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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-02-29 compared with 2023-02-27 · 64 added, 98 removed, 127 unchanged (56% of the section changed)

Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, we are routinely subject to a variety of risks, as described in “ Risk Factors ” included in this Annual Report.

The risks related to our business also include certain market risks that may affect our debt and other financial instruments.

At present, we face the market risks associated with our marketable equity securities subject to equity price volatility and with interest rate movements on our fixed income investments.

In the normal course of business, we are routinely subject to a variety of risks, as described in “ Part I - Item 1A Risk Factors ” included in this Annual Report on Form 10-K.

The risks related to our business also include certain market risks that may affect our financial instruments and certain liabilities.

At present, we face the market risks associated with our marketable equity securities, liability for Contractholder Funds, and balances for MRBs which are subject to equity price volatility and with interest rate movements on our fixed income investments and liabilities for debt, FPBs, MRBs, and Contractholder Funds.

We regularly assess these market risks and have established policies and business practices designed to protect against the adverse effects of these exposures.

At December 31, 2022 , we had a short-term revolving credit facility with an aggregate principal amount of $550 million outstanding which bears interest at a floating rate.

Accordingly, depending on the amounts drawn during 2022, fluctuations in market interest rates will have an impact on our resulting interest expense.

For example, a

100bps shift in interest rates will increase or decrease floating interest expense by approximatel y $11 million per year.

At December 31, 2021, we had $977 million in long-term debt, $400 million of which accrued interest at a floating rate.

On June 24, 2022, the following action previously approved by the F&G board of directors became effective:

(i) an exchange agreement with FNF pursuant to which F&G transferred shares of its common stock to FNF in exchange for the $400 million FNF Promissory Note, after which the note was retired.

There was no gain or loss recorded with respect to the exchange agreement.

Our fixed maturity investments, certain preferred securities and our floating rate debt are subject to an element of market risk from changes in interest rates.

Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of those instruments.

Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions.

We manage interest rate risk through a variety of measures.

We monitor our interest rate risk and make investment decisions to manage the perceived risk.

Equity price risk is the risk that we will incur economic losses due to adverse changes in equity prices.

In the past, our exposure to changes in equity prices primarily resulted from our holdings of equity securities.

At December 31, 2022 and December 31, 2021, we held $101 million and $143 million, respectively, in marketable equity securities (not including our investments in preferred securities of $722 million and $1,028 million, respectively, and our investments in unconsolidated affiliates of $2,427 million and $2,350 million, respectively).

Refer to Note B Fair Value of Financial Instruments to the Consolidated Financial Statements included in this Annual Report for additional details on how the carrying values of these investments are determined as of the balance sheet date.

Carrying values are subject to fluctuation and, consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported carrying value.

Fluctuation in the carrying value of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions.

Furthermore, amounts realized in the sale of a particular security may be affected by the relative quantity of the security being sold.

Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash equivalents and short-term investments.

Additionally, financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash equivalents, derivatives and short-term investments.

We require placement of cash in financial institutions evaluated as highly creditworthy.

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The Chief Risk Officer (“CRO”) heads our risk management process and reports directly to our Chief Executive Officer (“CEO”).

Our Enterprise Risk Committee discusses and approves all risk policies and reviews and approves

risks associated with our activities.

Our Enterprise Risk Management Committee discusses and approves all risk policies and reviews and approves risks associated with our activities.

This includes volatility (affecting earnings and value), exposure (required capital and market risk) and insurance risks.

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Book value guarantees in our insurance products.

Interest Rate Risk

Interest rate risk is our primary market risk exposure.

We define interest rate risk as the risk of an economic loss due to adverse changes in interest rates.

This risk arises from investing life insurance premiums and fixed annuity deposits received in interest-sensitive assets and carrying these funds as interest-sensitive liabilities.

Substantial and sustained increases or decreases in market interest rates can affect the profitability of the insurance products and the fair value of our investments, as the majority of our insurance liabilities are backed by fixed maturity securities.

The profitability of most of our products depends on the spreads between interest yield on investments and rates credited on insurance liabilities.

We have the ability to adjust the rates credited, primarily caps and credit rates, on the majority of the annuity liabilities at least annually, subject to minimum guaranteed values.

