insurance liabilities further below. Changes in reinsurance recoverables for which we have elected the FVO and the associated insurance liabilities are both recorded through policyholder benefits and changes in fair value of insurance liabilities within the consolidated statements of income (loss). For additional information about these reinsurance arrangements see Note 9.
We have elected the fair value option on the entirety of our modified coinsurance agreement receivables and payables. The modified coinsurance receivable represents reserve credits for insurance liabilities and is recorded to match the associated insurance liabilities, which are recorded at fair value. Accordingly, the fair value of our modified coinsurance receivable is determined by the fair value calculation of our insurance liabilities. See discussion regarding the significant accounting policies of insurance liabilities further below. Similarly, the modified coinsurance payable primarily represents the fair value of the assets backing the ceded insurance liabilities under the reinsurance agreement. Accordingly, the fair value of the modified coinsurance payable is calculated to match the fair value of the assets under the reinsurance agreement. The modified coinsurance agreement receivables and payables are presented on a net basis within reinsurance recoverables on the consolidated balance sheets.
Deposit asset: We have elected the fair value option on the entirety of our deposit asset, which represents assets, held in trust by the reinsurer, that back the insurance liabilities for certain of our fixed indexed annuities and fixed annuities with a guaranteed lifetime withdrawal income. The deposit is recorded to match the associated insurance liabilities, which are recorded at fair value. Accordingly, the fair value of our deposit asset is determined by the fair value calculation of our insurance liabilities.
Deferred charge assets ("Deferred charges")
For reinsurance transactions where, at contract inception, the value of the liability assumed (plus any ceding commission paid) exceeds the premium received, the Company recognizes a deferred charge asset for this difference.
The premium charged to ceding companies may be lower than our estimate of liabilities as these liabilities may not be settled for many years. As premium is received at inception, we expect to generate a profit from these reinsurance contracts as we may invest the premium for many years, thereby generating investment income. The deferred charge is amortized into income over the settlement period of the assumed reserves using an effective interest rate method. In applying the interest method an effective interest rate is derived and locked in for these retroactive reinsurance contracts based on the expected timing and amount of the loss and loss adjustment expense payments such that the present value of these estimated payments equals the consideration received.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
An impairment assessment is performed for each deferred charge at the end of each reporting period. If an asset is deemed to be impaired it is written down within that reporting period, with the adjustment recorded within policyholder benefits and changes in fair value of insurance liabilities within the consolidated statements of income (loss).
Deferred charges are assessed for impairment on an individual contract basis by determining the rate of return that we are required to earn on the invested assets to ensure that all cash flows arising from the assumed liabilities are met in full over the projected remaining payout period. This required rate of return is compared against the modeled rate of return at inception, the forecasted yield and the actual inception-to-date rate of return in order to identify indicators that would lead us to record an impairment of the deferred charge. During the year ended December 31, 2022 we identified two reinsurance contracts requiring impairment. Refer to Note 11 for further discussion on the impairment recorded.
Funds withheld by ceding companies
Funds withheld by ceding companies represent funds that have been retained by ceding companies where we receive a fixed crediting rate. Funds withheld by ceding companies are carried at cost.
The Company has elected to report the net investment income and investment gains (losses) related to the funds withheld by ceding companies in the same financial statement line that such investment income would have been recorded had the Company held the investments directly.
Goodwill and other intangibles
Goodwill: Goodwill represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. It is the excess of the cost of an acquisition over the fair value of the assets acquired and liabilities assumed at the date of acquisition.
Other intangibles: Other intangibles consist of state insurance licenses identified as part of the Company's acquisitions discussed further in Note 4. These intangible assets have an indefinite useful life and are not required to be amortized.
We review the carrying amount of goodwill and other intangibles on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount might not be recoverable. Goodwill impairment testing compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit to which the goodwill relates is less than the carrying amount of the reporting unit, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the reporting unit in an amount not to exceed the total amount of goodwill allocated to the reporting unit.
The impairment testing for other intangibles compares the fair value of the asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an impairment loss is recognized in the amount of that excess.
Other assets
Other assets primarily consist of other investment-related receivables, policyholder receivables and deferred acquisition costs.
Separate account assets
Separate account assets represent segregated funds that are invested for certain contractholders. The contractholder has the option of directing funds to a wide variety of investment options, most of which invest in mutual funds. The investment risk on the variable portion of a contract is borne by the contractholder, except to the extent of minimum guarantees by the Company, which are not separate account liabilities. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. The investment income and realized investment gains or losses from separate accounts generally accrue to the
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
contractholders and are not included in the Company’s results of operations. Mortality, policy administration and surrender charges assessed against the accounts are included in policy charges and fee income. Asset management and service fees charged to the accounts are included in other revenues. See Note 10 for additional information regarding separate account arrangements with contractual guarantees. See also separate account liabilities below.
Future policy benefits for life insurance and annuity contracts
Future policy benefits for life insurance and annuity contracts include retirement products whose payments depend on contract holder’s survival such as structured settlements with life contingencies, single premium immediate annuities ("SPIA") with life contingencies, and pension risk transfer annuities; and traditional life insurance products such as whole life ("WL") and return of premium ("RoP") term, accident & health ("A&H") and long term care ("LTC").
For these long duration traditional products, locked-in assumptions apply. The assumptions used to estimate benefit liabilities are set when a contract is issued and do not change with changes in actual experience unless a loss recognition event occurs. These locked-in assumptions include mortality, morbidity, persistency, maintenance expenses, and investment returns and include margins for adverse deviation to reflect uncertainty given that actual experience might deviate from these assumptions. Periodically, we are required to evaluate these locked-in assumptions. A loss recognition event occurs when there is a shortfall between the carrying amount of future policy benefit liabilities and estimated future policy benefit liabilities determined by applying current best estimate assumptions. If we determine a loss recognition event has occurred, we would record additional liabilities through a charge to future benefits expense. We would then replace the old locked-in assumption set with the current best estimate. Future reserves would be set by reviewing the updated best estimate assumptions periodically and making further adjustments where necessary. Other adjustments include unearned premium liabilities, incurred but not reported claims, and disabled lives reserves where A&H products such as disability income have claimants receiving ongoing benefits.
Policyholder contract deposits
The liability for policyholder contract deposits is recorded at accumulated or fund value (deposits received, plus accrued interest credited, less withdrawals, charges and fees). Amounts collected on investment-oriented products are not recognized as revenues, because they are recorded directly to policyholder contract deposits upon receipt.
Policyholder contract deposits are primarily comprised of deferred annuities and annuities issued in structured settlement arrangements, single premium immediate annuities ("SPIA"), single premium whole life contracts, contracts with no life contingent features and universal life-type contracts. The liability for these products represents an estimate of the present value of future benefits using an interest rate determined at the treaty inception date.
For universal life-type contracts that are determined to have profits in earlier years and losses in subsequent years from the insurance benefits, an additional liability is established in addition to the fund value to recognize the portion of amounts assessed against the contract holder (costs of insurance and all other charges and margins) that compensates us for benefits to be provided in future periods.
Insurance liabilities, at fair value
We have elected the fair value option on certain of our insurance liabilities, which primarily include liabilities for guaranteed benefits related to certain long-duration life and annuity contracts, which are discussed more fully in Note 10. These liabilities represent reserves for guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”), guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”). Changes in the fair value of insurance liabilities are reported in policyholder benefits and changes in fair value of insurance liabilities on the consolidated statements of income (loss).
The assumptions used in establishing reserves are generally based on the Company’s experience, industry experience and/or other factors, as applicable. We evaluate, and update when applicable, our actuarial assumptions such as mortality and policyholder behavior assumptions, on a quarterly basis. Generally, we do not expect trends
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term.
Liability for unpaid losses and loss adjustment expenses
Loss reserves and loss adjustment expenses ("LAE") represent estimates of unpaid claims, including estimates for claims incurred but not reported and loss adjustment expenses ("IBNR"), less applicable discount. We regularly review and update the methods used to determine loss reserve estimates. Because these estimates are subject to the outcome of future events, changes in estimates are common given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate loss are referred to as unfavorable or adverse development. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development. Prior year development can refer to either favorable or unfavorable development.
Discounting of loss reserves: We discount total workers’ compensation liabilities using a discount rate calculated from the U.S. Treasury rates plus a liquidity premium, along with the use of payout patterns specific to our primary and excess workers’ compensation portfolios. We lock in this discount rate at the inception of the contract, and no periodical updates are made. The locked in discount rate on the Company's current workers' compensation is 2.31%.
During the year ending December 31, 2022, the Company made a policy election to change its prior accounting policy where the discount rate was updated periodically along with the updated payout patterns. In our view, the revised accounting policy is a more preferable approach as changes in interest rates do not represent changes in amounts or timing of cash flows and the underlying deferred charge or gain would have been measured based on discount rates that existed at the time of the reinsurance contract.
