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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-02-29 compared with 2023-02-27 · 63 added, 83 removed, 98 unchanged (60% of the section changed)

18 unchanged sentences

Market prices are subject to fluctuation and, consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value.

Fluctuation in the market price 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.

Fluctuation in

the market price 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.

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Interest rate risk is the F&G segment's 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 F&G's holdings in interest sensitive assets and liabilities, primarily as a result of 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 F&G's insurance liabilities are backed by fixed maturity securities.

The profitability of most of F&G's products depends on the spreads between interest yield on investments and rates credited on insurance liabilities.

F&G has 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 F&G's 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 F&G's policy and contractual obligations, F&G must earn a sufficient return on invested assets.

Significant changes in interest rates exposes F&G 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, F&G 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 F&G's investment portfolio.

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.

Consequently, potential changes in value of financial instruments indicated by these simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material.

Because we actively manage our investments and liabilities, the net exposure to interest rates can vary over time.

However, any such decreases in the fair value of fixed maturity securities, unless related to credit concerns of the issuer requiring allowances for credit losses, would generally be realized only if we were required to sell such securities at losses prior to their maturity to meet liquidity needs.

Our liquidity needs are managed using the surrender and withdrawal provisions of the annuity contracts and through other means.

As part of F&G's asset liability management (“ALM”) program, F&G has 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 duration of the investment portfolio, excluding cash and cash equivalents, derivatives, policy loans, and common stocks as of December 31, 2022 and 2021 is summarized as follows:

(Dollars in millions) December 31, 2022

Duration (years) Amortized Cost % of Total

The duration of the investment portfolio, excluding cash and cash equivalents, derivatives, policy loans, and common stocks as of December 31, 2023, and December 31, 2022, is summarized as follows:

December 31, 2023

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

0-4 $ 26,146 54 %

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Total $ 49,263 100 %

(Dollars in millions) December 31, 2021

Duration (years) Amortized Cost % of Total

0-4 $ 17,765 48 %

December 31, 2022

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

0-4 $ 25,323 53 %

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Our F&G segment is exposed to equity price risk through certain insurance products.

F&G offers a variety of FIA/ IUL contracts with crediting strategies linked to the performance of indices such as the S&P 500 Index, Dow Jones Industrials or the NASDAQ 100 Index, and target volatility indices.

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 D 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.

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.

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

We offer a variety of FIA/ IUL contracts with crediting strategies linked to the performance of indices such as the S&P 500 Index, Dow Jones Industrials or the NASDAQ 100 Index, and target volatility indices.

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 F&G's 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.

To economically hedge the equity returns on these products, F&G purchases derivatives to hedge the FIA and IUL equity exposures.

The primary way F&G hedges 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.

This hedging strategy enables F&G 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.

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/ 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.

The majority of the call options are one-year options purchased to match the funding requirements underlying the FIA/ IUL contracts.

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Future returns, which may be reflected in FIA/ IUL contracts’ credited rates beyond the current policy term, are not hedged.

F&G attempts to manage the costs of these purchases through the terms of its FIA/ IUL contracts, which permit F&G to change cap, spread or participation rates, subject to certain guaranteed minimums that must be maintained.

We attempt to manage the costs of these purchases through the terms of the FIA/ IUL contracts, which permit us to change cap, spread or participation rates, subject to certain guaranteed minimums that must be maintained.

The derivatives are used to fund the FIA/ IUL contract index credits and the cost of the call options purchased is treated as a component of spread earnings.

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However, there may be an interim mismatch due to the fact that the hedges, which are put in place are only intended to cover exposures expected to remain until the end of an indexing term.

To the extent index credits earned by the contractholder exceed the proceeds from option expirations and futures income, F&G incurs a raw hedging loss.

See Note F Derivative Financial Instruments in the Consolidated Financial Statements included in Item 8 of Part II of 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.

When index credits to policyholders exceed option proceeds received at expiration related to such credits, any shortfall is funded by F&G's net investment spread earnings and futures income.

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

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

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 F 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 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.

The FIA/ IUL hedging strategy economically hedges the equity returns and exposes us to the risk that unhedged market exposures result in divergence between changes in the fair value of the liabilities and the hedging assets.

F&G uses a variety of techniques, including direct estimation of market sensitivities, to monitor this risk daily.

F&G intends to continue to adjust the hedging strategy as market conditions and risk tolerance change.

We use a variety of techniques, including direct estimation of market sensitivities, to monitor this risk daily.

We intend to continue to adjust the hedging strategy as market conditions and risk tolerance change.

Credit Risk and Counterparty Risk Related to our F&G Segment

Our F&G segment is exposed to the risk that a counterparty will default on its contractual obligation resulting in financial loss.

F&G's major source of credit risk arises predominantly in its insurance operations’ portfolios of debt and similar securities.