In addition, the

majority of the annuity products have surrender and withdrawal penalty provisions designed to encourage persistency and to help ensure targeted spreads are earned.

However, competitive factors, including the impact of the level of surrenders and withdrawals, may limit our ability to adjust or maintain crediting rates at the levels necessary to avoid a narrowing of spreads under certain market conditions.

In order to meet our policy and contractual obligations, we must earn a sufficient return on invested assets.

Significant changes in interest rates expose us to the risk of not earning the anticipated spreads between the interest rate earned on its investments and the credited interest rates paid on outstanding policies and contracts.

Both rising and declining interest rates can negatively affect interest earnings, spread income and the attractiveness of certain products.

During periods of increasing interest rates, we may offer higher crediting rates on interest-sensitive products, such as IUL insurance and fixed annuities, and may increase crediting rates on in-force products to keep these products competitive.

A rise in interest rates, in the absence of other countervailing changes, will result in a decline in the market value of our investment portfolio.

Asset Liability Management (“ALM”)

As part of our ALM program, we have made a significant effort to identify the assets appropriate to different product lines and ensure investing strategies match the profile of these liabilities.

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When the durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in the value of assets could be expected to be largely offset by a change in the value of liabilities.

The durations of the investment portfolio, excluding cash and cash equivalents, derivatives, policy loans, and common stocks as of December 31, 2022 and December 31, 2021, are summarized as follows:

(Dollars in millions) December 31, 2022

Duration (years) Amortized Cost % of Total

0-4 $ 25,323 53 %

5-9 10,010 21 %

10-14 9,423 21 %

15-19 2,515 5 %

Total $ 47,335 100 %

(Dollars in millions) December 31, 2021

Duration (years) Amortized Cost % of Total

The durations of the investment portfolio, net of investments subject to reinsurance agreements and excluding cash and cash equivalents, derivatives, policy loans, and common stocks as of December 31, 2023 and December 31, 2022, are summarized as follows:

(Dollars in millions) December 31, 2023 December 31, 2022

Duration (years) Amortized Cost % of Total Amortized Cost % of Total

0-4 $ 26,146 54 % $ 25,323 53 %

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Total $ 49,263 100 % $ 47,335 100 %

Interest Rate Risk

Interest rate risk is our primary market risk exposure.

We define interest rate risk as the risk of an economic loss due to adverse changes in interest rates.

This risk arises from investing life insurance premiums and fixed annuity deposits received in interest-sensitive assets and carrying these funds as interest-sensitive liabilities.

Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of investments.

We monitor our interest rate risk and make investment decisions to manage the perceived risk.

We manage interest rate risk through a variety of measures, including pay-float and receive-fixed interest rate swaps to reduce market risks from interest rate changes on our earnings associated with floating rate investments.

Product Liabilities

The profitability of most of our products depends on the spreads between interest yield on investments and rates credited on insurance liabilities.

We have the ability to adjust the rates credited, primarily caps and credit rates, on the majority of the annuity liabilities at least annually, subject to minimum guaranteed values.

In addition, the majority of the annuity products have surrender and withdrawal penalty provisions designed to encourage persistency and to help ensure targeted spreads are earned.

In order to meet our policy and contractual obligations, we must earn a sufficient return on invested assets.

Both rising and declining interest rates can negatively affect interest earnings, spread income and the attractiveness of certain products.

A rise in interest rates, in the absence of other countervailing changes, will result in a decline in the market value of our investment portfolio, partially offset by gains related to the fair value of MRBs.

In addition, at December 31, 2023 we had floating rate funding agreements outstanding to match certain of our floating rate investments.

Accordingly, fluctuations in market interest rates on the funding agreements will be significantly offset by corresponding changes in investment income associated with our floating rate investments.

Notes Payable

At December 31, 2023 , we had a short-term revolving credit facility which bears interest at a floating rate.

Accordingly, depending on the amounts outstanding during 2023, fluctuations in market interest rates will have an impact on our resulting interest expense.

The impact to net earnings, however, will again be significantly offset by corresponding changes in investment income associated with our floating rate investments.

Equity Price Risk

Equity price risk is the risk that we will incur economic losses due to adverse changes in equity prices.

In the past, our exposure to changes in equity prices primarily resulted from our holdings of equity securities.