The Company assessed the retrospective application of the above accounting policy change and determined that there were no material impacts to the December 31, 2022 or December 31, 2021 financial statements. Note that the beginning carrying value of the deferred gain at 2021 (as disclosed in Note 11) was revised from $2 million to $162 million to reflect the balance sheet reclassification impact of the accounting policy change with an offsetting impact to the liability for losses and LAE.
Premium Deficiency: The Company recognizes a premium deficiency reserve if the expected unpaid ultimate losses and loss adjustment expenses from future insured events exceed the related unearned premiums and other liabilities established and anticipated investment income. Any future expected losses on unearned premium are recorded as an increase to loss and loss adjustment expense reserves within the consolidated balance sheets and included within policyholder benefits and changes in fair value of insurance liabilities within the consolidated statements of income (loss).
Collateral deposit liability
The Company has contractually assumed certain environmental protection plan ("EPP") and clean-up cost cap ("CCC") exposures. EPP and CCC products are designed to incorporate elements of program funding (investment risk on EPP) along with cost overrun protection (insurance risk on CCC) for the remediation of known environmental contamination issues.
The Company recognizes proceeds received under EPP programs as a collateral deposit liability, given insurance risk is not transferred under such funding programs. As losses funded by the policyholder are paid, the collateral deposit liability is reduced and as interest, estimated by applying the effective yield method, is accrued, the collateral deposit liability is increased.
Long-term debt
Long-term debt is recorded within the consolidated balance sheets as proceeds received less unamortized issuance costs. Debt issuance costs are capitalized and amortized over the estimated life of the debt.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
Value of business acquired ("VOBA") and Deferred gain from reinsurance contracts
VOBA: The VOBA intangible liability represents the difference between estimated fair value of future best estimate liability cash flows and the Company's liability for future policyholder benefits and contract deposits after adjusting for current assumptions measured at the time of the acquisition.
The fair value estimate incorporated the following market participant based assumptions:
•Projections of future liability cash flows;
•A risk-free discount rate, representing the time value of money excluding non-performance risk;
•An adjustment to the risk-free discount rate to reflect the Company's credit rating and claims paying ability (i.e. non-performance risk); and
•The inclusion of a market risk margin to account for the inherent uncertainty in the liability cash flows.
This VOBA liability is amortized over the lives of the reinsured policies of up to 70 years, in relation to expected benefit payments or insurance in-force amounts for insurance contracts. The amortization is included within policyholder benefits and changes in fair value of insurance liabilities within the consolidated statements of income (loss).
Deferred gain - long duration: The difference between the consideration received in excess of the liabilities assumed under the reinsurance contract is recorded as a deferred gain from reinsurance contracts in the consolidated balance sheets. The deferred gain is amortized over the lives of the reinsured policies in relation to expected benefit payments or insurance in-force for insurance contracts. The amortization is included within policyholder benefits and changes in fair value of insurance liabilities within the consolidated statements of income (loss).
Deferred gain - short duration: Retroactive reinsurance contracts provide indemnification with respect to past loss events. For these contracts, the difference between the consideration received in excess of the liabilities assumed under the reinsurance contract, represents a net cost of reinsurance liability and is recorded as a deferred gain from reinsurance contracts in the consolidated balance sheets. The deferred gain is amortized into income over the settlement period of the assumed reserves using an effective interest rate method. In applying the interest method an effective interest rate is derived and locked in for these retroactive reinsurance contracts based on the expected timing and amount of the loss and loss adjustment expense payments such that the present value of these estimated payments equals the consideration received.
We monitor subsequent development on losses that occur during the retroactive period and will revise the deferred gain balance on a cumulative basis. The revised deferred gain balance is determined using the retrospective method so that the adjusted balance reflects the amount that would have existed had the revised estimates been available at the inception of the reinsurance transactions. The amortization, including any catch up adjustment recorded during the period of change, is included within policyholder benefits and changes in fair value of insurance liabilities within the consolidated statements of income (loss).
Loaned securities and repurchase agreements
Cash proceeds from securities lending transactions are primarily used to earn spread income, and are typically invested in cash equivalents, short-term investments or fixed maturities. Securities lending transactions are used primarily to earn spread income or to facilitate trading activity. As part of securities lending transactions, the Company transfers U.S. and foreign debt and equity securities, as well as U.S. government and government agency securities, and receives cash as collateral. Securities lending transactions are treated as financing arrangements and are recorded at the amount of cash received. The Company obtained collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the market value of the securities loaned on a daily basis with additional collateral obtained as necessary. Substantially all of the Company’s securities lending transactions are with large brokerage firms and large banks. Income and expenses associated with securities lending transactions used to earn spread income are reported as net investment income.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
Securities sold under repurchase agreements represents liabilities associated with securities repurchase agreements that are used primarily to earn spread income. As part of securities repurchase agreements, the Company transfers U.S. government and government agency securities to a third-party and receives cash as collateral. For securities repurchase agreements, the cash received is typically invested in cash equivalents, short-term investments or fixed maturities. Receivables associated with securities purchased under agreements to resell are generally reflected as cash equivalents. As part of securities resale agreements, the Company invests cash and receives as collateral U.S. government securities or other debt securities.
Securities repurchase and resale agreements that satisfy certain criteria are treated as secured borrowing or secured lending arrangements. These agreements are carried at the amounts at which the securities will be subsequently resold or reacquired, as specified in the respective transactions. For securities purchased under agreements to resell, the Company’s policy is to take possession or control of the securities either directly or through a third-party custodian. These securities are valued daily and additional securities or cash collateral is received, or returned, when appropriate to protect against credit exposure. Securities to be resold are the same, or substantially the same, as the securities received. The majority of these transactions are with large brokerage firms and large banks. For securities sold under repurchase agreements, the market value of the securities to be repurchased is monitored, and additional collateral is obtained where appropriate, to protect against credit exposure. The Company obtains collateral in an amount at least equal to 105% of the fair value of the securities sold. Securities to be repurchased are the same, or substantially the same, as those sold. The majority of these transactions are with highly rated money market funds. Income and expenses related to these transactions executed within the insurance companies used to earn spread income are reported as net investment income.
Separate account liabilities
Separate account liabilities primarily represent the contractholders’ account balances in separate account assets and to a lesser extent borrowings of the separate account, and will be equal and offsetting to total separate account assets. See also separate account assets above.
Other liabilities
Other liabilities primarily consist of accrued expenses, technical overdrafts, deferred revenue and payables resulting from purchases of securities that had not yet settled at the balance sheet date. Other liabilities may also include derivative instruments for which fair values are determined as described in the Investments section above.
Income Taxes
The Company operates as a partnership for U.S. federal income tax purposes and also owns a number of subsidiaries that are subject to U.S. federal and state income tax. During 2021, the Company also formed several non-US. entities, including entities in Bermuda and the U.K. The partners report their share of the underlying partnership’s income or loss on their local country income tax returns. In addition, for those subsidiaries that are subject to U.S. federal and state income taxes at the entity level, the related tax provision attributable to these operations is reflected in the consolidated statements of comprehensive income. Under Bermuda law, any Bermuda domiciled companies are not required to pay any income taxes in Bermuda on either operating income or capital gains and, as such, there is no related tax provision associated with these operations. These Bermuda subsidiaries operate in Bermuda and intend to operate the business in such a manner that they are not considered to be treated as engaged in the conduct of a trade or business in the U.S. The U.S. tax code, regulations and court decisions do not definitively identify activities that constitute being engaged in a trade or business in the U.S. and, as such, the Internal Revenue Service, or “IRS,” may assert that the Company’s Bermuda subsidiaries are engaged in a trade or business in the U.S. The U.K. subsidiary is a holding company and its activity for 2022 is limited to immaterial general operating expenses. There is no related tax provision associated with this activity.
The income tax provision is calculated under the asset and liability method. We recognize deferred income tax assets and liabilities for the expected future tax effects attributable to temporary differences between the financial statement and tax return basis of assets and liabilities based on enacted tax rates and other provisions of the tax law.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
Deferred tax assets and liabilities are recognized for the timing differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis at the balance sheet date. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to an amount that in management’s opinion, is more likely than not to be realized.
The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance, if necessary, to reduce the deferred tax asset to an amount that is more likely than not to be realized (a likelihood of more than 50%). The evaluation of the recoverability of the deferred tax asset and the need for a valuation allowance requires the Company to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.
The Company's framework for assessing the recoverability of deferred tax assets requires consideration of all available evidence, including: (i) the nature, frequency, and severity of cumulative financial reporting losses in recent years; (ii) the predictability of future operating profitability of the character necessary to realize the net deferred tax asset; (iii) the carry forward periods for the net operating loss, capital loss and foreign tax credit carry forwards, including the effect of reversing taxable temporary differences; and (iv) prudent and feasible tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset.