The fair value of F&G's fixed maturity portfolio totaled $31 billion and $30 billion at December 31, 2022 and 2021, respectively.

F&G's credit risk materializes primarily as impairment losses.

F&G is exposed to occasional cyclical economic downturns, during which impairment losses may be significantly higher than the long-term historical average.

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 $40 billion at December 31, 2023 .

Our credit risk materializes primarily as impairment losses.

We are exposed to occasional cyclical economic downturns, during which impairment losses may be significantly higher than the long-term historical average.

This is offset by years where it expects the actual impairment losses to be substantially lower than the long-term average.

Credit risk in the portfolio can also materialize as increased capital requirements as assets migrate into lower credit qualities over time.

The effect of rating migration on its capital requirements is also dependent on the economic cycle and increased asset impairment levels may go hand in hand with increased asset related capital requirements.

F&G attempts to manage the risk of default and rating migration by applying disciplined credit evaluation and underwriting standards and limiting allocations to lower quality, higher risk investments.

In addition, F&G diversifies exposure by issuer and country, using rating based issuer and country limits.

F&G also sets investment constraints that limit our exposure by industry segment.

To limit the impact that credit risk can have on earnings and capital adequacy levels, F&G has portfolio-level credit risk constraints in place.

Limit compliance is monitored on a monthly or, in some cases, daily basis.

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

F&G has 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.

The effect of rating migration on our capital requirements is also dependent on the economic cycle and increased asset impairment levels may go hand in hand with increased asset related capital requirements.

We attempt to manage the risk of default and rating migration by applying disciplined credit evaluation and underwriting standards and limiting allocations to lower quality, higher risk investments.

In addition, we diversify exposure by issuer and country, using rating-based issuer and country limits.

We also set investment constraints that limit our exposure by industry segment.

To limit the impact that credit risk can have on earnings and capital adequacy levels, we have portfolio-level credit risk constraints in place.

Limit compliance is monitored on a monthly basis.

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.

The exposure and credit rating of the counterparties are continuously monitored, and the aggregate value of transactions concluded is spread amongst different approved counterparties to limit the concentration in one counterparty.

This policy allows for the purchase of derivative instruments from counterparties and/or clearinghouses that meet the required qualifications under the Iowa Code.

F&G reviews the ratings of all the counterparties periodically.

This policy allows for the purchase of derivative instruments from counterparties and/or clearinghouses that meet the required qualifications under the insurance laws of Iowa.

We review the ratings of all the counterparties periodically.

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

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

F&G also has credit risk related to the ability of reinsurance counterparties to honor their obligations to pay the contract amounts under various agreements.

To minimize the risk of credit loss on such contracts, F&G diversifies exposures among many reinsurers and limits the amount of exposure to each based on credit rating.

F&G also generally limits selection of counterparties with which to do new transactions to those with an “A-” credit rating or above and/or that are appropriately collateralized and provide credit for reinsurance.

When exceptions are made to that principle, F&G ensures that collateral is obtained to mitigate risk of loss.

The following table presents F&G's reinsurance recoverable balances and financial strength ratings for our five largest reinsurance recoverable balances as of December 31, 2022 and 2021:

December 31, 2022

(Dollars in millions) Financial Strength Rating

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

Aspida $ 3,121 A- Not Rated Not Rated Not Rated

Wilton Reassurance Company 1,231 A+ Not Rated A Not Rated

Somerset 570 A- BBB+ Not Rated Not Rated

London Life 100 A+ Not Rated Not Rated Not Rated

Security Life of Denver Insurance Company 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

See Note F 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.

To minimize the risk of credit loss on such contracts, we diversify exposures among many reinsurers and limit the amount of exposure to each based on credit rating.

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.

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 that would require an allowance for uncollectible amounts.

For information on concentrations of reinsurance risk, refer to Note O F&G Reinsurance in the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report .

For information on counter party risk associated with our title business, refer to Note H Commitments and Contingencies in the Consolidated Financial Statements included in Item 8 of Part II of 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 O F&G 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 H 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

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 Item 8 of Part II of 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.

Actual results could differ from those estimates and assumptions used.

Concentrations of Financial Instruments Related to our F&G Segment

As of December 31, 2022, our F&G segment’s most significant investment in one industry, excluding United States, Foreign Government securities and structured securities, was its 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, F&G’s 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, 2022, F&G had one issuer, Blackstone Wave Asset Holdco, in which investments exceeded 10% of shareholders' equity and was F&G's largest concentration in any single issuer with a total fair value of $741 million or 2% of the invested assets portfolio.

Blackstone Wave Asset Holdco is a special purpose vehicle that holds investments in numerous limited partnership investments.

Those limited partnership investments are further diversified by holding interest in multiple individual investments and industries.

Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations - Investment Portfolio - Investment Industry 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 D - 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 Related to our F&G Segment

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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