Refer to Note B - Fair Value of Financial Instruments to the Consolidated Financial Statements included in Part II - Item 8 of this Annual Report on Form 10-K for additional details on how the carrying values of these investments are determined as of the balance sheet date.

Carrying values are subject to fluctuation and, consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported carrying value.

Furthermore, amounts realized in the sale of a particular security may be affected by the relative quantity of the security being sold.

We are also exposed to equity price risk through certain insurance products.

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Additionally, the estimated cost of providing GMWB on FIA products incorporates various assumptions about the overall performance of equity markets over certain time periods.

Periods of significant and sustained downturns in equity markets, increased equity volatility or reduced interest rates could result in an increase in the valuation of the future policy benefit or policyholder account balance liabilities associated with such products, resulting in a reduction in our net earnings.

The rate of amortization of intangibles related to FIA/ IUL products and the cost of providing GMWB could also increase if equity market performance is worse than assumed.

Periods of significant and sustained downturns in equity markets or increased equity volatility could result in an increase in the valuation of the MRB liabilities and decrease in the valuation of contractholder funds liabilities associated with such products.

To economically hedge the equity returns on these products, we purchase derivatives to hedge the FIA and IUL equity exposures.

The primary way we hedge FIA/ IUL equity exposure is to purchase over the counter equity index call options from broker-dealer derivative counterparties approved by F&G.

The second way to hedge FIA equity exposure is by purchasing exchange traded equity index futures contracts.

The second way to hedge FIA/ IUL equity exposure is by purchasing exchange traded equity index futures contracts.

This hedging strategy enables us to reduce the overall hedging costs and achieve a high correlation of returns on the call options purchased relative to the index credits earned by the FIA/ IUL contractholders.

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To the extent index credits earned by the contractholder exceed the proceeds from option expirations and futures income, we incur a raw hedging loss.

See Note D Derivative Financial Instruments to the Consolidated Financial Statements included in this Annual Report for additional details on the derivatives portfolio.

Fair value changes associated with these investments are intended to, but do not always, substantially offset the increase or decrease in the amounts added to policyholder account balances for indexed products.

See Note D - Derivative Financial Instruments to the Consolidated Financial Statements included in Part II - Item 8 of this Annual Report on Form 10-K for additional details on the derivatives portfolio.

Fair value changes associated with these investments are intended to, but do not always, substantially offset the increase or decrease in the amounts added to contractholder funds for indexed products.

When index credits to policyholders exceed option proceeds received at expiration related to such credits, any shortfall is funded by our excess of net investment income earned over the sum of interest credited to policyholders and the cost of hedging our risk on indexed product policies and futures income.

For the year ended December 31, 2022 , the year ended December 31, 2021 and the period from June 1, 2020 to December 31, 2020, the annual index credits to policyholders on their anniversaries were $155 million, $628 million and $178 million, respectively.

Proceeds received at expiration on options related to such credits were $158 million, $702 million and $185 million, respectively.

For the years ended December 31, 2023 , December 31, 2022 and December 31, 2021, the annual index credits to policyholders on their anniversaries were $203 million, $155 million and $628 million, respectively.

Proceeds received at expiration of options related to such credits were $212 million, $158 million and $702 million, respectively.

Other market exposures are hedged periodically depending on market conditions and our risk tolerance.

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Sensitivity Analysis

For purposes of this Annual Report , we perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our debt and other financial instruments.

The financial instruments that are included in the sensitivity analysis with respect to interest rate risk include fixed maturity investments, preferred securities and notes payable.

For purposes of this Annual Report on Form 10-K , we perform a sensitivity analysis to determine the effects that market risk exposures may have on various financial instruments.

The financial instruments that are included in the sensitivity analysis with respect to interest rate risk include fixed maturity investments, certain preferred securities, interest rate swaps, embedded derivatives, MRBs and floating rate notes payable and funding agreements.

The financial instruments that are included in the sensitivity analysis with respect to equity price risk include marketable equity securities.

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therefore, all of our market risk sensitive instruments were entered into for purposes other than trading.

The results of the sensitivity analysis at December 31, 2022, December 31, 2021 and December 31, 2020, are as follows:

The results of the sensitivity analysis at December 31, 2023 is as follows:

Interest Rate Risk

An increase in the levels of interest rates of 100 basis points, with all other variables held constant, would result in a decrease in the fair value of our fixed maturity securities and certain investments in preferred securities of $1.9 billion, $2.3 billion, and $1.3 billion at December 31, 2022, December 31, 2021 and December 31, 2020, respectively.