Insurance Revenue and Expense Recognition
Premiums for short-duration contracts are recorded as written on the inception date of the policy. For short-duration insurance contracts, premiums are generally earned on a pro-rata basis over the terms of the related policies. For traditional long-duration insurance contracts (including term and whole life contracts and certain annuities), premiums are earned when due. Estimates for premiums due but not yet collected are accrued. For annuities and structured settlements without significant mortality or morbidity risk (investment contracts) and universal life-type contracts (long-duration contracts with terms that are not fixed or guaranteed), premiums received are reported as policyholder contract deposits, insurance liabilities and/or separate account liabilities. Revenues from these contracts are reflected in policy charges and fee income consisting primarily of fees assessed against the policyholders’ account balances for policy administration charges and surrender charges. Policy charges are recognized as revenues in the period in which they are assessed against policyholders, unless the charges are designed to compensate us for the services to be provided in the future, in which case they are deferred.
In addition to fees, the Company earns investment income from the investments in the Company’s general account portfolio. Fees assessed that represent compensation to the Company for services to be provided in future periods and certain other fees are generally recorded when received. Benefits and expenses for these products include claims in excess of related account balances and expenses of contract administration.
Revenues for variable deferred annuity contracts consist of charges against contractholder account values or separate accounts for mortality and expense risks, administration fees, surrender charges and an annual maintenance fee per contract. Revenues for mortality and expense risk charges and administration fees are recognized as assessed against the contractholder. Surrender charge revenue is recognized when the surrender charge is assessed against the contractholder at the time of surrender. Liabilities for the variable investment options on annuity contracts represent the account value of the contracts and are included in separate account liabilities.
Foreign exchange gains
Financial statement accounts expressed in foreign currencies are translated into U.S. dollars. Functional currency assets and liabilities are translated into U.S. dollars generally using rates of exchange prevailing at the balance sheet date and the related translation adjustments are recorded as a separate component of other comprehensive income (loss), net of any related taxes. Functional currencies are generally the currencies of the local operating environment. Other foreign currency assets and liabilities that are considered monetary items are translated at exchange rates in effect at the balance sheet date. Foreign currency revenues and expenses are translated either
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
at transaction date exchange rates or using a weighted average exchange rate for the reporting period. These exchange gains and losses are recognized in foreign exchange gains within the consolidated statements of income (loss).
Asset management and service fees
Asset management and services fees principally includes asset-based asset management fees, which are recognized in the period in which the services are performed.
Other revenues
Other revenues are primarily comprised of third party administration fees.
Business combinations
The Company uses the acquisition method of accounting for all business combination transactions, and accordingly, recognizes the fair values of assets acquired, liabilities assumed and any noncontrolling interests in our consolidated financial statements. The allocation of fair values may be subject to adjustment after the initial allocation for up to a one-year period as more information becomes available relative to the fair values as of the acquisition date. The consolidated financial statements include the results of operations of any acquired company since the acquisition date.
Statement of Cash Flows presentation of funds withheld - directly managed
Withdrawals from our funds withheld - directly managed reinsurance arrangements are based on statutory levels of the associated assets and liabilities. The excess (shortfall) under these agreements is settled on a periodic basis and can be settled in either cash or securities depending on the specific reinsurance agreement. The portion settled in cash is reflected in cash from operations with the securities portion being reflected as a non-cash transaction. The Company presents activity within funds withheld - directly managed as well as activities related to the reinsurance arrangements as operating cash flows.
Accounting Standards Adopted During 2022
ASU 2016-02 Leases:
In February 2016, the FASB issued ASU No. 2016-02 which is intended to increase transparency and comparability of accounting for lease transactions. ASU 2016-02 requires lessees to recognize leases on the balance sheet as right-of-use assets ("ROU") and lease liabilities and requires both quantitative and qualitative disclosures regarding key information about leasing arrangements. Lessor accounting is largely unchanged. On January 1, 2022, the Company adopted the guidance prospectively. Adoption of the ASU 2016-02 did not have a material impact on the Company's consolidated financial statements.
The Company elected not to separate lease and non-lease components in its lease contracts and accounts for them as a single lease component. The Company also elected not to record a ROU asset for short-term leases that have a term of 12 months or less and do not contain purchase options that the Company is reasonably certain to exercise. The cost of short-term leases is recognized in the consolidated statements of income on a straight-line basis over the lease term. Operating lease ROU assets and lease liabilities are included in other assets and other liabilities, respectively, in the consolidated balance sheets. Finance lease assets and liabilities are included in other assets and long-term debt, respectively, in the consolidated balance sheets. The Company uses the risk-free rate, factoring in the lease term, to determine the lease liability, which is measured at the present value of future lease payments. The ROU asset is initially measured at the amount of the lease liability plus any prepaid rent and remaining initial direct costs, less any remaining lease incentives and accrued rent. The ROU asset is subject to impairment, during the lease term, in a manner consistent with the impairment of long-lived assets. The lease terms include periods covered by options to extend or terminate the lease depending on whether the Company is reasonably certain to exercise such options.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
ASU 2019-12 Simplifying the Accounting for Income Taxes:
In December 2019, the FASB issued ASU No. 2019-12 which eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod tax allocation and calculating income taxes in interim periods. ASU 2019-12 also clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
Future Adoption of Accounting Standards
ASU 2020-03 Codification Improvements to Financial Instruments:
In March 2020, the FASB issued ASU 2020-03 which makes narrow-scope improvements to various topics within the codification relating to financial instruments, inclusive of the new credit losses standard as described below. The amendments related to certain specific issues covered by the ASU were effective immediately upon the issuance of the ASU, and had no impact on our consolidated financial statements and disclosures. Other specific issues covered by the ASU related to the measurement of credit losses on financial instruments will become effective upon our adoption of ASU 2016-13 and the related ASUs as further described below.
ASUs 2016-13, 2018-19, 2019-04, 2019-05, 2019-10, 2019-11, 2020-02 Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments:
In June 2016, the FASB issued an accounting standard that introduced a new credit loss methodology, the Current Expected Credit Losses ("CECL") methodology, which requires earlier recognition of credit losses while also providing additional transparency about credit risk. The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, reinsurance receivables, and other financial assets measured at amortized cost. The allowance for credit losses is adjusted each period for changes in expected lifetime credit losses. The CECL methodology represents a significant change from prior U.S. GAAP and replaced the prior multiple existing impairment methods, which generally required that a loss be incurred before it was recognized. For AFS debt securities, if the fair value is less than cost and the Company intends to hold the security or it is more-likely-than-not that the Company will not be required to sell the security, the Company would record any applicable credit-related impairment through an allowance for credit losses and adjust subsequent periods for changes in credit risk. The Company is evaluating the effect that ASU 2016-13 will have on its consolidated financial statements and related disclosures. The impact of the ASU 2016-13 will depend upon the state of the economy, forecasted macroeconomic conditions and the Company’s assets at the date of adoption. The Company will adopt the standard on its effective date, January 1, 2023. The Company is continuing its assessment of the accounting standard adoption and its impact to the Company’s consolidated financial statements.
ASU 2018-12 Targeted Improvements to the Accounting for Long-Duration Contracts and ASU 2020-11 Effective Date and Early Application:
In August 2018, the FASB issued ASU 2018-12, an accounting standard update with the objective of making targeted improvements to the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. In November 2019, the FASB issued ASU 2019-09, an amendment to ASU 2018-12 extending the effective date of ASU 2018-12 for all entities, except for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, by two years. In November 2020, the FASB issued ASU 2020-11, Effective Date and Early Application, an amendment to ASU 2018-12, to defer the effective date of ASU 2018-12 by one year in response to implementation disruptions due to COVID-19.
The changes to the measurement, recognition, presentation and disclosure as provided by the new accounting standard update are summarized below:
•Requires the review and update of future policy benefit assumptions at least annually for traditional and limited pay long duration contracts, with the recognition and separate presentation of any resulting re-measurement gain or loss (except for discount rate changes as noted below) in the income statement;
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
•Requires the discount rate assumption to be updated at the end of each reporting period using an upper medium grade (low-credit risk) fixed income instrument yield that maximizes the use of observable market inputs and recognizes the impact of changes to discount rates in other comprehensive income (loss);
•Requires the measurement of all market risk benefits associated with deposit (or account balance) contracts at fair value through the income statement with the exception of instrument-specific credit risk changes, which will be recognized in other comprehensive income (loss);
•Requires the amortization of deferred acquisition costs (DAC) over the expected term of the related contracts on a constant-level basis; and
•Requires significant disclosures, including disclosures of disaggregated roll-forwards of policy benefits, account balances, market risk benefits, separate account liabilities and information about significant inputs, judgments and methods used in measurement and changes thereto and impact of those changes.