An increase in the levels of interest rates of 100 basis points, with all other variables held constant, would result in a decrease in the fair value of our fixed maturity securities and certain investments in preferred securities of approximately $2.4 billion, a net decrease in the fair value of interest rate swaps of approximately $0.1 billion and a net decrease in the combined fair value of embedded derivatives and MRBs of approximately $0.5 bil lion at December 31, 2023 .

For comparison, a similar increase in the levels of interest rates of 100 basis points, with all other variables held constant, would have resulted in a decrease in the fair value of our fixed maturity securities and certain investments in preferred securities of approximately $1.9 billion and a net decrease in the combined fair value of embedded derivatives and MRBs of approximately $0.4 billion at December 31, 2022.

A 100 basis point shift in interest rates for our floating rate debt and funding agreements will increase or decrease floating expense by approximatel y $14 million and $11 million per year as of December 31, 2023 and December 31, 2022, respectively .

As noted above, the impact to net earnings related to the interest rate swaps and floating rate notes payable and funding agreements will be significantly offset by corresponding changes in investment income associated with our floating rate investments.

The actuarial models used to estimate the impact of a one percentage point change in market interest rates incorporate numerous assumptions, require significant estimates and assume an immediate and parallel change in interest rates without any management of the investment portfolio in reaction to such change.

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Equity Price Risk

At December 31, 2022, a 10% decrease in market prices, with all other variables held constant, would result in an decrease in the fair value of our equity securities portfolio of $82 million, as compared with a decrease o f $117 million and $105 million at December 31, 2021 and December 31, 2020, respectively.

At December 31, 2023, a 10% decrease in market prices, with all other variables held constant, would result in a net decrease in the fair value of our equity securities portfolio of $61 million, as compared with a decrease of $82 million at December 31, 2022 .

Credit Risk and Counterparty Risk

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Our major source of credit risk arises predominantly in our insurance operations’ portfolios of debt and similar securities.

The fair value of our fixed maturity portfolio totaled $31 billion, $30 billion and $25 billion at December 31, 2022, December 31, 2021 and December 31, 2020, respectively.

The fair value of our fixed maturity portfolio totaled $40 billion at December 31, 2023 .

Our credit risk materializes primarily as impairment losses.

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Limit compliance is monitored on a monthly basis.

In connection with the use of call options, we are exposed to counterparty credit risk-the risk that a counterparty fails to perform under the terms of the derivative contract.

In connection with the use of derivative instruments, we are exposed to counterparty credit risk-the risk that a counterparty fails to perform under the terms of the derivative contract.

We have adopted a policy of only dealing with credit worthy counterparties and obtaining sufficient collateral where appropriate, as a means of attempting to mitigate the financial loss from defaults.

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Collateral support documents are negotiated to further reduce the exposure when deemed necessary.

See Note D Derivative Financial Instruments in the Consolidated Financial Statements included in this Annual Report for additional information regarding our exposure to credit loss.

See Note D - Derivative Financial Instruments in the Consolidated Financial Statements included in Part II - Item 8 of this Annual Report on Form 10-K for additional information regarding our exposure to credit loss.

We also have credit risk related to the ability of reinsurance counterparties to honor their obligations to pay the contract amounts under various agreements.

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We also generally limit selection of counterparties with which to do new transactions to those with an “A-” credit rating or above from at least one of the major rating agencies and/or that are appropriately collateralized and provide credit for reinsurance.

When exceptions are made to that principle, we ensure that collateral is obtained to mitigate risk of loss.

The following tables present our reinsurance recoverable balances and financial strength ratings for our five largest reinsurance recoverable balances as of December 31, 2022 and December 31, 2021 :

December 31, 2022

(Dollars in millions) Financial Strength Rating

Parent Company/Principal Reinsurers Reinsurance Recoverable AM Best S&P Fitch Moody's

Aspida Life Re Ltd $ 3,121 A- Not Rated Not Rated Not Rated

Wilton Re 1,231 A+ Not Rated A Not Rated

Somerset Reinsurance Ltd 570 A- BBB+ Not Rated Not Rated

London Life Reinsurance Co.