ASU 2018-12 permits two adoption methods for the liability for future policy benefits and deferred acquisition costs: (1) a modified retrospective transition method in which the guidance is applied to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI; or, (2) a full retrospective transition method. The Company will adopt ASU 2018-12 effective January 1, 2025 using the modified retrospective transition method where permitted, and apply the guidance as of January 1, 2023 (and record transition adjustments as of January 1, 2023) in the Company’s 2025 consolidated financial statements.
The Company has created a governance framework and a plan to support implementation of the updated standard. The Company continues to make progress in its implementation process that includes, but is not limited to, refining significant accounting policy decisions, employing appropriate internal controls, modifying actuarial models and systems, revising reporting processes and developing informative qualitative and quantitative disclosures.
The Company expects that while the adoption of this new accounting guidance will have a significant impact on the Company’s financial statements under U.S. GAAP, it does not expect adoption of the updated standard to impact its overall cash flows, subsidiaries’ dividend capacity or their ability to meet applicable regulatory capital standards, nor does the Company anticipate adoption to affect its existing debt covenants or strategies for capital deployment.
4. Acquisitions
Business Combinations
On January 1, 2022, the Company entered into a Stock Purchase Agreement with AIG Claims, Inc. ("AIG Claims"), a Delaware corporation, to purchase all outstanding shares of FPCS (formerly DSA P&C Solutions or Fortitude General). In addition, on January 1, 2022, the Company entered into a Stock Purchase Agreement with AIG Life Holdings, Inc. ("AIG Life"), a Texas corporation, to purchase all outstanding shares of FLAS. The Company paid the aggregate purchase price of $1 and $1 for FPCS and FLAS, respectively, in cash. A bargain purchase gain was recognized in the amount of $1 million and $1 million for FPCS and FLAS, respectively, representing the excess of the fair value of net assets acquired over the consideration paid. The bargain purchase gains are included in other revenues on the consolidated statements of income (loss). The Company did not incur any acquisition-related costs related to FPCS or FLAS subsequent to the date of acquisition.
On April 1, 2022, the Company acquired FLIAC (previously PALAC). PALAC was a wholly-owned subsidiary of Prudential Annuities, Inc (“PAI”), an indirect wholly-owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”), a New Jersey Corporation.
The total preliminary purchase consideration of the acquisition was $1,762 million comprised of $1,752 million cash transferred for the purchase price and a $10 million estimated cash reimbursement to the seller for transaction costs incurred. A bargain purchase gain was initially recognized in the amount of $5 million, representing the excess of the fair value of net assets acquired over the consideration paid. In December 2022, the Company made a measurement period adjustment that reduced the deferred tax asset that it previously recognized on its acquisition-date balance sheet by $97 million.
The net impact of this adjustment resulted in a change from the preliminary bargain purchase gain of $5 million that was recorded at April 1, 2022 to a goodwill balance of $93 million as of December 31, 2022. There have been no
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
goodwill impairments recorded subsequent to initial recognition. We will continue to evaluate the overall transaction through the one-year measurement period subsequent to acquisition date, as allowed under applicable accounting guidance, but do not expect any material changes.
Excluding the reimbursement to the seller for transaction costs included in the consideration as noted above, the Company has incurred acquisition-related expenses of $21 million and $7 million during the years ended December 31, 2022 and 2021, respectively, related to the FLIAC acquisition.
The following table summarizes the fair value of assets acquired and liabilities assumed, gross, at the acquisition date, inclusive of the measurement period adjustments discussed above, and represents amounts recognized for each major class of assets and liabilities, after application of push-down accounting.
| | | | | |
| April 1, 2022 |
| (in millions) |
| |
Assets: | |
Total investments | $ | 10,807 | |
Cash and cash equivalents | 1,578 | |
Reinsurance recoverables | 318 | |
| |
Income taxes | 255 | |
Deposit asset | 2,596 | |
Other assets | 96 | |
Separate account assets | 29,426 | |
| |
Total assets | 45,076 | |
| |
Liabilities: | |
Insurance liabilities | 13,611 | |
Other liabilities | 370 | |
Separate account liabilities | 29,426 | |
| |
Total liabilities | 43,407 | |
| |
Net assets acquired | 1,669 | |
| |
Consideration | 1,762 | |
| |
Goodwill | $ | 93 | |
Asset Acquisitions
On January 3, 2022, pursuant to a stock purchase agreement, the Company acquired Rx Life in exchange for $21 million. Rx Life, an Arizona domiciled life and annuity insurer with licensing throughout the United States, was renamed FRC on April 18, 2022. All coinsurance and yearly renewable term reinsurance agreements between Rx Life and reinsurers existing prior to the Company's acquisition of Rx Life were transferred to the Company. In aggregate, coverage provided to Rx Life by its reinsurance agreements results in the cession of 100% of Rx Life’s insurance liabilities to policyholders to its former parent.
Under the asset acquisition method of accounting, the total acquisition price of $21 million was allocated to FRC's net tangible assets based on their cost as of the acquisition date, which is also determined to be their fair values. The Company recorded intangible assets of $14 million related to state insurance licenses upon acquisition of FRC.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
These intangible assets have an indefinite useful life and there have been no impairments recorded subsequent to initial recognition.
On May 12, 2022, pursuant to a stock purchase agreement, the Company acquired PLIC in exchange for $20 million. PLIC, an Ohio domiciled property and casualty insurer with licensing throughout the United States, was renamed FCIC on July 27, 2022. All of PLIC’s previous insurance policies were novated prior to the acquisition.
Under the asset acquisition method of accounting, the total acquisition price of $20 million was allocated to FCIC's net tangible assets based on their cost as of the acquisition date, which is also determined to be their fair values. The Company recorded intangible assets of $12 million related to state insurance licenses upon acquisition of FCIC. These intangible assets have an indefinite useful life and there have been no impairments recorded subsequent to initial recognition.
5. Significant Reinsurance Transactions
The Company acquires blocks of legacy reserves through legal entity acquisitions and reinsurance agreements. The following table summarizes the Company's significant run-off reinsurance transactions completed between January 1, 2021 and December 31, 2022. Values are shown in millions at the execution date of transaction.
| | | | | | | | | | | | | | | | | |
Transaction | Execution Date | Total Liabilities Assumed | Total Assets Transferred | Deferred Gain (Charge) | Primary Nature of Transaction |
2022 Inception: | | | | | |
Reinsurance agreement with a U.S. based life insurance company | November 17, 2022 | $ | 1,239 | | $ | 1,024 | | $ | (215) | | Legacy block of fixed deferred annuities, with an effective date of October 1, 2022. |
LPT reinsurance agreement with a Bermuda based reinsurance company | March 31, 2022 | $ | 305 | | $ | 297 | | $ | (8) | | Quota share participation on reinsurance treaties with terms from 2011 through 2020. Effective date of October 1, 2021. |
Reinsurance agreement with an affiliated Japanese life insurance company | March 31, 2022 | $ | 4,173 | | $ | 4,173 | | $ | — | | Legacy block of payout and deferred annuities on a coinsurance basis, with an effective date of March 31, 2022. |
LPT reinsurance agreement with a Bermuda based reinsurance company | February 17, 2022 | $ | 236 | | $ | 236 | | $ | — | | Small-business primary general liability policies for underwriting years 2013 through 2019, net of inuring reinsurance, with an effective date of February 25, 2021. |
Total | $ | 5,953 | | $ | 5,730 | | $ | (223) | | |
2021 Inception: | | | | | |
Reinsurance agreement with a U.S. based life insurance company | October 28, 2021 | $ | 2,882 | | $ | 3,320 | | $ | 438 | | Legacy annuity closed block of business on a funds withheld basis, with an effective date of October 1, 2021. |
Total | $ | 2,882 | | $ | 3,320 | | $ | 438 | | |
Effective October 1, 2022, the Company entered into a flow reinsurance transaction with an affiliated Japanese life insurance company in which the Company reinsures a quota share basis of USD and AUD denominated single premium whole life products issued to the Japanese market.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
6. Investments
Fixed Maturity Securities Available for Sale
The following table presents the amortized cost or cost, gross unrealized gains, gross unrealized losses and fair value of our available for sale fixed maturity securities at December 31, (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Amortized | | Gross | | Gross | | |
| Cost or | | Unrealized | | Unrealized | | Fair |
| Cost | | Gains | | Losses | | Value |
| | | | | | | |
Fixed maturity securities, available for sale: | | | | | | | |
U.S. government and government sponsored entities | $ | 701 | | | $ | — | | | $ | (314) | | | $ | 387 | |
Obligations of states, municipalities and political subdivisions | 89 | | | — | | | (15) | | | 74 | |
Non-U.S. governments | 45 | | | 1 | | | (20) | | | 26 | |
Corporate debt | 1,124 | | | 5 | | | (221) | | | 908 | |
| | | | | | | |
Mortgage-backed, asset-backed and collateralized: | | | | | | | |
RMBS | 44 | | | — | | | (5) | | | 39 | |
CMBS | 150 | | | — | | | (10) | | | 140 | |
CDO / ABS | 121 | | | — | | | (8) | | | 113 | |
| | | | | | | |
Total mortgage-backed, asset-backed and collateralized | 315 | | | — | | | (23) | | | 292 | |
| | | | | | | |
Total fixed maturity securities, available for sale | $ | 2,274 | | | $ | 6 | | | $ | (593) | | | $ | 1,687 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Amortized | | Gross | | Gross | | |
| Cost or | | Unrealized | | Unrealized | | Fair |
| Cost | | Gains | | Losses | | Value |
| | | | | | | |
Fixed maturity securities, available for sale: | | | | | | | |
U.S. government and government sponsored entities | $ | 691 | | | $ | — | | | $ | (41) | | | $ | 650 | |
Obligations of states, municipalities and political subdivisions | 117 | | | 1 | | | (1) | | | 117 | |
Non-U.S. governments | 52 | | | 1 | | | — | | | 53 | |
Corporate debt | 990 | | | 41 | | | (4) | | | 1,027 | |
| | | | | | | |
Mortgage-backed, asset-backed and collateralized: | | | | | | | |
RMBS | 47 | | | — | | | (1) | | | 46 | |
CMBS | 265 | | | 1 | | | (3) | | | 263 | |
CDO / ABS | 109 | | | 1 | | | — | | | 110 | |
| | | | | | | |
Total mortgage-backed, asset-backed and collateralized | 421 | | | 2 | | | (4) | | | 419 | |
| | | | | | | |
Total fixed maturity securities, available for sale | $ | 2,271 | | | $ | 45 | | | $ | (50) | | | $ | 2,266 | |
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
Fixed Maturity Securities Available for Sale in a Loss Position
The following table summarizes the fair value and gross unrealized losses on our available for sale securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Less than 12 Months | | Greater than 12 Months | | Total |
| | | Gross | | | | Gross | | | | Gross |
| Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| Value | | Losses | | Value | | Losses | | Value | | Losses |
| | | | | | | | | | | |
Fixed maturity securities, available for sale: | | | | | | | | | | | |
U.S. government and government sponsored entities | $ | 1 | | | $ | — | | | $ | 386 | | | $ | (314) | | | $ | 387 | | | $ | (314) | |
Obligations of states and municipalities and other political | 44 | | | (9) | | | 31 | | | (6) | | | 75 | | | (15) | |
Non-U.S. governments | 26 | | | (20) | | | — | | | — | | | 26 | | | (20) | |
Corporate debt | 702 | | | (150) | | | 200 | | | (71) | | | 902 | | | (221) | |
| | | | | | | | | | | |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | | | |
RMBS | 30 | | | (3) | | | 9 | | | (2) | | | 39 | | | (5) | |
CMBS | 53 | | | (4) | | | 87 | | | (6) | | | 140 | | | (10) | |
CDO / ABS | 87 | | | (7) | | | 20 | | | (1) | | | 107 | | | (8) | |
| | | | | | | | | | | |
Total mortgage-backed, asset-backed and collateralized | 170 | | | (14) | | | 116 | | | (9) | | | 286 | | | (23) | |
| | | | | | | | | | | |
Total fixed maturity securities, available for sale | $ | 943 | | | $ | (193) | | | $ | 733 | | | $ | (400) | | | $ | 1,676 | | | $ | (593) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Less than 12 Months | | Greater than 12 Months | | Total |
| | | Gross | | | | Gross | | | | Gross |
| Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| Value | | Losses | | Value | | Losses | | Value | | Losses |
| | | | | | | | | | | |
Fixed maturity securities, available for sale: | | | | | | | | | | | |
U.S. government and government sponsored entities | $ | 490 | | | $ | (25) | | | $ | 158 | | | $ | (16) | | | $ | 648 | | | $ | (41) | |
Obligations of states and municipalities and other political | 68 | | | (1) | | | — | | | — | | | $ | 68 | | | (1) | |
Non-U.S. governments | 2 | | | — | | | — | | | — | | | $ | 2 | | | — | |
Corporate debt | 417 | | | (4) | | | 8 | | | — | | | $ | 425 | | | (4) | |
| | | | | | | | | | | |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | | | |
RMBS | 43 | | | (1) | | | — | | | — | | | $ | 43 | | | (1) | |
CMBS | 187 | | | (3) | | | — | | | — | | | $ | 187 | | | (3) | |
CDO / ABS | 40 | | | | | — | | | — | | | $ | 40 | | | — | |
| | | | | | | | | | | |
Total mortgage-backed, asset-backed and collateralized | 270 | | | (4) | | | — | | | — | | | 270 | | | (4) | |
| | | | | | | | | | | |
Total fixed maturity securities, available for sale | $ | 1,247 | | | $ | (34) | | | $ | 166 | | | $ | (16) | | | $ | 1,413 | | | $ | (50) | |
At December 31, 2022, we held 702 individual fixed maturity securities that were in an unrealized loss position, 182 of which were in a continuous unrealized loss position for 12 months or more. At December 31, 2021 we held 264 individual fixed maturity securities that were in an unrealized loss position, 6 of which were in a continuous unrealized loss position for 12 months or more.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
We did not recognize the unrealized losses in earnings on these fixed maturity securities within the consolidated statements of income (loss) at December 31, 2022 or at December 31, 2021 because we neither intended to sell the securities nor did we believe that it was more likely than not that we will be required to sell these securities before recovery of their amortized cost basis.
The Company did not recognize any OTTI losses on fixed maturity securities for the years ended December 31, 2022 or 2021.
Contractual Maturities of Fixed Maturity Securities Available for Sale
The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity at December 31, (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Total Fixed Maturity Securities, Available for Sale |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | | | | | | |
Due in one year or less | $ | 20 | | | $ | 19 | | | $ | 27 | | | $ | 27 | |
Due after one year through five years | 214 | | | 204 | | | 135 | | | 135 | |
Due after five years through ten years | 184 | | | 153 | | | 86 | | | 85 | |
Due after ten years | 1,541 | | | 1,019 | | | 1,602 | | | 1,600 | |
Mortgage-backed, asset-backed and collateralized | 315 | | | 292 | | | 421 | | | 419 | |
| | | | | | | |
Total | $ | 2,274 | | | $ | 1,687 | | | $ | 2,271 | | | $ | 2,266 | |
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed, commercial mortgage-backed, residential mortgage-backed, and collateralized securities are shown separately in the table above, as they do not have a single maturity date.
Proceeds and gross gains and losses from voluntary sales
The following table presents the proceeds from voluntary sales and the gross gains and losses on those sales of AFS fixed maturity securities for the years ended December 31, (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
Proceeds from voluntary sales | $ | 620 | | | $ | 1,396 | |
Gross gains | 46 | | | 54 | |
Gross losses | (188) | | | (68) | |
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
Other Invested Assets
The following table presents a breakdown of other invested assets by asset class at December 31, (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
LPs/LLCs: | | | |
Equity Method: | | | |
Private equity | $ | 842 | | | $ | 679 | |
Real estate-related | 5 | | | — | |
Fair Value: | | | |
Private equity | 934 | | | — | |
| | | |
Total LPs/LLCs(1) | 1,781 | | | 679 | |
| | | |
Derivatives | 177 | | | — | |
Other | 11 | | | — | |
| | | |
Total other invested assets | $ | 1,969 | | | $ | 679 | |
(1) Includes related party balances of $1,749 million and $666 million as of December 31, 2022 and 2021, respectively.
Our private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents, which limits our ability to liquidate those investments. These restrictions may include lock-ups, redemption gates, restricted share classes or side pockets, restrictions on the frequency of redemption and notice periods.
Net Investment Income
The following table presents the components of net investment income for the years ended December 31, (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
Fixed maturity securities | $ | 353 | | | $ | 76 | |
Other invested assets | 61 | | | 89 | |
Short term investments and other investments | 53 | | | 3 | |
Funds withheld - directly managed | 1,677 | | | 1,923 | |
| | | |
Gross investment income | 2,144 | | | 2,091 | |
| | | |
Investment expenses | (51) | | | (42) | |
| | | |
Net investment income | $ | 2,093 | | | $ | 2,049 | |
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
Investment Gains (Losses)
The following table presents the components of investment gains (losses) for the years ended December 31, (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
Realized losses on fixed maturity securities | $ | (712) | | | $ | (15) | |
Unrealized losses on fixed maturity securities under the FVO | (403) | | | — | |
Unrealized losses on equity securities | (27) | | | — | |
Realized gains (losses) on funds withheld - directly managed | (995) | | | 79 | |
Net losses on derivative instruments | (913) | | | — | |
Other realized losses | (63) | | | — | |
| | | |
Investment gains (losses) | $ | (3,113) | | | $ | 64 | |
The amount of unrealized appreciation (depreciation) of fixed maturity securities, available for sale reclassified from accumulated other comprehensive income (loss) to investment gains (losses) upon the sale of securities was $(4) million for the year ended December 31, 2022 and $75 million for the year ended December 31, 2021.
Included in investment gains (losses) from funds withheld - directly managed for the years ended December 31, 2022 and 2021 are $42 million of gains and $24 million of gains, respectively, related to the transfer of securities from funds withheld - directly managed to fixed maturity securities, available for sale.
Loaned securities and repurchase agreements
In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions.
The following table sets forth, by type, the securities we have agreed to repurchase. The below amounts represent the cash received under the outstanding repurchase agreements at December 31, (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Remaining Contractual Maturities of the Agreements |
| Overnight & Continuous | | Up to 30 days | | 30-90 days | | Total |
| | | | | | | |
Corporate debt securities | $ | — | | | $ | 111 | | | $ | 200 | | | $ | 311 | |
The market value of the securities initially posted as collateral under the repurchase agreements was $315 million. Subsequent to our posting of collateral, the market value of the securities increased to $326 million resulting in the receipt of $11 million of additional funds from the counterparty.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
The following table sets forth the remaining contractual maturities of the Company's securities lending transactions by security type that was loaned. The amounts below represent cash collateral received for the loaned securities at December 31,(in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Remaining Contractual Maturities of the Agreements |
| Overnight & Continuous | | Up to 30 days | | 30-90 days | | Total |
| | | | | | | |
Equity securities | $ | 106 | | | $ | — | | | $ | — | | | $ | 106 | |
The market value of the securities loaned was $103 million as of December 31, 2022.
The Company did not have any loaned securities or repurchase agreements during the year ended December 31, 2021.
Securities Pledged, Restricted Assets and Special Deposits
The Company pledges as collateral investment securities it owns to unaffiliated parties through certain transactions, including securities lending, securities sold under repurchase agreements, collateralized borrowings and postings of collateral with derivative counterparties.
In the normal course of its business activities, the Company accepts collateral that can be sold or repledged. The primary sources of this collateral are securities purchased under agreements to resell.
As of December 31, 2022 the Company had securities with fair value of $15 million on deposit with governmental authorities or trustees as required by certain insurance laws. As of December 31, 2021, the Company had no securities on deposit with governmental authorities or trustees as required by certain insurance laws.
We utilize asset trust accounts to collateralize business with our reinsurance counterparties. As of December 31, 2022 and 2021 we held $4,643 million and $266 million, respectively, of assets in these trusts for the benefit of our counterparties.
As of December 31, 2022 and 2021, 90% and 94%, respectively, of the fixed maturity securities within the funds withheld - directly managed, serving as collateral for our reinsurance receivable, are classified as investment grade by the National Association of Insurance Commissioners ("NAIC").
Concentration of Credit Risk
Other than the funds withheld - directly managed balance attributable to the AIG affiliates, there are no significant concentrations of credit risk within the Company's invested assets. In the event of a ceding company's insolvency, we would need to assert a claim on the investments collateralizing our reinsurance receivable and used to settle our liabilities. However, we have the ability to offset amounts we owe to the ceding company, which reduces our risk of loss. In accordance with the terms of our reinsurance agreements, we are obligated to fund any shortfall between U.S. statutory book value of the investments collateralizing the reinsurance receivable and U.S. statutory insurance reserves. Likewise, if there is an excess between the U.S. statutory book value of investments collateralizing the reinsurance receivable and U.S. statutory insurance reserves, the ceding companies are required to fund the excess to our funds withheld account.
7. Derivatives and Hedging
Types of Derivative Instruments and Derivative Strategies
The Company utilizes various derivative instruments and strategies to manage interest rate, foreign currency exchange rate, equity and credit risk. Commonly used derivative instruments include but are not necessarily limited to:
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
•Interest rate contracts: futures, swaps, swaptions, forwards, options, caps and floors
•Equity contracts: futures, options and total return swaps
•Foreign exchange contracts: futures, options, forwards and swaps
•Credit contracts: single and index reference credit default swaps, credit default index swaptions and credit index options
See Note 3 for a detailed discussion of the accounting treatment for derivative instruments. See Note 8 for additional disclosures related to the fair value of our derivative instruments.
Interest Rate Contracts
Interest rate swaps, swaptions and futures are used by the Company to reduce risks from changes in interest rates, manage interest rate exposures arising from mismatches between assets and liabilities.
Swaps may be attributed to specific assets or liabilities or to a portfolio of assets or liabilities. Under interest rate swaps, the Company agrees with counterparties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed upon notional principal amount.
In standardized exchange-traded interest rate futures transactions, the Company purchases or sells a specified number of contracts, the values of which are determined by the daily market values of underlying referenced investments. The Company enters into exchange-traded futures with regulated futures commission merchants who are members of a trading exchange.
Equity Contracts
Equity options, total return swaps, and futures are used by the Company to manage its exposure to the equity markets which impacts the value of assets and liabilities it owns or anticipates acquiring or selling.
Equity index options are contracts which will settle in cash based on differentials in the underlying indices at the time of exercise and the strike price. The Company uses combinations of purchases and sales of equity index options to hedge the effects of adverse changes in equity indices within a predetermined range.
Total return swaps are contracts whereby the Company agrees with counterparties to exchange, at specified intervals, the difference between the return on an asset (or market index) and Secured Overnight Financing Rate (“SOFR”) plus an associated funding spread based on a notional amount. The Company generally uses total return swaps to hedge the effect of adverse changes in equity indices.
In standardized exchange-traded equity futures transactions, the Company purchases or sells a specified number of contracts, the values of which are determined by the daily market values underlying referenced equity indices. The Company enters into exchange-traded futures with regulated futures commission merchants who are members of a trading exchange.
Foreign Exchange Contracts
Currency derivatives, including currency swaps and forwards, are used by the Company to reduce risks from changes in currency exchange rates with respect to investments denominated in foreign currencies that the Company either holds or intends to acquire or sell.
Under currency forwards, the Company agrees with counterparties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. The Company executes forward sales of the hedged currency in exchange for U.S. dollars at a specified exchange rate. The maturities of these forwards correspond with the future periods in which the non-U.S. dollar-denominated earnings are expected to be generated.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
Under currency swaps, the Company agrees with counterparties to exchange, at specified intervals, the difference between one currency and another at an exchange rate and calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party.
Credit Contracts
The Company purchases credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. The Company sells credit protection using credit derivatives in order to generate a credit spread for the benefit of the Company’s investment portfolio.
Primary Risks Managed by Derivatives
The table below provides a summary of the gross notional amount and fair value of derivative contracts by the primary underlying risks, excluding derivatives within our funds withheld - directly managed. Many derivative instruments contain multiple underlying risks. The fair value amounts below represent the value of derivative contracts prior to taking into account the netting effects of master netting agreements and cash collateral at December 31, (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Notional | | Gross Fair Value | | Notional | | Gross Fair Value |
Instrument Type | | Assets | | Liabilities | | | Assets | | Liabilities |
| | | |
Interest rate swaps | $ | 14,648 | | | $ | 276 | | | $ | 670 | | | $ | — | | | $ | — | | | $ | — | |
Foreign currency forwards | 1,680 | | | 97 | | | 13 | | | — | | | — | | | — | |
Foreign currency swaps | 594 | | | 24 | | | 3 | | | — | | | — | | | — | |
Credit default swaps | 591 | | | 6 | | | — | | | — | | | — | | | — | |
Equity futures | 1,737 | | | 46 | | | — | | | — | | | — | | | — | |
Total return swaps | — | | | 23 | | | 49 | | | — | | | — | | | — | |
Equity options | 10,425 | | | 298 | | | 355 | | | — | | | — | | | — | |
Total USD denominated derivatives | 29,675 | | | 770 | | | 1,090 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Foreign currency swaps | — | | | — | | | — | | | 5 | | | — | | | — | |
Total GBP denominated derivatives | — | | | — | | | — | | | 5 | | | — | | | — | |
| | | | | | | | | | | |
Total Derivatives (1) | $ | 29,675 | | | $ | 770 | | | $ | 1,090 | | | $ | 5 | | | $ | — | | | $ | — | |
(1) Recorded in other invested assets and derivative liabilities on the consolidated balance sheets.
Offsetting Assets and Liabilities
The following table presents recognized assets and liabilities (excluding derivative instruments within our funds withheld - directly managed), that are offset in the consolidated balance sheets, and/or are subject to an
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the consolidated balance sheets at December 31, (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Gross Amounts of Recognized Financial Instruments | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments/ Collateral(1) | | Net Amount |
Offsetting of Financial Assets: | | | | | | | | | |
Derivatives | $ | 512 | | | $ | (335) | | | $ | 177 | | | $ | (177) | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | |
Offsetting of Financial Liabilities: | | | | | | | | | |
Derivatives | $ | 832 | | | $ | (632) | | | $ | 200 | | | $ | — | | | $ | 200 | |
Repurchase agreements | 311 | | | — | | | 311 | | | (311) | | | — | |
Securities lending transactions | 106 | | | — | | | 106 | | | (103) | | | 3 | |
(1) Amounts exclude the excess of collateral received/pledged from/to the counterparty.
The Company did not have any asset or liabilities, that are offset in the consolidated balance sheets at December 31, 2021.
For securities purchased under agreements to resell and securities sold under repurchase agreements, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset.
The following tables provide the financial statement classification and impact of derivatives for the years ended December 31, (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
Instrument Type | Investment gains (losses) | | Foreign exchanges gains (losses) | | Investment gains (losses) | | Foreign exchanges gains (losses) |
| | | | | | | |
Interest rate swaps | $ | (797) | | | $ | — | | | $ | — | | | $ | — | |
Foreign currency forwards | — | | | 26 | | | — | | — |
Foreign currency swaps | (22) | | | 98 | | | — | | — |
Credit default swaps | 4 | | | — | | | — | | — |
Equity futures | 277 | | | — | | | — | | — |
Total return swaps | 182 | | | — | | | — | | — |
Equity options | (557) | | | — | | | — | | — |
Total USD denominated derivatives | (913) | | | 124 | | | — | | | — | |
| | | | | | | |
Foreign currency swaps | — | | — | | — | | — |
Total GBP denominated derivatives | — | | | — | | | — | | | — | |
| | | | | | | |
Total Derivatives | $ | (913) | | | $ | 124 | | | $ | — | | | $ | — | |
Counterparty Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial derivative transactions with a positive fair value. The Company manages credit risk by (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreements, as applicable; (ii) trading through central clearing and OTC parties; and (iii) obtaining collateral, such as cash and securities, when appropriate.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
Substantially all of the Company’s derivative agreements require daily full collateralization by the party in a liability position.
8. Fair Value Measurements
Fair Value Measurements on a Recurring Basis
Fair value is defined as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are responsible for the determination of the value of the investments carried at fair value and the supporting methodologies and assumptions.
The degree of judgment used in measuring the fair value of financial instruments generally inversely correlates with the level of observable valuation inputs. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, liquidity and general market conditions.
Fair Value Hierarchy
Assets and liabilities recorded at fair value in the consolidated balance sheets are measured and classified in accordance with a fair value hierarchy consisting of three levels based on the observability of valuation inputs as follows:
•Level 1: Fair value measurements based on unadjusted quoted prices in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.
•Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
•Level 3: Fair value measurements based on valuation techniques that use significant inputs that are both observable and unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions about the inputs a hypothetical market participant would use to value that asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The following is a description of the valuation methodologies used for assets and liabilities carried at fair value. These methodologies are applied to assets and liabilities across the levels discussed above, and it is the observability of the inputs used that determines the appropriate level in the fair value hierarchy for the respective asset or liability.
Valuation of Financial Instruments Measured at Fair Value
Funds withheld - directly managed
The Company has elected the FVO on the funds withheld - directly managed portfolios. The fair value of the underlying assets collateralizing the funds withheld - directly managed is generally based on market observable
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
inputs using industry standard valuation techniques but also requires certain significant unobservable inputs for specific asset classes. The level in the fair value hierarchy assigned to the funds withheld - directly managed is based upon the observability of inputs used to value the underlying investment assets held at fair value within the funds withheld portfolio.
Fixed maturity securities
Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to measure fixed maturity securities at fair value. Market price data is generally obtained from dealer markets. We employ multiple independent third-party valuation service providers that gather, analyze, and interpret market information to derive fair value estimates for individual investments, based upon market-accepted methodologies and assumptions. The methodologies used by these independent third-party valuation service providers are reviewed and understood by management, through periodic discussion with and information provided by the independent third-party valuation service providers, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. The pricing hierarchy is updated for new financial products and recent pricing experience with various vendors. In addition, control processes are applied to the fair values received from independent third-party valuation service providers to determine the accuracy of these values.
These control processes are designed to assess whether the fair values received from independent third-party valuation service providers are accurately recorded, that their data inputs and valuation techniques are appropriate and consistently applied and that the assumptions used appear reasonable and consistent with the objective of determining fair value. We assess the reasonableness of individual security values received from independent third-party valuation service providers through various analytical techniques, review of various pricing integrity reports and pricing trends, back testing, and have procedures to escalate related questions internally and to the independent third-party valuation service providers for resolution. To assess the degree of pricing consensus among various valuation service providers for specific asset types, we conduct comparisons of prices received from available sources. We use these comparisons to establish a hierarchy for the fair values received from independent third-party valuation service providers to be used for particular security classes. We also validate prices for selected securities through reviews by members of management who have relevant expertise and who are independent of those charged with executing investing transactions.
When observable price quotations are not available, internally-developed valuations or indicative broker quotes are also used to determine fair value in circumstances, or where the Company ultimately concludes that pricing information received from the independent pricing services is not reflective of market activity. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information with an internally developed valuation. Fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of comparable securities, adjusted for illiquidity and structure. Fair values determined internally are also subject to management review to determine whether the valuation models and related inputs are reasonable. Pricing service overrides, internally-developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.
Equity securities
Equity securities consist principally of investments in common and preferred stock of publicly traded companies, privately traded securities, as well as mutual fund shares. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities are determined using discounted cash flow, earnings multiple and other valuation models that require a substantial level of judgment around inputs and therefore are classified within Level 3. The fair values of mutual fund shares that transact regularly (but do not trade in active markets because they are not publicly available) are based on transaction prices of identical fund shares and are classified within Level 2 in the fair value hierarchy.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
Mortgage loans
Fair value for mortgage loans is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate or foreign government bond rate (for non-U.S. dollar-denominated loans) plus an appropriate credit spread for loans of similar quality, average life and currency. The quality ratings for these loans, a primary determinant of the credit spreads and a significant component of the pricing process, are based on an internally-developed methodology. Certain commercial mortgage loans are valued incorporating other factors, including the terms of the loans, the principal exit strategies for the loans, prevailing interest rates and credit risk.
Derivative instruments (Other invested assets and derivative liabilities)
The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, credit spreads, market volatility, expected returns, NPR, liquidity and other factors.
The Company's exchange-traded futures and options include treasury and equity futures. Exchange-traded futures and options are valued using quoted prices in active markets and are classified within Level 1 in the fair value hierarchy.
The majority of the Company’s derivative positions are traded in the OTC derivative market and are classified within Level 2 in the fair value hierarchy. OTC derivatives classified within Level 2 are valued using models that utilize actively quoted or observable market input from external market data providers, third-party pricing vendors and/or recent trading activity. The Company’s policy is to use mid-market pricing in determining its best estimate of fair value. The fair values of most OTC derivatives, including interest rate and cross-currency swaps, currency forward contracts and credit default swaps are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black-Scholes option pricing models. These models’ key inputs include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, currency rates, credit spreads, equity prices, index dividend yields, NPR, volatility and other factors.
The Company’s cleared interest rate swaps and credit derivatives linked to an index are valued using models that utilize actively quoted or observable market inputs, including the secured overnight financing rate (SOFR), obtained from external market data providers, third-party pricing vendors, and/or recent trading activity. These derivatives are classified as Level 2 in the fair value hierarchy.
Other invested assets - LPs/LLCs
Other invested assets include our investments in private equity funds which we utilize NAV as an estimate of the fair value, which is a permitted practical expedient. Due to the time lag in the NAV reported by certain fund managers, we adjust the valuation for capital calls and distributions that occur between the date of the NAV and our consolidated financial statements.
Short-term investments
For short-term investments, amortized cost is used as the best estimate of fair value, and they are primarily classified as Level 2. All other instruments are valued using unadjusted quoted prices in active markets that are accessible for identical assets and are classified as Level 1.
Cash and Cash equivalents
Cash and cash equivalents include money market instruments and other highly liquid debt instruments. Cash and cash equivalents, including certain money market instruments, are primarily valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. All other instruments are primarily classified as Level 2, since due to their short term nature, amortized cost is used as the best estimate of fair value.
Reinsurance recoverables
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
We have elected the fair option on certain reinsurance recoverables which are recorded to match the associated insurance liabilities, which are recorded at fair value. Accordingly, the fair value of the reinsurance recoverables for which we have elected the FVO, is determined by the fair value calculation of our insurance liabilities. See our discussion of the fair value determination for insurance liabilities below.
Deposit asset
We have elected the fair value option on the entirety of our deposit asset, which represents assets, held in trust by the reinsurer, that back the insurance liabilities for certain of our fixed indexed annuities and fixed annuities with a guaranteed lifetime withdrawal income. The deposit is recorded to match the associated insurance liabilities, which are recorded at fair value. Accordingly, the fair value of our deposit asset is determined by the fair value calculation of our insurance liabilities. See discussion of the fair value determination for insurance liabilities below.
Insurance liabilities, at fair value
We have elected the fair value option on certain of our insurance liabilities, which are primarily comprised of guarantees primarily associated with the living benefit features of certain variable annuity contracts. These are optional riders that are added to the base variable annuity contract, which includes Mortality and Expense charges ("M&E") and contract charges. The fair values of these liabilities are calculated as the present value of future expected benefit payments to customers, anticipated future trail commissions paid to agents and certain administrative expenses less the present value of future expected rider fees, M&E charges, contract charges and the anticipated future reimbursement of certain asset management fees. This methodology could result in either a liability or asset balance, given changing capital market conditions and various actuarial assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally developed models with option pricing techniques. The models are based on a risk neutral valuation framework and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. The determination of these risk premiums requires the use of management's judgment.
The significant inputs to the valuation models include capital market assumptions, such as interest rate levels and volatility assumptions, as well as actuarially determined assumptions, including contractholder behavior, such as lapse rates, benefit utilization rates, withdrawal rates, and mortality rates. Since many of these assumptions are unobservable and are considered to be significant inputs to the liability valuation, the insurance liabilities have been reflected within Level 3 in the fair value hierarchy.
Separate account assets and liabilities
Separate account assets include fixed maturity securities, treasuries, equity securities, mutual funds and commercial mortgage loans for which values are determined consistent with similar instruments described above under fixed maturity securities and equity securities. Separate account liabilities are recorded at the amount credited to the contractholder, which reflects the change in fair value of the corresponding separate account assets including contractholder deposits less withdrawals and fees.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
Assets and Liabilities Measured at Fair Value
The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used at December 31, (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Level 1 | | Level 2 | | Level 3 | | Fair Value Based on NAV as Practical Expedient | | Netting(1) | | Total |
Assets: | | | | | | | | | | | |
Fixed maturity securities, available for sale: | | | | | | | | | | | |
U.S. government and government sponsored entities | $ | — | | | $ | 387 | | | $ | — | | | $ | — | | | $ | — | | | $ | 387 | |
Obligations of states, municipalities and political subdivisions | — | | | 74 | | | — | | | — | | | — | | | 74 | |
Non-U.S. governments | — | | | 26 | | | — | | | — | | | — | | | 26 | |
Corporate debt | — | | | 908 | | | — | | | — | | | — | | | 908 | |
RMBS | — | | | 39 | | | — | | | — | | | — | | | 39 | |
CMBS | — | | | 140 | | | — | | | — | | | — | | | 140 | |
CDO / ABS | — | | | 113 | | | — | | | — | | | — | | | 113 | |
Total fixed maturity securities, available for sale | — | | | 1,687 | | | — | | | — | | | — | | | 1,687 | |
| | | | | | | | | | | |
Fixed maturity securities, securities at fair value | | | | | | | | | | | |
U.S. government and government sponsored entities | — | | | 702 | | | — | | | — | | | — | | | 702 | |
Obligations of states, municipalities and political subdivisions | — | | | 359 | | | — | | | — | | | — | | | 359 | |
Non-U.S. governments | — | | | 1,231 | | | — | | | — | | | — | | | 1,231 | |
Corporate debt | — | | | 4,269 | | | 212 | | | — | | | — | | | 4,481 | |
RMBS | — | | | 412 | | | — | | | — | | | — | | | 412 | |
CMBS | — | | | 363 | | | — | | | — | | | — | | | 363 | |
CDO / ABS | — | | | 1,097 | | | 290 | | | — | | | — | | | 1,387 | |
Total fixed maturity securities, securities at fair value | — | | | 8,433 | | | 502 | | | — | | | — | | | 8,935 | |
| | | | | | | | | | | |
Funds withheld - directly managed | 607 | | | 21,583 | | | 8,572 | | | 2,241 | | | — | | | 33,003 | |
Equity securities | 175 | | | — | | | — | | | — | | | — | | | 175 | |
Mortgage loans | — | | | — | | | 334 | | | — | | | — | | | 334 | |
Other invested assets | — | | | 513 | | | — | | | 1,780 | | | (335) | | | 1,958 | |
Short term investments | 17 | | | 245 | | | — | | | — | | | — | | | 262 | |
Cash and cash equivalents | 2,158 | | | 58 | | | — | | | — | | | — | | | 2,216 | |
Reinsurance recoverables | — | | | — | | | 253 | | | — | | | — | | | 253 | |
Deposit asset | — | | | — | | | 607 | | | — | | | — | | | 607 | |
Separate account assets | — | | | 23,601 | | | — | | | — | | | — | | | 23,601 | |
Total assets | $ | 2,957 | | | $ | 56,120 | | | $ | 10,268 | | | $ | 4,021 | | | $ | (335) | | | $ | 73,031 | |
| | | | | | | | | | | |
Liabilities: | | | | | | | | | | | |
Insurance liabilities, at fair value | $ | — | | | $ | — | | | $ | 5,546 | | | $ | — | | | $ | — | | | $ | 5,546 | |
Derivative liabilities | — | | | 832 | | | — | | | — | | | (632) | | | 200 | |
Separate account liabilities | — | | | 23,601 | | | — | | | — | | | — | | | 23,601 | |
Total liabilities | $ | — | | | $ | 24,433 | | | $ | 5,546 | | | $ | — | | | $ | (632) | | | $ | 29,347 | |
(1)“Netting” amounts represent offsetting considerations as disclosed in Note 7.
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as of and for the year ended December 31, 2021 (not covered by the auditor's report)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Level 1 | | Level 2 | | Level 3 | | Fair Value Based on NAV as Practical Expedient | | Netting(1) | | Total |
Assets: | | | | | | | | | | | |
Fixed maturity securities, available for sale: | | | | | | | | | | | |
U.S. government and government sponsored entities | $ | — | | | $ | 650 | | | $ | — | | | $ | — | | | $ | — | | | $ | 650 | |
Obligations of states, municipalities and political subdivisions | — | | | 117 | | | — | | | — | | | — | | | 117 | |
Non-U.S. governments | — | | | 53 | | | — | | | — | | | — | | | 53 | |
Corporate debt | — | | | 1,027 | | | — | | | — | | | — | | | 1,027 | |
RMBS | — | | | 46 | | | — | | | — | | | — | | | 46 | |
CMBS | — | | | 263 | | | — | | | — | | | — | | | 263 | |
CDO / ABS | — | | | 110 | | | — | | | — | | | — | | | 110 | |
Total fixed maturity securities available for sale | — | | | 2,266 | | | — | | | — | | | — | | | 2,266 | |
| | | | | | | | | | | |
Short term investments | 248 | | | 33 | | | 12 | | | — | | | — | | | 293 | |
Cash and cash equivalents | 854 | | | 141 | | | — | | | — | | | — | | | 995 | |
Other invested assets | — | | | — | | | — | | | 679 | | | — | | | 679 | |
Funds withheld - directly managed | 343 | | | 34,154 | | | 7,451 | | | 2,000 | | | — | | | 43,948 | |
Total assets | $ | 1,445 | | | $ | 36,594 | | | $ | 7,463 | | | $ | 2,679 | | | $ | — | | | $ | 48,181 | |
| | | | | | | | | | | |
(1)“Netting” amounts represent offsetting considerations as disclosed in Note 7.
Quantitative Information About Level 3 Fair Value Measurements
The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 assets and liabilities, which includes only those financial instruments for which information about the inputs is reasonably available to us, such as data from independent third-party valuation service providers and from internal valuation models. Weighted averages are calculated by weighting each input by the relative fair value of the respective assets and liabilities. Table shows values at December 31, (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Fair | | Valuation | | Unobservable | | Range | | Impact of increase in |
| Value | | Technique | | Input | | (Weighted Average) | | the input on fair value |
Assets: | | | | | | | | | |
Fixed maturities: | | | | | | | | | |
Corporate debt | $ | 212 | | | Discounted Cash Flow | | Discount rate | | 4.33% - 8.46% (6.55%) | | Decrease |
CDO / ABS | 290 | | | Discounted Cash Flow | | Discount rate | | 2.20%-13.77% (6.56%) | | Decrease |
Mortgage loans: | | | | | | | | | |
Commercial | 35 | | | Trade price | | Trade price | | N/A | | Increase |
Residential | 138 | | | Trade price | | Trade price | | N/A | | Increase |
161 | | | Level yield | | Market yield | | 5.75% - 9.97% (8.40%) | | Increase |
Deposit asset | 607 | | | Fair values are determined using the same unobservable inputs as insurance liabilities, at fair value. |
Reinsurance recoverables | 253 | | | Fair values are determined using the same unobservable inputs as insurance liabilities, at fair value. |
FGH Parent, L.P.
Notes to Consolidated Financial Statements
As of and for the year ended December 31, 2022 (not covered by the auditor's report) and as o