100 A+ Not Rated Not Rated Not Rated

Security Life of Denver 93 Not Rated A- A- Baa1

December 31, 2021

(Dollars in millions) Financial Strength Rating

Parent Company/Principal Reinsurers Reinsurance Recoverable AM Best S&P Fitch Moody's

Wilton Re $ 1,269 A+ Not Rated A+ Not Rated

Aspida Life Re Ltd 873 A- Not Rated BBB Not Rated

Somerset Reinsurance Ltd 780 A- BBB+ Not Rated Not Rated

Security Life of Denver 102 Not Rated A- A- Baa1

London Life Reinsurance Co.

102 A+ Not Rated Not Rated Not Rated

In the normal course of business, certain reinsurance recoverables are subject to reviews by the reinsurers.

We are not aware of any material disputes arising from these reviews or other communications with the counterparties as of December 31, 2022 and December 31, 2021 , that would require an allowance for uncollectible amounts.

For information on concentrations of reinsurance risk, refer to Note J Reinsurance in the Consolidated Financial Statements included in this Annual Report .

For further information on certain risk associated with our business, refer to Note F Commitments and Contingencies in the Consolidated Financial Statements included in this Annual Report.

We are not aware of any material disputes arising from these reviews or other communications with the counterparties as of December 31, 2023 and December 31, 2022, that would require an increase to the allowance for credit losses.

For information on concentrations of reinsurance risk, refer to Note E - Reinsurance in the Consolidated Financial Statements included in Part II - Item 8 of this Annual Report on Form 10-K.

For further information on certain risk associated with our business, refer to Note N - Commitments and Contingencies in the Consolidated Financial Statements included in Part II - Item 8 of this Annual Report on Form 10-K.

Use of Estimates and Assumptions

The preparation of our Consolidated Financial Statements included in this Annual Report in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The preparation of our Consolidated Financial Statements included in this Annual Report on Form 10-K in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates and assumptions used.

Concentrations of Financial Instruments

As of December 31, 2022 , our most significant investment in one industry, excluding United States and Foreign Government securities and structured securities, was our investment securities in the Banking industry with a fair value of $2,855 million or 7% of the invested assets portfolio and an amortized cost of $3,301 million.

As of December 31, 2022 , our holdings in this industry include investments in 132 different issuers with the top ten investments accounting for 37% of the total holdings in this industry.

As of December 31, 2021 , our most significant investment in one industry, excluding U.S.

, Foreign Government securities and structured securities, was our investment securities in the Banking industry with a fair value of $2,919 million or 8% of the invested assets portfolio and an amortized cost of $2,854 million.

As of December 31, 2021 , our holdings in this industry include investments in 132 different issuers with the top ten investments accounting for 37% of the total holdings in this industry.

Refer to Note C Investments in the Consolidated Financial Statements included in this Annual Report for our underlying investment concentrations that exceed 10% of shareholders equity as of December 31, 2022 and December 31, 2021.

Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations - Investment Portfolio - Investment Concentrations included in Part II - Item 7 of this Annual Report on Form 10-K regarding the top ten investment concentrations of our fixed maturity and equity securities including the fair value and percent of total fixed maturity and equity securities fair value as of December 31, 2023 and December 31, 2022.

Refer to Note C - Investments in the Consolidated Financial Statements included in Part II - Item 8 of this Annual Report on Form 10-K for our underlying investment concentrations that exceed 10% of shareholders equity as of December 31, 2023 and December 31, 2022.

Concentrations of Financial and Capital Markets Risk

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A rise in interest rates, in the absence of other countervailing changes, will increase the net unrealized loss position and, if long-term interest rates rise dramatically within a six- to twelve-month time period, certain of our products may be exposed to disintermediation risk.

Disintermediation risk refers to the risk that

policyholders surrender their contracts in a rising interest rate environment, requiring us to liquidate assets in an unrealized loss position.

Disintermediation risk refers to the risk that policyholders surrender their contracts in a rising interest rate environment, requiring us to liquidate assets in an unrealized loss position.

We attempt to mitigate the risk, including changes in interest rates by investing in less rate-sensitive investments, including senior tranches of collateralized loan obligations, non-agency residential mortgage-backed securities, and various types of asset-backed securities.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk