Brookfield Wealth Solutions Ltd 6-K, filed Jan 17, 2024
Brookfield Wealth Solutions Ltd. (BNT)
About this 6-K
Brookfield Wealth Solutions Ltd filed this 6-K on January 17, 2024.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16
OF THE SECURITIES EXCHANGE ACT OF 1934
For the month of: January 2024
Commission File Number: 001-40509
BROOKFIELD REINSURANCE LTD.
(Translation of registrant’s name into English)
Ideation House, First Floor
94 Pitts Bay Road
Pembroke, HM08
Bermuda
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F ☒ Form 40-F ☐
INFORMATION CONTAINED IN THIS FORM 6-K REPORT
Exhibit Index
SIGNATURE
Pursuant to the requirements 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.
| BROOKFIELD REINSURANCE LTD. | ||||||||
| Date: January 16, 2024 | By: | /s/ Thomas Corbett | ||||||
| Name: | Thomas Corbett | |||||||
| Title: | Chief Financial Officer | |||||||
Exhibit 99.1
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
These Unaudited Pro Forma Financial Statements are based on the combined and consolidated financial statements of Brookfield Reinsurance Ltd. (the “Company”), the consolidated financial statements of American National Insurance Company (“American National”), Argo Group International Holdings, Ltd. (“Argo”) and American Equity Investment Life Holding Company (“AEL”), and the financial information of the Real Estate Assets (as defined below) as adjusted to give effect to the acquisitions of American National (the “American National acquisition”), the Real Estate Assets and Argo (the “Argo acquisition”), and the probable acquisition of American Equity Investment Life Holding Company (“AEL acquisition”). These Unaudited Pro Forma Financial Statements have been prepared to illustrate the effects of the following transaction accounting adjustments that occurred upon completion of the American National acquisition, the acquisition of the Real Estate Assets and the Argo acquisition, or are expected to occur upon completion of the AEL acquisition (collectively, the “Transactions”):
Consummated transactions:
| • | The Company acquired a 100% interest in American National for total cash consideration of $5.1 billion. American National offers a broad portfolio of insurance products, including individual and group life insurance, annuities, health insurance, and property and casualty insurance. The Company acquired control of American National on May 25, 2022 and funded the acquisition through the issuance of $3.6 billion of junior preferred shares and class C shares to Brookfield Corporation and $1.5 billion of term loans issued to a consortium of external lenders. |
| • | In the first half of 2023, the Company acquired interests in a portfolio of core office and mixed-use real estate properties (“Real Estate Assets”) which are accounted for as equity method investments. The properties are office and mixed-use commercial properties that provide stable operating income to the Company’s insurance portfolio. Total fair value of the consideration transferred in relation to the portfolio of assets acquired was approximately $800 million, and was funded with cash on hand available to the Company. |
| • | On November 16, 2023, the Company completed the acquisition of 100% interest in Argo for total cash consideration of $1.1 billion. Argo is a U.S. focused underwriter of specialty insurance products in the property and casualty market. The Company has funded the transaction with existing cash on hand available to the Company. |
Probable transaction:
| • | The Company is expected to acquire all of the outstanding shares of common stock of AEL it does not already own for total expected consideration of $3.4 billion, which values AEL at $4.3 billion. AEL is a U.S. based insurance company, specializing in the development and sale of annuity and life insurance products. The Company is expected to fund the transaction with cash on hand available to the Company, class A limited voting shares of Brookfield Asset Management Ltd. (“BAM”), and $350 million of debt financing. |
The information in the Unaudited Condensed Pro Forma Statement of Operating Results give effect to the pro forma adjustments as if they had been consummated on January 1, 2022. The information in the Unaudited Condensed Pro Forma Statement of Financial Position gives effect to the pro forma adjustments of the Argo transaction as consummated and the AEL acquisition as probable on June 30, 2023. As a result of the acquisition of American National on May 25, 2022, the acquired assets and liabilities of American National are included within the statement of financial position of the Company as of June 30, 2023 and the results of American National have been included in the Company’s statement of operations for the six months ended June 30, 2023. As a result of the acquisition of the Real Estate Assets in the first half of 2023, the investments in the Real Estate Assets are included within the statement of financial position of the Company as of June 30, 2023. All financial data in the Unaudited Pro Forma Financial Statements is presented in U.S. dollars, and unless otherwise noted, has been prepared using accounting policies that are consistent with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The Unaudited Pro Forma Financial Statements are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. The notes to the Unaudited Pro Forma Financial Statements provide a detailed discussion of how such adjustments were derived and presented in the Unaudited Pro Forma Financial Statements. The Unaudited Pro Forma Financial Statements should be read in conjunction with:
1
| • | the audited financial statements of the Company as at December 31, 2022 and 2021 and for each of the years in the three years ended December 31, 2022, and the unaudited interim financial statements of the Company as at June 30, 2023 and December 31, 2022 and for the three and six months ended June 30, 2023 and 2022; |
| • | the audited combined statement of revenues and certain operating expenses of the Real Estate Assets for the year ended December 31, 2022, and the unaudited combined statement of revenues and certain operating expenses for the six months ended June 30, 2023; |
| • | the audited financial statements of American National as of December 31, 2021 and 2020 and for each of the years in the two year period ended December 31, 2021, and the unaudited interim financial statements of American National as of June 30, 2022 and December 31, 2021 and for the six months ended June 30, 2022 and 2021; |
| • | the audited financial statements of Argo as at December 31, 2022 and 2021 and for each of the years in the three years ended December 31, 2022, and the unaudited interim financial statements of Argo as at June 30, 2023 and December 31, 2022 and for the three and six months ended June 30, 2023 and 2022; and |
| • | the audited financial statements of AEL as at December 31, 2022 and 2021 and for each of the years in the three years ended December 31, 2022, and the unaudited interim financial statements of AEL as at June 30, 2023 and December 31, 2022 and for the three and six months ended June 30, 2023 and 2022, as well as |
| • | the accompanying notes to such financial statements. |
The historical financial statements of the Company have been prepared in accordance with U.S. GAAP. The Unaudited Pro Forma Financial Statements have been prepared for illustrative purposes only and are not necessarily indicative of the Company’s financial position or results of its operations had the transactions for which we are giving pro forma effect occurred on the dates or for the periods indicated, nor is such pro forma financial information necessarily indicative of the results to be expected for any future period. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
2
UNAUDITED PRO FORMA STATEMENT OF FINANCIAL POSITION
As at June 30, 2023
Brookfield Reinsurance Ltd.
| Brookfield Reinsurance Ltd. (Historical) |
Consummated Transaction |
Probable Transaction |
Pro Forma Combined |
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| As at June 30, 2023 In USD, millions |
Argo (2) | AEL (3) | ||||||||||||||
| Assets |
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|
Available-for-sale fixed maturity securities, at fair value |
$ | 15,833 | $ | 2,525 | $ | 38,680 | $ | 57,038 | ||||||||
| Equity securities, at fair value |
1,362 | 12 | (875 | ) | 499 | |||||||||||
| Mortgage loans on real estate |
5,958 | 144 | 6,900 | 13,002 | ||||||||||||
| Real estate and real estate partnerships |
2,224 | — | 2,920 | 5,144 | ||||||||||||
| Investment funds |
1,956 | 318 | — | 2,274 | ||||||||||||
| Policy loans, net |
381 | — | — | 381 | ||||||||||||
| Private loans |
1,337 | — | — | 1,337 | ||||||||||||
| Short term investments |
2,905 | 1,098 | — | 4,003 | ||||||||||||
| Other invested assets, net |
402 | 5 | 2,545 | 2,952 | ||||||||||||
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| Total investments |
32,358 | 4,102 | 50,170 | 86,630 | ||||||||||||
| Cash and cash equivalents |
2,893 | (1,015 | ) | 5,001 | 6,879 | |||||||||||
| Accrued investment income |
285 | 17 | 488 | 790 | ||||||||||||
| Deferred policy acquisition costs |
1,986 | — | — | 1,986 | ||||||||||||
| Coinsurance deposits |
— | — | 13,362 | 13,362 | ||||||||||||
| Reinsurance funds withheld |
6,540 | — | (4,938 | ) | 1,602 | |||||||||||
| Premiums due and other receivables |
541 | 265 | — | 806 | ||||||||||||
| Ceded unearned premiums |
— | 388 | — | 388 | ||||||||||||
| Deferred tax asset |
489 | 56 | 1,036 | 1,581 | ||||||||||||
| Reinsurance recoverables, net |
627 | 2,888 | — | 3,515 | ||||||||||||
| Property and equipment |
160 | — | — | 160 | ||||||||||||
| Goodwill, VOBA and intangible assets |
121 | 332 | 2,502 | 2,955 | ||||||||||||
| Other assets |
849 | 243 | 1,120 | 2,212 | ||||||||||||
| Separate account assets |
1,145 | — | — | 1,145 | ||||||||||||
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| Total assets |
$ | 47,994 | $ | 7,276 | $ | 68,741 | $ | 124,011 | ||||||||
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| Liabilities |
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| Future policy benefits |
8,863 | — | — | 8,863 | ||||||||||||
| Policyholders’ account balances |
23,018 | — | 56,972 | 79,990 | ||||||||||||
| Policy and contract claims |
1,868 | 5,344 | 210 | 7,422 | ||||||||||||
| Deposit liabilities |
1,632 | — | — | 1,632 | ||||||||||||
| Market risk benefit |
131 | — | 2,673 | 2,804 | ||||||||||||
| Unearned premium reserve |
1,150 | 986 | — | 2,136 | ||||||||||||
| Due to related parties |
525 | — | — | 525 | ||||||||||||
| Other policyholder funds |
316 | — | — | 316 | ||||||||||||
| Notes payable |
158 | — | — | 158 | ||||||||||||
| Corporate borrowings |
1,740 | — | — | 1,740 | ||||||||||||
| Subsidiary borrowings |
1,494 | 369 | 1,213 | 3,076 | ||||||||||||
| Liabilities issued to reinsurance entities |
217 | — | — | 217 | ||||||||||||
| Other liabilities |
1,191 | 440 | 3,935 | 5,566 | ||||||||||||
| Separate account liabilities |
1,145 | — | — | 1,145 | ||||||||||||
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| Total liabilities |
$ | 43,448 | $ | 7,139 | $ | 65,003 | $ | 115,590 | ||||||||
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| Junior preferred shares |
2,635 | — | — | 2,635 | ||||||||||||
| Equity |
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| Class A exchangeable, Class B, and Class C (10,450,952 class A exchangeable shares, 24,000 class B shares; par value $33.56 per share and 41,314,891 class C shares issued and outstanding; par value $1 per share) |
1,926 | — | — | 1,926 | ||||||||||||
| Additional paid-in capital |
— | — | 3,110 | 3,110 | ||||||||||||
| Retained earnings |
477 | (10 | ) | — | 467 | |||||||||||
| Accumulated other comprehensive income (loss), net of taxes |
(501 | ) | — | — | (501 | ) | ||||||||||
| Non-controlling interests |
9 | 147 | 628 | 784 | ||||||||||||
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| Total equity |
$ | 1,911 | $ | 137 | $ | 3,738 | $ | 5,786 | ||||||||
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| Total liabilities and equity |
$ | 47,994 | $ | 7,276 | $ | 68,741 | $ | 124,011 | ||||||||
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3
UNAUDITED PRO FORMA STATEMENT OF OPERATING RESULTS
For the Six Months Ended June 30, 2023
Brookfield Reinsurance Ltd.
| Brookfield Reinsurance Ltd. (Historical) |
Consummated Transactions |
Pro Forma - Consum- mated Transactions (Subtotal) |
Probable Transaction |
Pro Forma Combined |
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| For the six months ended June 30, 2023 In USD, millions (except per share amounts) |
Real Estate Assets (1) |
Argo (2) | AEL (3) | Note | ||||||||||||||||||||||||
| Net premiums |
$ | 1,899 | $ | — | $ | 681 | $ | 2,580 | $ | 141 | $ | 2,721 | ||||||||||||||||
| Other policy revenue |
200 | — | — | 200 | 33 | 233 | ||||||||||||||||||||||
| Net investment income |
840 | 9 | 60 | 909 | 1,104 | 2,013 | ||||||||||||||||||||||
| Investment related gains (losses), net |
186 | — | (6 | ) | 180 | 237 | 417 | |||||||||||||||||||||
| Net investment results from funds withheld |
118 | — | — | 118 | — | 118 | ||||||||||||||||||||||
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| Total revenues |
3,243 | 9 | 735 | 3,987 | 1,515 | 5,502 | ||||||||||||||||||||||
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| Policyholder benefits and claims incurred |
(1,875 | ) | — | (506 | ) | (2,381 | ) | (12 | ) | (2,393 | ) | |||||||||||||||||
| Interest sensitive contract benefits |
(557 | ) | — | — | (557 | ) | (180 | ) | (737 | ) | ||||||||||||||||||
| Commissions for acquiring and servicing policies |
(393 | ) | — | (300 | ) | (693 | ) | — | (693 | ) | ||||||||||||||||||
| Net change in deferred policy acquisition costs |
362 | — | — | 362 | — | 362 | ||||||||||||||||||||||
| Change in fair value of market risk benefit |
8 | — | — | 8 | (40 | ) | (32 | ) | ||||||||||||||||||||
| Change in fair value of embedded derivatives |
— | — | — | — | (568 | ) | (568 | ) | ||||||||||||||||||||
| Other reinsurance expenses |
(37 | ) | — | — | (37 | ) | — | (37 | ) | |||||||||||||||||||
| Operating expenses |
(362 | ) | — | (38 | ) | (400 | ) | (150 | ) | (550 | ) | |||||||||||||||||
| Interest expense |
(120 | ) | — | (16 | ) | (136 | ) | (31 | ) | (167 | ) | |||||||||||||||||
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| Total benefits and expenses |
(2,974 | ) | — | (860 | ) | (3,834 | ) | (981 | ) | (4,815 | ) | |||||||||||||||||
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| Net income (loss) before income taxes |
269 | 9 | (125 | ) | 153 | 534 | 687 | |||||||||||||||||||||
| Income tax recovery (expense) |
(2 | ) | — | 6 | 4 | (237 | ) | (233 | ) | |||||||||||||||||||
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| Net income (loss) for the period |
$ | 267 | $ | 9 | $ | (119 | ) | $ | 157 | $ | 297 | $ | 454 | |||||||||||||||
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| Attributable to: |
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| Class A exchangeable and Class B shareholders |
2 | — | — | 2 | — | 2 | ||||||||||||||||||||||
| Class C shareholders |
263 | 9 | (124 | ) | 148 | 275 | 423 | |||||||||||||||||||||
| Non-controlling interests |
2 | — | 5 | 7 | 22 | 29 | ||||||||||||||||||||||
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| $ | 267 | $ | 9 | $ | (119 | ) | $ | 157 | $ | 297 | $ | 454 | ||||||||||||||||
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| Net income (loss) per class C share |
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| Basic |
$ | 5.04 | 5 | $ | 2.77 | |||||||||||||||||||||||
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See the accompanying notes to the pro forma financial statements.
4
UNAUDITED PRO FORMA STATEMENT OF OPERATING RESULTS
For the Year Ended December 31, 2022
Brookfield Reinsurance Ltd.
| Consummated Transactions | Probable Transaction |
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| For the year ended December 31, 2022 In USD, millions |
Brookfield Reinsurance Ltd. (Historical) |
American National (4) |
Real Estate Assets (1) |
Argo (2.1) |
Pro Forma - Con-summated Transactions |
AEL (3.1) |
Note | Pro Forma Combined |
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| Net premiums |
$ | 3,011 | $ | 979 | $ | — | $ | 1,258 | $ | 5,248 | $ | 250 | $ | 5,498 | ||||||||||||||||||
| Other policy revenue |
224 | 178 | — | — | 402 | 42 | 444 | |||||||||||||||||||||||||
| Net investment income |
978 | 385 | 5 | 130 | 1,498 | 2,308 | 3,806 | |||||||||||||||||||||||||
| Investment related gains (losses), net |
(185 | ) | (7 | ) | — | (141 | ) | (333 | ) | (1,186 | ) | (1,519 | ) | |||||||||||||||||||
| Net investment results from funds withheld |
281 | — | — | — | 281 | — | 281 | |||||||||||||||||||||||||
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| Total revenues |
4,309 | 1,535 | 5 | 1,247 | 7,096 | 1,414 | 8,510 | |||||||||||||||||||||||||
| Claims and policyholder benefits |
(2,852 | ) | (854 | ) | — | (928 | ) | (4,634 | ) | (33 | ) | (4,667 | ) | |||||||||||||||||||
| Interest sensitive contract benefits |
(357 | ) | (53 | ) | — | — | (410 | ) | (555 | ) | (965 | ) | ||||||||||||||||||||
| Commissions for acquiring and servicing policies |
(413 | ) | (319 | ) | — | (614 | ) | (1,346 | ) | — | (1,346 | ) | ||||||||||||||||||||
| Net change in deferred policy acquisition costs |
339 | 224 | — | — | 563 | — | 563 | |||||||||||||||||||||||||
| Change in fair value of market risk benefit |
127 | (5 | ) | — | — | 122 | (4 | ) | 118 | |||||||||||||||||||||||
| Change in fair value of embedded derivatives |
— | — | — | — | — | 1,732 | 1,732 | |||||||||||||||||||||||||
| Operating expenses |
(439 | ) | (260 | ) | — | (89 | ) | (788 | ) | (290 | ) | (1,078 | ) | |||||||||||||||||||
| Other reinsurance expenses |
(78 | ) | — | — | — | (78 | ) | — | (78 | ) | ||||||||||||||||||||||
| Interest expense |
(104 | ) | (24 | ) | — | (22 | ) | (150 | ) | (60 | ) | (210 | ) | |||||||||||||||||||
| Impairment of intangible assets and goodwill |
— | — | — | (28 | ) | (28 | ) | — | (28 | ) | ||||||||||||||||||||||
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| Total benefits and expenses |
(3,777 | ) | (1,291 | ) | — | (1,681 | ) | (6,749 | ) | 790 | (5,959 | ) | ||||||||||||||||||||
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| Net income (loss) before income taxes |
532 | 244 | 5 | (434 | ) | 347 | 2,204 | 2,551 | ||||||||||||||||||||||||
| Income tax recovery (expense) |
(31 | ) | (49 | ) | — | 8 | (72 | ) | (463 | ) | (535 | ) | ||||||||||||||||||||
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| Net income (loss) for the period |
$ | 501 | $ | 195 | $ | 5 | $ | (426 | ) | $ | 275 | $ | 1,741 | $ | 2,016 | |||||||||||||||||
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| Attributable to: |
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| Class A exchangeable and Class B shareholders |
6 | — | — | — | 6 | — | 6 | |||||||||||||||||||||||||
| Class C shareholders |
493 | 193 | 5 | (437 | ) | 254 | 1,697 | 1,951 | ||||||||||||||||||||||||
| Non-controlling interests |
2 | 2 | — | 11 | 15 | 44 | 59 | |||||||||||||||||||||||||
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| Net income (loss) for the period |
$ | 501 | $ | 195 | $ | 5 | $ | (426 | ) | $ | 275 | $ | 1,741 | $ | 2,016 | |||||||||||||||||
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| Net income (loss) per class C share |
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| Basic |
$ | 13.75 | 5 | $ | 15.34 | |||||||||||||||||||||||||||
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See the accompanying notes to the pro forma financial statements
5
Pro Forma Adjustments
| 1. | Real Estate Assets |
In the first half of 2023, the Company acquired the Real Estate Assets, which are interests in a portfolio of core office and mixed-use real estate properties. The Company’s interests in the Real Estate Assets range from 5.8 to 49.5 percent, which do not provide the Company with a controlling financial interest and are deemed to provide the Company with the ability to exert significant influence over the properties, and therefore the Company accounts for such interests using the equity method.
Transaction accounting adjustments related to the Real Estate Assets are made to net investment income for the Company’s share of the properties’ earnings (losses) as follows:
| • | The Company’s consolidated statement of operating results for the six months ended June 30, 2023 has been adjusted to reflect $9 million for the Company’s share of the Real Estate Assets’ results from January 1, 2023 to the date of the acquisitions. |
| • | The Company’s consolidated statement of operating results for the year ended December 31, 2022 has been adjusted to $5 million for the Company’s share of the Real Estate Assets’ results for the year ended December 31, 2022. |
| 2. | Argo – June 30, 2023 |
The following tables and explanatory notes present the statement of financial position as at June 30, 2023 and the statement of operating results for the six months ended June 30, 2023 of Argo, as adjusted to give effect to the Argo acquisition. On November 16, 2023, the Company completed the acquisition at $30.00 per share for a total consideration of $1.1 billion in cash at closing of the merger, funded by existing cash on hand and liquidity available to the Company, while the preferred shares continue to be outstanding and considered as our non-controlling interests.
UNAUDITED PRO FORMA STATEMENT OF FINANCIAL POSITION
As at June 30, 2023
Argo Group International Holdings, Ltd.
| As at June 30, 2023 In USD, millions |
Argo (Historical) (2a) |
Reclassification to conform presentation (2b) |
Transaction Accounting Adjustments (2c) |
Argo Pro Forma |
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| Assets |
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| Investments: |
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| Fixed maturities available-for-sale, at fair value |
$ | 2,590 | $ | (2,590 | ) | $ | — | $ | — | |||||||||||
| Available-for-sale fixed maturity securities, at fair value |
— | 2,590 | (65 | ) | 2c | (i) | 2,525 | |||||||||||||
| Commercial mortgage loan |
160 | (160 | ) | — | 2c | (i) | — | |||||||||||||
| Mortgage loans on real estate |
— | 160 | (16 | ) | 2c | (i) | 144 | |||||||||||||
| Equity securities, at fair value |
43 | — | (31 | ) | 2c | (i) | 12 | |||||||||||||
| Investment funds |
— | 322 | (4 | ) | 2c | (i) | 318 | |||||||||||||
| Other investments |
327 | (327 | ) | — | — | |||||||||||||||
| Other invested assets, net |
— | 5 | — | 5 | ||||||||||||||||
| Short term investments, at fair value |
841 | (841 | ) | — | — | |||||||||||||||
| Short term investments |
— | 841 | 257 | 2c | (i) | 1,098 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total investments |
3,961 | — | 141 | 4,102 | ||||||||||||||||
| Cash |
29 | — | (1,044 | ) | 2c | (iv) | (1,015 | ) | ||||||||||||
| Accrued investment income |
19 | — | (2 | ) | 2c | (i) | 17 | |||||||||||||
| Premiums due and other receivables |
— | 312 | (47 | ) | 2c | (i) | 265 | |||||||||||||
| Premiums receivable |
312 | (312 | ) | — | — | |||||||||||||||
| Reinsurance recoverables, net |
— | 2,908 | (20 | ) | 2c | (i) | 2,888 | |||||||||||||
6
| Reinsurance recoverables |
2,908 | (2,908 | ) | — | — | |||||||||||||||
| Goodwill |
119 | — | (119 | ) | 2c | (ii) | — | |||||||||||||
| Current income taxes receivable, net |
45 | (45 | ) | — | — | |||||||||||||||
| Deferred tax asset, net |
101 | — | (45 | ) | 2c | (vi) | 56 | |||||||||||||
| Deferred acquisition costs, net |
104 | — | (104 | ) | 2c | (vii) | — | |||||||||||||
| Ceded unearned premiums |
358 | — | 30 | 2c | (i) | 388 | ||||||||||||||
| Operating lease right-of-use assets |
53 | (53 | ) | — | — | |||||||||||||||
| Goodwill, VOBA and intangible assets |
— | — | 332 | 2c | (vii)(viii) | 332 | ||||||||||||||
| Other assets |
178 | 98 | (33 | ) | 2c | (i) | 243 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total assets |
$ | 8,187 | $ | — | $ | (911 | ) | $ | 7,276 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Liabilities and shareholders’ equity |
||||||||||||||||||||
| Policy and contract claims |
— | 5,205 | 139 | 2c | (i) | 5,344 | ||||||||||||||
| Reserves for losses and loss adjustment expenses |
5,205 | (5,205 | ) | — | — | |||||||||||||||
| Unearned premiums |
1,003 | — | (17 | ) | 2c | (i) | 986 | |||||||||||||
| Accrued underwriting expenses and other liabilities |
50 | (50 | ) | — | — | |||||||||||||||
| Reinsurance payable |
— | — | — | — | ||||||||||||||||
| Ceded reinsurance payable, net |
183 | (183 | ) | — | — | |||||||||||||||
| Funds held |
51 | (51 | ) | — | — | |||||||||||||||
| Subsidiary borrowings |
— | 399 | (30 | ) | 2c | (iii) | 369 | |||||||||||||
| Senior unsecured fixed rate notes |
140 | (140 | ) | — | — | |||||||||||||||
| Junior subordinated debentures |
259 | (259 | ) | — | — | |||||||||||||||
| Other liabilities |
— | 345 | 95 | 2c | (v), (ix) | 440 | ||||||||||||||
| Operating lease liabilities |
61 | (61 | ) | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total liabilities |
6,952 | — | 187 | 7,139 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Shareholders’ equity: |
||||||||||||||||||||
| Preferred shares and additional paid-in capital |
144 | (144 | ) | — | — | |||||||||||||||
| Common shares |
46 | — | (46 | ) | 2c | (iv) | — | |||||||||||||
| Additional paid-in capital |
1,395 | — | (1,395 | ) | 2c | (iv) | — | |||||||||||||
| Treasury shares |
(455 | ) | — | 455 | 2c | (iv) | — | |||||||||||||
| Retained earnings |
371 | — | (381 | ) | 2c | (iv) | (10 | ) | ||||||||||||
| Accumulated other comprehensive loss, net of taxes |
(266 | ) | — | 266 | 2c | (iv) | — | |||||||||||||
| Non-controlling interests |
— | 144 | 3 | 147 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total shareholders’ equity |
1,235 | — | (1,098 | ) | 137 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total liabilities and shareholders’ equity |
$ | 8,187 | $ | — | $ | (911 | ) | $ | 7,276 | |||||||||||
|
|
|
|
|
|
|
|
|
7
UNAUDITED PRO FORMA STATEMENT OF OPERATING RESULTS
For the Six Months Ended June 30, 2023
Argo Group International Holdings, Ltd.
| For the six months ended June 30, 2023 In USD, millions |
Argo (Historical) (2a) |
Reclass- ification to conform presentation (2b) |
Disposal of Assets Held for Sale (2c(x)) |
Transaction Accounting Adjustments (2d) |
Argo Pro Forma |
|||||||||||||||||||
| Premiums and other revenue: |
||||||||||||||||||||||||
| Earned premiums |
$ | 720 | $ | (720 | ) | $ | — | $ | — | $ | — | |||||||||||||
| Net premiums |
— | 720 | (39 | ) | — | 681 | ||||||||||||||||||
| Net investment income |
62 | — | (2 | ) | 60 | |||||||||||||||||||
| Investment related gains (losses), net |
— | (16 | ) | 20 | (10 | ) | 2c | (ii) | (6 | ) | ||||||||||||||
| Net realized investment and other gains (losses) |
(28 | ) | 28 | — | — | — | ||||||||||||||||||
| Change in fair value recognized |
12 | (12 | ) | — | — | — | ||||||||||||||||||
| Change in allowance for credit losses on fixed maturity securities |
— | — | — | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total net investment and other gains (losses) |
(16 | ) | — | 20 | (10 | ) | (6 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total revenue |
766 | — | (21 | ) | (10 | ) | 735 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Expenses: |
||||||||||||||||||||||||
| Losses and loss adjustment expenses |
(526 | ) | 526 | — | — | — | ||||||||||||||||||
| Claims and policyholder benefits |
— | (526 | ) | 20 | — | (506 | ) | |||||||||||||||||
| Underwriting, acquisition and insurance |
(248 | ) | 232 | 16 | — | — | ||||||||||||||||||
| Commissions for acquiring and servicing policies |
— | (232 | ) | — | (68 | ) | 2c | (vii) | (300 | ) | ||||||||||||||
| Non-operating expenses |
(18 | ) | 18 | — | — | — | ||||||||||||||||||
| Operating expenses |
— | (19 | ) | — | (19 | ) | 2c | (viii) | (38 | ) | ||||||||||||||
| Interest expense |
(17 | ) | — | — | 1 | 2c | (iii) | (16 | ) | |||||||||||||||
| Fee and other income (expense), net |
1 | (1 | ) | — | — | — | ||||||||||||||||||
| Foreign currency exchange gains (losses) |
(4 | ) | 2 | 2 | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total expenses |
(812 | ) | — | 38 | (86 | ) | (860 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Income (loss) before income taxes |
(46 | ) | — | 17 | (96 | ) | (125 | ) | ||||||||||||||||
| Income tax provision (benefit) |
14 | — | (7 | ) | (1 | ) | 2c | (vi) | 6 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income (loss) |
(32 | ) | — | 10 | (97 | ) | (119 | ) | ||||||||||||||||
| Dividends on preferred shares |
(5 | ) | — | — | — | (5 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income (loss) attributable to common |
(37 | ) | — | 10 | (97 | ) | (124 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Attributable to: |
||||||||||||||||||||||||
| Class A exchangeable and Class B shareholders |
— | — | — | — | — | |||||||||||||||||||
| Class C shareholders |
(37 | ) | — | 10 | (97 | ) | (124 | ) | ||||||||||||||||
| Non-controlling interests |
5 | — | — | — | 5 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| $ | (32 | ) | $ | — | $ | 10 | $ | (97 | ) | $ | (119 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS
| a. | The historical financial statements of Argo are prepared in accordance with U.S. GAAP. The Company has reviewed and determined that there are no material differences in accounting policies applied by Argo and the Company. |
| b. | Certain reclassification adjustments have been recorded to conform Argo’s financial statement presentation to the presentation used by the Company. |
8
| c. | The Argo acquisition is accounted for using the acquisition method under ASC 805 Business Combinations with the Company being identified as the acquirer. The pro forma adjustments in the Unaudited Pro Forma Statement of Financial Position record the use of $1.1 billion of cash on hand at the Company in exchange for the net assets of Argo. The following table summarizes, on a preliminary basis, the expected cash consideration transferred, the fair value of assets acquired and liabilities assumed at the acquisition date, and any resulting goodwill: |
| Consideration transferred |
$ | 1,060 | ||
| Cash & cash equivalents |
45 | |||
| Investments |
4,102 | |||
| Accrued investment income |
17 | |||
| Value of business acquired (VOBA) and other intangible assets |
316 | |||
| Premiums due and other receivables |
265 | |||
| Reinsurance recoverables |
2,888 | |||
| Deferred tax asset, net |
56 | |||
| Ceded unearned premiums |
388 | |||
| Other assets |
243 | |||
| Policyholder and contract claims |
(5,344 | ) | ||
| Unearned premiums |
(986 | ) | ||
| Subsidiary borrowings |
(369 | ) | ||
| Other liabilities |
(440 | ) | ||
|
|
|
|||
| Net identifiable assets acquired |
1,181 | |||
| Non-controlling interests |
(137 | ) | ||
|
|
|
|||
| Net assets acquired |
1,044 | |||
|
|
|
|||
| Goodwill |
$ | 16 | ||
|
|
|
The purchase price allocation is determined with the detailed valuations and necessary calculations to the adjustments referred to in the explanatory notes below. The allocation includes (1) fair value adjustments to policyholder and contract claims; (2) recognition of the value of business acquired or other intangible assets such as insurance licenses, broker relationship, internally developed software, and trade names and (3) other changes to assets and liabilities. Accordingly, the unaudited pro forma adjustments are preliminary and have been made solely for illustrative purposes.
Preliminary ASC 805 adjustments include the following:
| i. | Assets acquired and liabilities assumed are adjusted to their acquisition date fair value based on the preliminary purchase price allocation. |
| ii. | This adjustment removes the $119 million of goodwill previously recognized by Argo, and the recognition of a goodwill of $16 million, based on the purchase price allocation as outlined above. |
| iii. | Reflects a decrease of $30 million in subsidiary borrowings and the corresponding decrease in interest expense associated with the difference between the estimated fair value and the carrying value of assumed debt on acquisition. |
| iv. | This relates to the payment of purchase price of $1.1 billion to Argo’s historical common stockholders and the elimination of Argo’s historical equity, in conjunction with the adjustment to reflect the cash position in the latest purchase price allocation. |
| v. | These adjustments reflect the elimination of $95 million of historical deferred gain as it relates to cash collected upfront for premiums that have not been earned. The unearned premium is reset as part of the purchase price allocation within policy and contract claims. |
| vi. | This adjustment reflects the purchase accounting adjustments to the Argo historical deferred tax assets of $101 million. The Unaudited Pro Forma Statement of Operating Results has been adjusted to reflect the income tax and deferred tax impact of the transaction accounting adjustments based on an effective tax rate of 21%. |
9
| vii. | This adjustment eliminates the deferred policy acquisition costs previously recognized by Argo which do not represent rights to future cash flows, and now reflects the $180 million of VOBA recognized as part of purchase price allocation. This results in an increase of commission expenses for acquiring and servicing policies arising from amortization of $68 million for the six months ended June 30, 2023. |
| viii. | Reflects intangible assets of $136 million upon acquisition, primarily consist of insurance licenses, broker relationship, internally developed software, and trade names. Amortization expense of $19 million related to those with a definite useful life is included in Argo’s Unaudited Pro forma Statement of Operating Results. |
| ix. | Reflects the accrual of $10 million of estimated transaction costs to be incurred by the Company in connection with its acquisition of Argo. These costs are reflected in the Unaudited Pro Forma Statement of Operating Results of the Company for the year ended December 31, 2022 and will not affect the Company’s statement of operating results beyond 12 months after the acquisition date. |
| x. | On February 2, 2023, Argo completed the sale of the entire issued share capital of Argo Underwriting Agency Limited for total consideration of $156 million, which included cash proceeds of $125 million and an additional $31 million placed in escrow related to certain reinsurance-related recoverables. The Unaudited Pro Forma Statement of Operating Results for the six months ended June 30, 2023 has been adjusted to give effect to the disposition by removing the results of disposed operations for the period from January 1, 2023 to the date of the disposal. |
10
2.1. Argo – December 31, 2022
The following table and explanatory notes present the statement of operating results for year ended December 31, 2022, as adjusted to give effect to the Argo acquisition.
UNAUDITED PRO FORMA STATEMENT OF OPERATING RESULTS
For the Year Ended December 31, 2022
Argo Group International Holdings, Ltd.
| For the year ended December 31, 2022 In USD, millions |
Argo (Historical) (2.1a) |
Reclassification to conform presentation (2.1b) |
Disposal of Assets Held for Sale (2.1c) |
Transaction Accounting Adjustments (2.1d) |
Argo Pro Forma |
|||||||||||||||||||
| Premiums and other revenue: |
||||||||||||||||||||||||
| Earned premiums |
$ | 1,740 | $ | (1,740 | ) | $ | — | $ | — | $ | — | |||||||||||||
| Net premiums |
— | 1,740 | (482 | ) | — | 1,258 | ||||||||||||||||||
| Net investment income |
130 | — | — | — | 130 | |||||||||||||||||||
| Investment related gains (losses), net |
— | (115 | ) | (26 | ) | — | (141 | ) | ||||||||||||||||
| Net realized investment and other gains (losses) |
(116 | ) | 116 | — | — | — | ||||||||||||||||||
| Change in fair value recognized |
3 | (3 | ) | — | — | — | ||||||||||||||||||
| Change in allowance for credit losses on fixed maturity securities |
(2 | ) | 2 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total net investment and other gains (losses) |
(115 | ) | — | (26 | ) | — | (141 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total revenue |
1,755 | — | (508 | ) | — | 1,247 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Expenses: |
||||||||||||||||||||||||
| Losses and loss adjustment expenses |
(1,167 | ) | 1,167 | — | — | — | ||||||||||||||||||
| Claims and policyholder benefits |
— | (1,167 | ) | 239 | — | (928 | ) | |||||||||||||||||
| Underwriting, acquisition and insurance expenses |
(671 | ) | 671 | — | — | — | ||||||||||||||||||
| Commissions for acquiring and servicing policies |
— | (671 | ) | 195 | (138 | ) | 2.1d | (i) | (614 | ) | ||||||||||||||
| Non-operating expenses |
(51 | ) | 51 | — | — | — | ||||||||||||||||||
| Operating expenses |
— | (45 | ) | 4 | (48 | ) | 2.1d | (ii) | (89 | ) | ||||||||||||||
| Interest expense |
(27 | ) | — | 3 | 2 | 2.1d | (iii) | (22 | ) | |||||||||||||||
| Fee and other income (expense), net |
1 | (1 | ) | — | — | — | ||||||||||||||||||
| Foreign currency exchange gains (losses) |
5 | (5 | ) | — | — | — | ||||||||||||||||||
| Impairment of intangible assets and goodwill |
(28 | ) | — | — | — | 2.1e | (28 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total expenses |
(1,938 | ) | — | 441 | (184 | ) | (1,681 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Income (loss) before income taxes |
(183 | ) | — | (67 | ) | (184 | ) | (434 | ) | |||||||||||||||
| Income tax (provision) benefit |
8 | — | — | — | 2.1d | (iv) | 8 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income (loss) |
$ | (175 | ) | $ | — | $ | (67 | ) | $ | (184 | ) | $ | (426 | ) | ||||||||||
| Dividends on preferred shares |
11 | — | — | — | 11 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income (loss) attributable to common shareholders |
$ | (186 | ) | $ | — | $ | (67 | ) | $ | (184 | ) | $ | (437 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Attributable to: |
||||||||||||||||||||||||
| Class A exchangeable and Class B shareholders |
— | — | — | — | — | |||||||||||||||||||
| Class C shareholders |
(186 | ) | — | (67 | ) | (184 | ) | (437 | ) | |||||||||||||||
| Non-controlling interests |
11 | — | — | — | 11 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| $ | (175 | ) | $ | — | $ | (67 | ) | $ | (184 | ) | $ | (426 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
11
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS
| a. | The historical financial statements of Argo are prepared in accordance with U.S. GAAP. The Company has determined that there are no material differences in accounting policies applied by Argo and the Company. |
| b. | Certain reclassification adjustments have been recorded to conform Argo’s financial statement presentation to the presentation used by the Company. |
| c. | On February 2, 2023, Argo completed the sale of the entire issued share capital of Argo Underwriting Agency Limited for total consideration of $156 million, which included cash proceeds of $125 million and an additional $31 million placed in escrow related to certain reinsurance-related recoverables. The Unaudited Pro Forma Statement of Operating Results have been adjusted to give effect to the disposition by removing the results of disposed operations for the year ended December 31, 2022. |
| d. | Preliminary ASC 805 adjustments include the following: |
| i. | Eliminates the deferred policy acquisition costs previously recognized by Argo which do not represent rights to future cash flows, and reflects the amortization of VOBA recognized as part of purchase price allocation. This results in a net increase to commissions for acquiring and servicing policies of $138 million for the year ended December 31, 2022. |
| ii. | Reflects the accrual of $10 million of estimated transaction costs to be incurred by the Company in connection with its acquisition of Argo. These costs are reflected in the Unaudited Pro Forma Statement of Operating Results of the Company for the year ended December 31, 2022 and will not affect the Company’s statement of operating results beyond 12 months after the acquisition date. The adjustment also includes $38 million of amortization expense on the intangible assets with definite useful life recognized as part of the purchase price allocation. |
| iii. | Reflects a decrease in interest expense associated with the difference between the estimated fair value and the carrying value of assumed debt on acquisition. |
| iv. | The Unaudited Pro Forma Statement of Operating Results has been adjusted to reflect the income tax and deferred tax impact of the transaction accounting adjustments based on an effective tax rate of 21%. |
| e. | The historical financial statements of Argo included an impairment of intangible assets and goodwill of $28 million, consisting of a $17 million impairment of indefinite lived intangible assets and $11 million of goodwill. These impairment charges have not been reversed. As Argo Underwriting Agency Limited was subsequently disposed of, the impairment charges are expected to be non-recurring. |
12
3. American Equity Investment Life Holding Company – June 30, 2023
The following tables and explanatory notes present the statement of financial position as at June 30, 2023 and the statement of operating results for the six months ended June 30, 2023 of AEL, as adjusted to give effect to the AEL acquisition. As part of the definitive merger agreement, each issued and outstanding share of AEL not already owned by the Company will be converted into the right to receive $55.00 per share at closing of the merger, payable in cash and Brookfield Asset Management Ltd. (NYSE, TSX: BAM) (“BAM”) class A limited voting shares (“BAM Shares”). In certain circumstances, the Company will have the option to pay cash for the share portion of the consideration. For purpose of these unaudited pro forma financial statements, it is assumed that consideration is comprised of approximately $2.4 billion in cash which will be partly financed by $350 million of debt financing, 30.8 million BAM shares valued at $38.85 per share, and $875 million of the Company’s pre-existing investment in AEL. The merger consideration per AEL common share represents a 35% premium to AEL’s closing share price on June 23, 2023 and a 42% premium to the 90-day volume weighted average price (“VWAP”) as of the same date, in each case, for the AEL common shares. Subsequent to the acquisition, AEL’s preferred shares will continue to be outstanding and be part of the Company’s non-controlling interests.
13
UNAUDITED PRO FORMA STATEMENT OF FINANCIAL POSITION
As at June 30, 2023
American Equity Investment Life Holding Company
| As at June 30, 2023 In USD, millions |
AEL (Historical) (3a) |
Reclassification to conform presentation (3b) |
Transaction Accounting Adjustments (3c) |
AEL Pro Forma |
||||||||||||||
| Assets |
||||||||||||||||||
| Investments: |
||||||||||||||||||
| Fixed maturity securities, available for sale, at fair value |
$ | 38,680 | $ | (38,680 | ) | $ | — | $ | — | |||||||||
| Available-for-sale fixed maturity securities, at fair value |
— | 38,680 | — | 38,680 | ||||||||||||||
| Equity securities, at fair value |
— | — | (875 | ) | 3c(i) | (875 | ) | |||||||||||
| Mortgage loans on real estate |
7,374 | — | (474 | ) | 3c(vii) | 6,900 | ||||||||||||
| Real estate investments related to consolidated variable interest entities |
1,270 | (1,270 | ) | — | — | |||||||||||||
| Limited partnerships and limited liability companies |
1,650 | (1,650 | ) | — | — | |||||||||||||
| Real estate and real estate partnerships |
— | 2,920 | — | 2,920 | ||||||||||||||
| Derivative instruments |
1,132 | (1,132 | ) | — | — | |||||||||||||
| Other investments |
1,413 | (1,413 | ) | — | — | |||||||||||||
| Other invested assets, net |
— | 2,545 | — | 2,545 | ||||||||||||||
| Total investments |
51,519 | — | (1,349 | ) | 50,170 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Cash and cash equivalents |
5,001 | — | — | 5,001 | ||||||||||||||
| Coinsurance deposits |
14,247 | — | (885 | ) | 3c(vii) | 13,362 | ||||||||||||
| Reinsurance funds withheld |
— | — | (4,938 | ) | 3c(viii) | (4,938 | ) | |||||||||||
| Market risk benefits |
234 | (234 | ) | — | — | |||||||||||||
| Deferred policy acquisition costs |
2,843 | — | (2,843 | ) | 3c(iv) | — | ||||||||||||
| Deferred sales inducements |
2,134 | — | (2,134 | ) | 3c(iv) | — | ||||||||||||
| Deferred income taxes |
293 | — | 743 | 3c(vi) | 1,036 | |||||||||||||
| Accrued investment income |
488 | — | — | 488 | ||||||||||||||
| Income taxes recoverable |
56 | (56 | ) | — | — | |||||||||||||
| Other assets |
830 | 290 | — | 1,120 | ||||||||||||||
| Goodwill, VOBA and intangible assets |
— | — | 2,502 | 3c(ii) | 2,502 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total assets |
77,645 | — | (8,904 | ) | 68,741 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Liabilities and Stockholders’ Equity |
||||||||||||||||||
| Liabilities |
||||||||||||||||||
| Policy benefit reserves |
59,857 | 7,565 | (10,450 | ) | 3c(vii), 3c(viii) | 56,972 | ||||||||||||
| Market risk benefits |
2,673 | — | — | 2,673 | ||||||||||||||
| Notes and loan payable |
789 | (789 | ) | — | — | |||||||||||||
| Subsidiary borrowings |
— | 868 | 345 | 3c(iii),(vii) | 1,213 | |||||||||||||
| Subordinated debentures |
79 | (79 | ) | — | — | |||||||||||||
| Funds withheld for reinsurance liabilities |
7,565 | (7,565 | ) | — | — | |||||||||||||
| Other policy funds and contract claims |
202 | (202 | ) | — | — | |||||||||||||
| Policy and contract claims |
— | 202 | 8 | 3c(vii) | 210 | |||||||||||||
| Other liabilities |
3,885 | — | 50 | 3c(v) | 3,935 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total liabilities |
75,050 | — | (10,047 | ) | 65,003 | |||||||||||||
| Stockholders’ equity: |
||||||||||||||||||
| Preferred stock |
— | — | — | 3c(v) | — | |||||||||||||
| Common stock |
78 | — | (78 | ) | 3c(v) | — | ||||||||||||
| Additional paid-in capital |
1,056 | — | 2,054 | 3c(v) | 3,110 | |||||||||||||
| Accumulated other comprehensive loss |
(3,425 | ) | — | 3,425 | 3c(v) | — | ||||||||||||
| Retained earnings |
4,863 | — | (4,863 | ) | 3c(v) | — | ||||||||||||
| Noncontrolling interests |
23 | — | 605 | 3c(i) | 628 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total stockholders’ equity |
2,595 | — | 1,143 | 3,738 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total liabilities and stockholders’ equity |
$ | 77,645 | $ | — | $ | (8,904 | ) | $ | 68,741 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
14
UNAUDITED PRO FORMA STATEMENT OF OPERATING RESULTS
For the Six Months Ended June 30, 2023
American Equity Investment Life Holding Company
| For the six months ended June 30, 2023 In USD, millions |
AEL (Historical) (3a) |
Reclassification to conform presentation (3b) |
Transaction Accounting Adjustments (3c) |
AEL Pro Forma |
||||||||||||||||
| Revenue: |
||||||||||||||||||||
| Premiums and other considerations |
$ | 7 | $ | (7 | ) | $ | — | $ | — | |||||||||||
| Annuity product charges |
134 | (134 | ) | — | — | |||||||||||||||
| Net premiums |
— | 141 | — | 141 | ||||||||||||||||
| Net investment income |
1,104 | — | — | 1,104 | ||||||||||||||||
| Other policy revenue |
— | 33 | — | 33 | ||||||||||||||||
| Investment related gains (losses), net |
— | 237 | — | 237 | ||||||||||||||||
| Change in fair value of derivatives |
289 | (289 | ) | — | — | |||||||||||||||
| Net realized gains (losses) on investments |
(52 | ) | 52 | — | — | |||||||||||||||
| Other revenue |
33 | (33 | ) | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total revenue |
1,515 | — | — | 1,515 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Benefits and expenses: |
||||||||||||||||||||
| Insurance policy benefits and change in future policy benefits |
(12 | ) | 12 | — | — | |||||||||||||||
| Claims and policyholder benefits |
— | (12 | ) | — | (12 | ) | ||||||||||||||
| Interest sensitive and index product benefits |
(180 | ) | 180 | — | — | |||||||||||||||
| Interest sensitive contract benefits |
— | (180 | ) | — | (180 | ) | ||||||||||||||
| Market risk benefits (gains) losses |
(40 | ) | 40 | — | — | |||||||||||||||
| Change in fair value of market risk benefit |
— | (40 | ) | — | (40 | ) | ||||||||||||||
| Amortization of deferred sales inducements |
(94 | ) | — | 94 | 3c | (iv) | — | |||||||||||||
| Change in fair value of embedded derivatives |
(618 | ) | — | 50 | 3c | (viii) | (568 | ) | ||||||||||||
| Interest expense |
— | (25 | ) | (6 | ) | 3c | (iii) | (31 | ) | |||||||||||
| Interest expense on notes and loan payable |
(22 | ) | 22 | — | — | |||||||||||||||
| Interest expense on subordinated debentures |
(3 | ) | 3 | — | — | |||||||||||||||
| Amortization of deferred policy acquisition costs |
(137 | ) | — | 137 | 3c | (iv) | — | |||||||||||||
| Other operating costs and expenses |
(150 | ) | — | — | (150 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total benefits and expenses |
(1,256 | ) | — | 275 | (981 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Income (loss) before taxes |
259 | — | 275 | 534 | ||||||||||||||||
| Income tax provision (benefit) |
(60 | ) | — | (177 | ) | 3c | (vi) | (237 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) |
$ | 199 | $ | — | $ | 98 | $ | 297 | ||||||||||||
| Less: Net income available to non-controlling interests |
— | — | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) available to American Equity Investment Life Holding Company stockholders |
199 | — | 98 | 297 | ||||||||||||||||
| Less: Preferred stock dividends |
22 | — | — | 22 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) available to American Equity Investment Life Holding Company common stockholders |
177 | — | 98 | 275 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Attributable to: |
||||||||||||||||||||
| Class A exchangeable and Class B shareholders |
— | — | — | — | ||||||||||||||||
| Class C shareholders |
177 | — | 98 | 275 | ||||||||||||||||
| Non-controlling interests |
22 | — | — | 22 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 199 | $ | — | $ | 98 | $ | 297 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
15
| a. | The historical financial statements of AEL are prepared in accordance with U.S. GAAP. The Company has reviewed and determined that there are no material differences in accounting policies applied by AEL and the Company. |
| b. | Certain reclassification adjustments have been recorded to conform AEL’s financial statement presentation to the presentation used by the Company. |
| c. | The AEL acquisition will be accounted for using the acquisition method under ASC 805 Business Combinations with the Company being identified as the acquirer. The pro forma adjustments in the Unaudited Pro Forma Statement of Financial Position reflects total consideration of $4.3 billion. The following table summarizes, on a preliminary basis, the expected consideration transferred, the fair value of assets acquired and liabilities assumed at the acquisition date, and any resulting goodwill: |
| Fair value of consideration transferred |
||||
| Cash |
$ | 2,260 | ||
| BAM shares |
1,200 | |||
| Fair value of the Company’s pre-existing interest in AEL |
875 | |||
|
|
|
|||
| Total consideration |
4,335 | |||
| Cash and cash equivalents |
5,001 | |||
| Investments |
46,107 | |||
| Coinsurance deposits |
13,362 | |||
| Deferred income taxes |
1,036 | |||
| Accrued investment income |
488 | |||
| Income taxes recoverable |
— | |||
| Other assets |
1,120 | |||
| Policy benefit reserves |
(56,972 | ) | ||
| Market risk benefit liabilities |
(2,673 | ) | ||
| Subsidiary borrowings |
(863 | ) | ||
| Other policy funds and contract claims |
(210 | ) | ||
| Funds withheld for reinsurance liabilities |
— | |||
| Other liabilities |
(3,935 | ) | ||
|
|
|
|||
| Net identifiable assets acquired |
2,461 | |||
| Non-controlling interests |
(628 | ) | ||
|
|
|
|||
| Net assets acquired |
1,833 | |||
|
|
|
|||
| Goodwill, VOBA & intangibles |
$ | 2,502 | ||
|
|
|
The preliminary purchase price allocation used to prepare the transaction accounting adjustments in the Unaudited Pro Forma Statement of Financial Position is based on various assumptions to determine management’s best estimates of fair value. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations to the adjustments referred to in the explanatory notes below. Accordingly, the unaudited pro forma adjustments are preliminary and have been made solely for illustrative purposes.
Preliminary ASC 805 adjustments include the following:
| i. | As part of the transaction, the Company is expected to issue Class C shares to Brookfield Corporation in exchange for BAM class A limited voting shares, which will in turn be used as payment for the acquisition. These adjustments reflect the AEL’s equity net of total considerations of $4.3 billion, which comprise cash, the Company’s existing investment in AEL, as well as BAM’s Class A limited voting shares. The adjustments also include the elimination of AEL’s historical equity. The cash portion of the consideration is expected to be funded by additional subsidiary borrowings of $350 million and through the issuance of additional equity. Noncontrolling interest has been adjusted to reflect the fair value of AEL’s preferred shares which will continue to be outstanding upon closing of the acquisition. |
| ii. | Includes $2.5 billion related to the recognition of goodwill and VOBA, as well as intangible assets related to brand name and distribution channels, based on the preliminary purchase price as outlined above. The preliminary allocation of the $2.5 billion to goodwill, VOBA and intangibles is estimated to be in the range of $500 million to $1.2 billion, $500 million to $1.1 billion and $0 to $200 million, respectively. |
16
| iii. | Reflects an increase of $345 million in subsidiary borrowings as part of the financing of the transaction and the adjustment to reflect the fair value of AEL’s existing financing, as well as the corresponding interest expense. |
| iv. | Eliminates the deferred policy acquisition and deferred sales inducement costs previously recognized by AEL which do not represent rights to future cash flows. Deferred policy acquisitions costs will be reset through the finalization of the purchase price allocation. This results in a decrease to total assets of $5.0 billion as at June 30, 2023 and a decrease of $94 million and $137 million of amortization of the sales inducement costs and deferred acquisition costs, respectively, for the six months ended June 30, 2023. |
| v. | Reflects the accrual of $50 million of liability associated with the estimated transaction costs to be incurred by the Company in connection with its acquisition of AEL. These transaction costs are reflected in the Unaudited Pro Forma Statement of Operating Results of the Company for the year ended December 31, 2022 and will not affect the Company’s statement of operating results beyond 12 months after the acquisition date. |
| vi. | Reflects the purchase accounting adjustments of $743 million to the AEL historical deferred tax assets. The Unaudited Pro Forma Statement of Operating Results has been adjusted to reflect the deferred tax impact of the transaction accounting adjustments based on an effective tax rate of 21%. |
| vii. | Reflects the fair value of the balances to give effect to the acquisition. |
| viii. | Reflects the reversal of reinsurance funds withheld and derivative balances related to reinsurance treaties between the Company and AEL that will eliminate upon acquisition. |
17
3.1 American Equity Investment Life Holding Company – December 31, 2022
The following tables and explanatory notes present the statement of operating results for year ended December 31, 2022, as adjusted to give effect to the AEL acquisition.
UNAUDITED PRO FORMA STATEMENT OF OPERATING RESULTS
For the Year Ended December 31, 2022
American Equity Investment Life Holding Company
| For the year ended December 31, 2022 In USD, millions |
AEL (Historical) (3.1a) |
Reclassification to conform presentation (3.1b) |
Transaction Accounting Adjustments (3.1c) |
AEL Pro Forma |
||||||||||||||||
| Revenue: |
||||||||||||||||||||
| Premiums and other considerations |
$ | 20 | $ | (20 | ) | $ | — | $ | — | |||||||||||
| Annuity product charges |
230 | (230 | ) | — | — | |||||||||||||||
| Net premiums |
— | 250 | — | 250 | ||||||||||||||||
| Other policy revenue |
42 | 42 | ||||||||||||||||||
| Net investment income |
2,308 | — | — | 2,308 | ||||||||||||||||
| Investment related gains (losses), net |
— | (1,186 | ) | — | (1,186 | ) | ||||||||||||||
| Change in fair value of derivatives |
(1,138 | ) | 1,138 | — | — | |||||||||||||||
| Net realized losses on investments |
(48 | ) | 48 | — | — | |||||||||||||||
| Other revenue |
42 | (42 | ) | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total revenue |
1,414 | — | — | 1,414 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Benefits and expenses: |
||||||||||||||||||||
| Insurance policy benefits and change in future policy benefits |
(33 | ) | 33 | — | — | |||||||||||||||
| Claims and policyholder benefits |
— | (33 | ) | — | (33 | ) | ||||||||||||||
| Interest sensitive and index product benefits |
(555 | ) | 555 | — | — | |||||||||||||||
| Interest sensitive contract benefits |
— | (555 | ) | — | (555 | ) | ||||||||||||||
| Change in fair value of market risk benefit |
(4 | ) | — | — | (4 | ) | ||||||||||||||
| Amortization of deferred sales inducements |
(182 | ) | — | 182 | 3.1c | (iv) | — | |||||||||||||
| Change in fair value of embedded derivatives |
2,353 | — | (621 | ) | 3.1c | (ii) | 1,732 | |||||||||||||
| Interest expense |
— | (37 | ) | (23 | ) | 3.1c | (iii) | (60 | ) | |||||||||||
| Interest expense on notes and loan payable |
(32 | ) | 32 | — | — | |||||||||||||||
| Interest expense on subordinated debentures |
(5 | ) | 5 | — | — | |||||||||||||||
| Amortization of deferred policy acquisition costs |
(284 | ) | — | 284 | 3.1c | (iv) | — | |||||||||||||
| Other operating costs and expenses |
(240 | ) | — | (50 | ) | 3.1c | (i) | (290 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total benefits and expenses |
1,018 | — | (228 | ) | 790 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Income (loss) before taxes |
2,432 | — | (228 | ) | 2,204 | |||||||||||||||
| Income tax provision (benefit) |
(511 | ) | — | 48 | 3.1c | (v) | (463 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) |
$ | 1,921 | $ | — | $ | (180 | ) | $ | 1,741 | |||||||||||
| Less: Net income available to noncontrolling interests |
— | — | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) available to American Equity Investment Life Holding Company stockholders |
1,921 | — | (180 | ) | 1,741 | |||||||||||||||
| Less: Preferred stock dividends |
(44 | ) | — | — | (44 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) available to American Equity Investment Life Holding Company common stockholders |
1,877 | — | (180 | ) | 1,697 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Attributable to: |
||||||||||||||||||||
| Class A exchangeable and Class B shareholders |
— | — | — | — | ||||||||||||||||
| Class C shareholders |
1,877 | — | (180 | ) | 1,697 | |||||||||||||||
| Non-controlling interests |
44 | — | — | 44 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 1,921 | $ | — | $ | (180 | ) | $ | 1,741 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
18
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS
| a. | The historical financial statements of AEL are prepared in accordance with U.S. GAAP. The Company has determined that there are no material differences in accounting policies applied by AEL and the Company. |
| b. | Certain adjustments have been recorded to give effect to the adoption of ASU 2018-12, Long-Duration Improvements (“ASU 2018-12”), as of January 1, 2022 and to conform AEL’s financial statement presentation to the presentation used by the Company. The impact of the adoption of ASU 2018-12 is to increase AEL’s net income by $699 million. |
| c. | Preliminary ASC 805 adjustments include the following: |
| i. | Reflects the estimated transaction costs related to the acquisition. These transaction costs are reflected in the Unaudited Pro Forma Statement of Operating Results of the Company for the year ended December 31, 2022 and will not affect the Company’s statement of operating results beyond 12 months after the acquisition date. |
| ii. | Reflects the reversal of derivative gains related to reinsurance treaties between the Company and AEL that will eliminate upon acquisition. |
| iii. | Reflects interest expense on additional debt issued in association with the acquisition. |
| iv. | Eliminates the amortization of deferred sales inducements and deferred policy acquisition costs previously recognized by AEL which will be removed upon acquisition. |
| v. | The Unaudited Pro Forma Statement of Operating Results has been adjusted to reflect the deferred tax impact of the transaction accounting adjustments based on an effective tax rate of 21%. |
19
4. American National – For the Period from January 1, 2022 to May 24, 2022
On May 25, 2022, the Company has completed its acquisition of American National in an all-cash transaction valued at approximately $5.1 billion at a price of $190 per share. As a result of the acquisition, American National’s operating results from May 25, 2022 to December 31, 2022 have been included in the Company’s consolidated statement of operating results for the year ended December, 2022. The following table and explanatory notes present the statement of operating results for period from January 1, 2022 to May 24, 2022 of American National with the adoption of ASU 2018-12, as adjusted to give effect to the American National acquisition as if it had been consummated on January 1, 2022.
UNAUDITED PRO FORMA STATEMENT OF OPERATING RESULTS
For the Period from January 1, 2022 to May 24, 2022
American National Group, LLC
| For the period from January 1, 2022 to May 24, 2022 In USD, millions |
American National Historical (4a) |
Transaction Accounting Adjustments (4b) |
American National Pro Forma |
|||||||||||||
| Net premiums |
$ | 979 | $ | — | $ | 979 | ||||||||||
| Other policy revenue |
178 | — | 178 | |||||||||||||
| Net investment income |
385 | — | 385 | |||||||||||||
| Investment related gains (losses), net |
(7 | ) | — | (7 | ) | |||||||||||
| Net investment results from funds withheld |
— | — | — | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total revenues |
1,535 | — | 1,535 | |||||||||||||
| Claims and policyholder benefits |
(854 | ) | — | (854 | ) | |||||||||||
| Interest sensitive contract benefits |
(53 | ) | — | (53 | ) | |||||||||||
| Commissions for acquiring and servicing policies |
(319 | ) | — | (319 | ) | |||||||||||
| Net change in deferred policy acquisition costs |
163 | 61 | 4b | (i) | 224 | |||||||||||
| Change in fair value of market risk benefit |
(5 | ) | — | (5 | ) | |||||||||||
| Operating expenses |
(260 | ) | — | (260 | ) | |||||||||||
| Other reinsurance expenses |
— | — | — | |||||||||||||
| Interest expense |
— | (24 | ) | 4b | (ii) | (24 | ) | |||||||||
|
|
|
|
|
|
|
|||||||||||
| Total benefits and expenses |
(1,328 | ) | 37 | (1,291 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income (loss) before income taxes |
207 | 37 | 244 | |||||||||||||
| Income tax recovery (expense) |
(41 | ) | (8 | ) | 4b | (iii) | (49 | ) | ||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income (loss) for the period |
$ | 166 | $ | 29 | $ | 195 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Attributable to: |
||||||||||||||||
| Class A exchangeable and Class B shareholders |
— | — | — | |||||||||||||
| Class C shareholders |
164 | 29 | 193 | |||||||||||||
| Non-controlling interests |
2 | — | 2 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| $ | 166 | $ | 29 | $ | 195 | |||||||||||
|
|
|
|
|
|
|
|||||||||||
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS
| a. | The financial information of American National was prepared in accordance with U.S. GAAP. The Company has determined that there were no material differences in accounting policies applied by American National and the Company for the period from January 1, 2022 to the date of acquisition on May 25, 2022. The adoption of ASU 2018-12 has increased net income, net of tax, by $32 million for the period from January 1, 2022 to May 24, 2022. |
20
| b. | The American National acquisition has been accounted for using the acquisition method under ASC 805 Business Combinations with the Company identified as the acquirer. The consideration transferred for the acquisition was $5.1 billion of cash on hand in exchange for the net assets of American National. The following table summarizes the provisional purchase price allocation recorded by the Company and included in its audited statement of financial position as at December 31, 2022 reflects the cash consideration transferred, the fair value of assets acquired and liabilities assumed at the acquisition date, and the resulting goodwill: |
| Consideration transferred |
$ | 5,107 | ||
| Cash & cash equivalents |
1,021 | |||
| Investments |
22,519 | |||
| Accrued investment income |
101 | |||
| Premiums due and other receivables |
437 | |||
| Reinsurance recoverable |
45 | |||
| Deferred tax assets |
374 | |||
| Property and equipment |
138 | |||
| Prepaid pension |
149 | |||
| Equity accounted investment |
1,402 | |||
| Deferred acquisition costs and value of business acquired |
555 | |||
| Reinsurance assets |
410 | |||
| Investment properties |
541 | |||
| Other assets |
198 | |||
| Separate account assets |
1,123 | |||
| Future policy benefits |
(5,304 | ) | ||
| Policyholders’ account balances |
(13,880 | ) | ||
| Policy and contract claims |
(1,706 | ) | ||
| Unearned premiums |
(1,073 | ) | ||
| Other policyholder funds |
(324 | ) | ||
| Notes payable |
(158 | ) | ||
| Other liabilities |
(449 | ) | ||
| Separate account liabilities |
(1,123 | ) | ||
|
|
|
|||
| Net identifiable assets acquired |
4,996 | |||
| Non-controlling interests |
(10 | ) | ||
|
|
|
|||
| Net assets acquired |
4,986 | |||
|
|
|
|||
| Goodwill |
$ | 121 | ||
|
|
|
The following ASC 805 adjustments have been made to prepare the Unaudited Pro Forma Statement of Operating Results in order to give effect to the acquisition of American National as though it had occurred on January 1, 2022:
| i. | This adjustment records the additional amortization expense related to the value of business acquired intangible asset recognized by the Company on acquisition, net of the reversal of the amortization of American National’s deferred policy acquisition costs that had previously been recorded which do not represent rights to future cash flows. This results in an increase in changes in deferred acquisition costs of $61 million for the year ended December 31, 2022. |
| ii. | The Company financed the cash purchase price paid to acquire control of American National through the issuance of $3.6 billion of junior preferred shares to Brookfield Corporation and $1.5 billion of term loans issued to a consortium of external lenders. This adjustment reflects the additional interest expense that would have been incurred on the term loans that accrue interest at 1.42% per annum, had the facilities been in place on January 1, 2022. |
| iii. | This adjustment reflects the income tax impact of the ASC 805 adjustments recorded, based on an effective tax rate of 21%. |
21
5. Earnings per share
The payment of distributions on our Company’s class A exchangeable shares and our class B shares are at the discretion of our board. Distributions on these shares are typically made quarterly, at the end of March, June, September and December of each year. The class A exchangeable shares and the class B shares have been structured with the intention of providing an economic return equivalent to one Brookfield Class A Share, and receive the same distribution amount as the Brookfield Class A holders. As a result, Brookfield Class A shareholders and Brookfield Reinsurance’s class A exchangeable shareholders received distributions of $0.56 per share for the full year ended December 31, 2022. Following the spin-off of Brookfield Asset Management from Brookfield Corporation in December 2022, it is expected that in 2023 the holders of Brookfield Class A Shares and Brookfield Reinsurance class A exchangeable shareholders will receive a quarterly distribution of $0.07 per share, or $0.28 annually. The holder of our class C shares are entitled to receive distributions if, as and when declared by our board subject to the prior rights of the holders of all classes and series of the preferred shares, class A exchangeable shares, class B shares, and any other shares ranking senior to the class C shares with respect to priority in payment of distributions.
Pro forma basic earnings per share have been calculated using the weighted-average number of class C shares of 122,768,366 and of 133,033,422 for pro forma basic and diluted earnings per share for the year ended December 31, 2022 and the six months ended June 30, 2023, respectively. This reflects the additional class C share to be issued as part of the consideration for the AEL acquisition. The Company has no potentially dilutive instruments. Class A exchangeable shares and class B shares are not considered participating securities or considered to be ordinary shares as defined within U.S. GAAP and consequently per share amounts for these classes of shares has not been presented.
| Pro-Forma Combined Net Income | ||||||||
| In USD, millions (except per share amounts) | For the Year Ended December 31, 2022 |
For the Six Months Ended June 30, 2023 |
||||||
| Net income for the period |
$ | 2,016 | $ | 454 | ||||
| Distributions to: |
||||||||
| Class A exchangeable & Class B |
(6 | ) | (2 | ) | ||||
| Redeemable junior preferred shares |
(68 | ) | (55 | ) | ||||
| Non-controlling interests |
(59 | ) | (29 | ) | ||||
|
|
|
|
|
|||||
| Net income attributable to class C shareholders |
$ | 1,883 | $ | 368 | ||||
|
|
|
|
|
|||||
| Net income per class C share, basic |
$ | 15.34 | $ | 2.77 | ||||
|
|
|
|
|
|||||
6. Master Services Agreement with Brookfield Corporation
Brookfield Corporation and its subsidiaries provide management services to the Company pursuant to a master services agreement (the “Master Services Agreement”). Pursuant to the Master Services Agreement, on a quarterly basis, the Company pays a base management fee to the service providers equal to 0.0625% (0.25% annually) of the capital managed by Brookfield Corporation and its subsidiaries. The base management fee is expected to increase by $135 million annually from the probable transactions, which has not been reflected in the Pro Forma Financial Statements.
22
Exhibit 99.2
ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except number of shares and per share amounts)
| September 30, 2023 |
December 31, 2022 |
|||||||
| (Unaudited) | ||||||||
| Assets |
||||||||
| Investments: |
||||||||
| Fixed maturities available-for-sale, at fair value (amortized cost: 2023 - $2,873.2, 2022 - $3,016.4; allowance for expected credit losses: 2023 - $4.4, 2022 - $2.8) |
$ | 2,537.4 | $ | 2,675.5 | ||||
| Commercial mortgage loans (cost: 2023 - $159.9, 2022 - $159.9; allowance for expected credit losses: 2023 - $0.2, 2022 - $0.2) |
159.7 | 159.7 | ||||||
| Equity securities, at fair value (cost: 2023 - $16.2; 2022 - $54.7) |
11.6 | 43.9 | ||||||
| Other investments (cost: 2023 - $326.3; 2022 - $323.2) |
326.3 | 323.2 | ||||||
| Short-term investments, at fair value (amortized cost: 2023 - $1,222.7; 2022 - $449.4) |
1,222.7 | 449.6 | ||||||
|
|
|
|
|
|||||
| Total investments |
4,257.7 | 3,651.9 | ||||||
|
|
|
|
|
|||||
| Cash and restricted cash |
64.2 | 50.2 | ||||||
| Accrued investment income |
20.1 | 18.6 | ||||||
| Premiums receivable |
269.7 | 292.0 | ||||||
| Reinsurance recoverables |
2,889.6 | 3,029.1 | ||||||
| Goodwill |
118.6 | 118.6 | ||||||
| Current income taxes receivable, net |
45.9 | 44.9 | ||||||
| Deferred tax asset, net |
88.4 | 101.2 | ||||||
| Deferred acquisition costs, net |
108.5 | 107.0 | ||||||
| Ceded unearned premiums |
337.4 | 375.5 | ||||||
| Operating lease right-of-use assets |
51.6 | 57.7 | ||||||
| Other assets |
187.8 | 121.5 | ||||||
| Assets held-for-sale |
— | 2,066.2 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 8,439.5 | $ | 10,034.4 | ||||
|
|
|
|
|
|||||
| Liabilities and Shareholders’ Equity |
||||||||
| Reserves for losses and loss adjustment expenses |
$ | 5,328.7 | $ | 5,051.6 | ||||
| Unearned premiums |
987.6 | 1,039.9 | ||||||
| Accrued underwriting expenses and other liabilities |
261.7 | 121.3 | ||||||
| Ceded reinsurance payable, net |
180.6 | 158.7 | ||||||
| Funds held |
50.8 | 50.0 | ||||||
| Senior unsecured fixed rate notes |
140.6 | 140.5 | ||||||
| Junior subordinated debentures |
258.8 | 258.6 | ||||||
| Operating lease liabilities |
59.4 | 66.4 | ||||||
| Liabilities held-for-sale |
— | 1,914.5 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
7,268.2 | 8,801.5 | ||||||
|
|
|
|
|
|||||
| Commitments and contingencies (Note 14) |
| |||||||
| Shareholders’ equity: |
| |||||||
| Preferred shares and additional paid-in capital - $1.00 par, 30,000,000 shares authorized; 6,000 and 6,000 shares issued at September 30, 2023 and December 31, 2022, respectively; liquidation preference $25,000 |
144.0 | 144.0 | ||||||
| Common shares - $1.00 par, 500,000,000 shares authorized; 46,520,812 and 46,379,297 shares issued at September 30, 2023 and December 31, 2022, respectively |
46.5 | 46.4 | ||||||
| Additional paid-in capital |
1,396.1 | 1,395.4 | ||||||
| Treasury shares (11,318,339 and 11,318,339 shares at September 30, 2023 and December 31, 2022, respectively) |
(455.1 | ) | (455.1 | ) | ||||
| Retained earnings |
321.1 | 407.3 | ||||||
| Accumulated other comprehensive loss, net of taxes |
(281.3 | ) | (305.1 | ) | ||||
| Total shareholders’ equity |
1,171.3 | 1,232.9 | ||||||
|
|
|
|
|
|||||
| Total liabilities and shareholders’ equity |
$ | 8,439.5 | $ | 10,034.4 | ||||
|
|
|
|
|
|||||
See accompanying notes.
3
ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions, except number of shares and per share amounts)
(Unaudited)
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Premiums and other revenue: |
||||||||||||||||
| Net earned premiums |
$ | 342.7 | $ | 455.0 | $ | 1,062.5 | $ | 1,389.9 | ||||||||
| Net investment income |
40.4 | 34.0 | 102.9 | 100.9 | ||||||||||||
| Net investment and other gains (losses): |
||||||||||||||||
| Net realized investment and other gains (losses) |
7.4 | (42.3 | ) | (21.0 | ) | (119.2 | ) | |||||||||
| Change in fair value recognized |
(10.1 | ) | (1.1 | ) | 2.1 | 2.5 | ||||||||||
| Change in allowance for credit losses on fixed maturity securities |
(2.0 | ) | (1.3 | ) | (2.1 | ) | (2.9 | ) | ||||||||
| Total net investment and other gains (losses) |
(4.7 | ) | (44.7 | ) | (21.0 | ) | (119.6 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total revenue |
378.4 | 444.3 | 1,144.4 | 1,371.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Expenses: |
||||||||||||||||
| Losses and loss adjustment expenses |
280.9 | 298.8 | 806.9 | 858.4 | ||||||||||||
| Underwriting, acquisition and insurance expenses |
116.1 | 161.0 | 364.0 | 494.9 | ||||||||||||
| Non-operating expenses |
5.1 | 11.0 | 23.5 | 33.9 | ||||||||||||
| Interest expense |
8.7 | 6.8 | 25.4 | 18.7 | ||||||||||||
| Fee and other (income) expense, net |
0.2 | 0.1 | (0.3 | ) | (1.8 | ) | ||||||||||
| Foreign currency exchange (gains) losses |
(3.3 | ) | (9.1 | ) | 0.1 | (16.5 | ) | |||||||||
| Impairment of goodwill and intangible assets |
— | 28.5 | — | 28.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total expenses |
407.7 | 497.1 | 1,219.6 | 1,416.1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income (loss) before income taxes |
(29.3 | ) | (52.8 | ) | (75.2 | ) | (44.9 | ) | ||||||||
| Income tax provision (benefit) |
17.6 | (4.0 | ) | 3.3 | 21.1 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income (loss) |
$ | (46.9 | ) | $ | (48.8 | ) | $ | (78.5 | ) | $ | (66.0 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Dividends on preferred shares |
2.6 | 2.6 | 7.9 | 7.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income (loss) attributable to common shareholders |
$ | (49.5 | ) | $ | (51.4 | ) | $ | (86.4 | ) | $ | (73.9 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income (loss) attributable to common shareholders per common share: |
||||||||||||||||
| Basic |
$ | (1.41 | ) | $ | (1.47 | ) | $ | (2.46 | ) | $ | (2.11 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Diluted |
$ | (1.41 | ) | $ | (1.47 | ) | $ | (2.46 | ) | $ | (2.11 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Dividend declared per common share |
$ | — | $ | 0.31 | $ | — | $ | 0.93 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Weighted average common shares: |
||||||||||||||||
| Basic |
35,197,824 | 35,014,182 | 35,158,416 | 34,955,787 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Diluted |
35,197,824 | 35,014,182 | 35,158,416 | 34,955,787 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying notes.
4
ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income (loss) |
$ | (46.9 | ) | $ | (48.8 | ) | $ | (78.5 | ) | $ | (66.0 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Other comprehensive income (loss): |
||||||||||||||||
| Foreign currency translation: |
||||||||||||||||
| Foreign currency translation adjustments |
0.5 | (1.0 | ) | 1.0 | (1.4 | ) | ||||||||||
| Reclassification adjustment for foreign currency translation included in net income |
— | — | — | 31.8 | ||||||||||||
| Defined benefit pension plans: |
||||||||||||||||
| Net gain arising during the period |
— | — | 1.0 | — | ||||||||||||
| Unrealized gains (losses) on fixed maturity securities: |
||||||||||||||||
| Gains (losses) arising during the period |
(20.7 | ) | (137.6 | ) | (0.7 | ) | (460.0 | ) | ||||||||
| Reclassification adjustment for losses (gains) included in net income (loss) |
1.5 | 47.5 | 27.4 | 42.1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Other comprehensive income (loss) before tax |
(18.7 | ) | (91.1 | ) | 28.7 | (387.5 | ) | |||||||||
| Income tax provision (benefit) related to other comprehensive income (loss): |
||||||||||||||||
| Defined benefit pension plans: |
||||||||||||||||
| Net gain arising during the period |
— | — | 0.2 | — | ||||||||||||
| Unrealized gains (losses) on fixed maturity securities: |
||||||||||||||||
| Gains (losses) arising during the period |
(3.3 | ) | (24.0 | ) | (0.3 | ) | (86.1 | ) | ||||||||
| Reclassification adjustment for losses (gains) included in net income (loss) |
(0.4 | ) | 9.8 | 5.0 | 8.8 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income tax (benefit) provision related to other comprehensive income (loss) |
(3.7 | ) | (14.2 | ) | 4.9 | (77.3 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Other comprehensive income (loss), net of tax |
(15.0 | ) | (76.9 | ) | 23.8 | (310.2 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Comprehensive income (loss) |
$ | (61.9 | ) | $ | (125.7 | ) | $ | (54.7 | ) | $ | (376.2 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying notes.
5
ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions, except number of shares and per share amounts)
(Unaudited)
| Preferred Shares and Additional Paid-in Capital |
Common Shares |
Additional Paid-In Capital |
Treasury Shares |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Shareholders’ Equity |
||||||||||||||||||||||
| Balance, June 30, 2022 |
$ | 144.0 | $ | 46.3 | $ | 1,388.9 | $ | (455.1 | ) | $ | 592.6 | $ | (256.0 | ) | $ | 1,460.7 | ||||||||||||
| Net loss |
— | — | — | — | (48.8 | ) | — | (48.8 | ) | |||||||||||||||||||
| Other comprehensive loss—Change in fair value of fixed maturities, net of taxes |
— | — | — | — | — | (75.9 | ) | (75.9 | ) | |||||||||||||||||||
| Other comprehensive loss, net—Other |
— | — | — | — | — | (1.0 | ) | (1.0 | ) | |||||||||||||||||||
| Activity under stock incentive plans |
— | 0.1 | 3.9 | — | — | — | 4.0 | |||||||||||||||||||||
| Retirement of common shares (tax payments on equity compensation) |
— | (0.1 | ) | (0.6 | ) | — | — | — | (0.7 | ) | ||||||||||||||||||
| Employee stock purchase plan |
— | — | 0.4 | — | — | — | 0.4 | |||||||||||||||||||||
| Dividends on preferred shares |
— | — | — | — | (2.6 | ) | — | (2.6 | ) | |||||||||||||||||||
| Cash dividend declared—common shares ($0.31/share) |
— | — | — | — | (11.2 | ) | — | (11.2 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance, September 30, 2022 |
$ | 144.0 | $ | 46.3 | $ | 1,392.6 | $ | (455.1 | ) | $ | 530.0 | $ | (332.9 | ) | $ | 1,324.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance, June 30, 2023 |
$ | 144.0 | $ | 46.5 | $ | 1,395.1 | $ | (455.1 | ) | $ | 370.6 | $ | (266.3 | ) | $ | 1,234.8 | ||||||||||||
| Net loss |
— | — | — | — | (46.9 | ) | — | (46.9 | ) | |||||||||||||||||||
| Other comprehensive loss—Change in fair value of fixed maturities, net of taxes |
— | — | — | — | — | (15.5 | ) | (15.5 | ) | |||||||||||||||||||
| Other comprehensive income, net—Other |
— | — | — | — | — | 0.5 | 0.5 | |||||||||||||||||||||
| Activity under stock incentive plans |
— | — | 0.7 | — | — | — | 0.7 | |||||||||||||||||||||
| Retirement of common shares (tax payments on equity compensation) |
— | — | (0.1 | ) | — | — | — | (0.1 | ) | |||||||||||||||||||
| Employee stock purchase plan |
— | — | 0.4 | — | — | — | 0.4 | |||||||||||||||||||||
| Dividends on preferred shares |
— | — | — | — | (2.6 | ) | — | (2.6 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance, September 30, 2023 |
$ | 144.0 | $ | 46.5 | $ | 1,396.1 | $ | (455.1 | ) | $ | 321.1 | $ | (281.3 | ) | $ | 1,171.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
See accompanying notes.
6
| Preferred Shares and Additional Paid-in Capital |
Common Shares |
Additional Paid-In Capital |
Treasury Shares |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Shareholders’ Equity |
||||||||||||||||||||||
| Balance, December 31, 2021 |
$ | 144.0 | $ | 46.2 | $ | 1,386.4 | $ | (455.1 | ) | $ | 636.4 | $ | (22.7 | ) | $ | 1,735.2 | ||||||||||||
| Net loss |
— | — | — | — | (66.0 | ) | — | (66.0 | ) | |||||||||||||||||||
| Other comprehensive loss—Change in fair value of fixed maturities, net of taxes |
— | — | — | — | — | (340.6 | ) | (340.6 | ) | |||||||||||||||||||
| Other comprehensive income, net—Other |
— | — | — | — | — | 30.4 | 30.4 | |||||||||||||||||||||
| Activity under stock incentive plans |
— | 0.2 | 6.8 | — | — | — | 7.0 | |||||||||||||||||||||
| Retirement of common shares (tax payments on equity compensation) |
— | (0.1 | ) | (1.9 | ) | — | — | — | (2.0 | ) | ||||||||||||||||||
| Employee stock purchase plan |
— | — | 1.3 | — | — | — | 1.3 | |||||||||||||||||||||
| Dividends on preferred shares |
— | — | — | — | (7.9 | ) | — | (7.9 | ) | |||||||||||||||||||
| Cash dividend declared—common shares ($0.93/share) |
— | — | — | — | (32.5 | ) | — | (32.5 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance, September 30, 2022 |
$ | 144.0 | $ | 46.3 | $ | 1,392.6 | $ | (455.1 | ) | $ | 530.0 | $ | (332.9 | ) | $ | 1,324.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance, December 31, 2022 |
$ | 144.0 | $ | 46.4 | $ | 1,395.4 | $ | (455.1 | ) | $ | 407.3 | $ | (305.1 | ) | $ | 1,232.9 | ||||||||||||
| Net loss |
— | — | — | — | (78.5 | ) | — | (78.5 | ) | |||||||||||||||||||
| Other comprehensive income—change in fair value of fixed maturities, net of taxes |
— | — | — | — | — | 22.0 | 22.0 | |||||||||||||||||||||
| Other comprehensive income, net—other |
— | — | — | — | — | 1.8 | 1.8 | |||||||||||||||||||||
| Activity under stock incentive plans |
— | 0.1 | 0.4 | — | — | — | 0.5 | |||||||||||||||||||||
| Retirement of common shares (tax payments on equity compensation) |
— | — | (0.9 | ) | — | — | — | (0.9 | ) | |||||||||||||||||||
| Employee stock purchase plan |
— | — | 1.2 | — | — | — | 1.2 | |||||||||||||||||||||
| Dividends on preferred shares |
— | — | — | — | (7.9 | ) | — | (7.9 | ) | |||||||||||||||||||
| Cash dividend declared—common shares ($0.00/share) |
— | — | — | — | 0.2 | — | 0.2 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance, September 30, 2023 |
$ | 144.0 | $ | 46.5 | $ | 1,396.1 | $ | (455.1 | ) | $ | 321.1 | $ | (281.3 | ) | $ | 1,171.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
See accompanying notes.
7
ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
| For the Nine Months Ended September 30, |
||||||||
| 2023 | 2022 | |||||||
| Cash flows provided by (used in) operating activities: |
||||||||
| Net loss |
$ | (78.5 | ) | $ | (66.0 | ) | ||
| Adjustments to reconcile net loss to cash provided by (used in) operating activities: |
||||||||
| Amortization and depreciation |
11.3 | 15.0 | ||||||
| Share-based payments expense |
0.3 | 6.4 | ||||||
| Deferred income tax expense (benefit), net |
4.7 | (2.6 | ) | |||||
| Net investment and other (gains) losses |
21.0 | 119.6 | ||||||
| Undistributed earnings from alternative investment portfolio |
(9.3 | ) | (21.8 | ) | ||||
| Loss on disposals of long-lived assets, net |
— | (0.6 | ) | |||||
| Foreign currency exchange (gains) losses |
0.1 | (16.5 | ) | |||||
| Impairment of goodwill and intangibles |
— | 28.5 | ||||||
| Change in: |
||||||||
| Accrued investment income |
(1.6 | ) | (2.2 | ) | ||||
| Receivables |
743.4 | (274.2 | ) | |||||
| Deferred acquisition costs |
(10.7 | ) | (17.3 | ) | ||||
| Ceded unearned premiums |
(19.5 | ) | 40.4 | |||||
| Reserves for losses and loss adjustment expenses |
(223.8 | ) | 334.6 | |||||
| Unearned premiums |
(10.6 | ) | (2.9 | ) | ||||
| Ceded reinsurance payable and funds held |
(55.8 | ) | (32.1 | ) | ||||
| Income taxes |
(1.7 | ) | 1.0 | |||||
| Accrued underwriting expenses and other liabilities |
(46.6 | ) | (11.6 | ) | ||||
| Other, net |
(51.2 | ) | 1.8 | |||||
|
|
|
|
|
|||||
| Cash provided by operating activities |
271.5 | 99.5 | ||||||
|
|
|
|
|
|||||
| Cash flows provided by (used in) investing activities: |
||||||||
| Sales of fixed maturity investments |
21.4 | 678.3 | ||||||
| Maturities and mandatory calls of fixed maturity investments |
119.5 | 323.8 | ||||||
| Sales of equity securities |
45.7 | 16.3 | ||||||
| Sales of other investments |
21.5 | 45.3 | ||||||
| Purchases of fixed maturity investments |
(11.9 | ) | (1,042.1 | ) | ||||
| Purchases of equity securities |
(0.3 | ) | (1.0 | ) | ||||
| Purchases of other investments |
(16.6 | ) | (36.2 | ) | ||||
| Change in foreign regulatory deposits and voluntary pools |
— | (4.0 | ) | |||||
| Purchase of mortgage loans |
— | (158.8 | ) | |||||
| Change in short-term investments |
(566.4 | ) | 82.2 | |||||
| Settlements of foreign currency exchange forward contracts |
4.5 | (21.5 | ) | |||||
| Proceeds from business divestitures, net of cash transferred |
62.9 | 13.9 | ||||||
| Purchases of fixed assets, net |
(2.4 | ) | (2.3 | ) | ||||
|
|
|
|
|
|||||
| Cash provided by (used in) investing activities |
(322.1 | ) | (106.1 | ) | ||||
|
|
|
|
|
|||||
| Cash flows provided by (used in) financing activities: |
| |||||||
| Activity under stock incentive plans |
1.2 | 2.1 | ||||||
| Payment of cash dividends to preferred shareholders |
(7.9 | ) | (7.9 | ) | ||||
| Payment of cash dividends to common shareholders |
0.2 | (32.5 | ) | |||||
|
|
|
|
|
|||||
| Cash used in financing activities |
(6.5 | ) | (38.3 | ) | ||||
|
|
|
|
|
|||||
| Effect of exchange rate changes on cash |
0.3 | (1.8 | ) | |||||
|
|
|
|
|
|||||
| Net change in cash and restricted cash |
(56.8 | ) | (46.7 | ) | ||||
| Net change in cash balances classified as held-for-sale |
70.8 | — | ||||||
| Cash and restricted cash, beginning of year |
50.2 | 146.1 | ||||||
|
|
|
|
|
|||||
| Cash and restricted cash, end of period |
$ | 64.2 | $ | 99.4 | ||||
|
|
|
|
|
|||||
See accompanying notes.
8
ARGO GROUP INTERNATIONAL HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | Business and Significant Accounting Policies |
The accompanying Condensed Consolidated Financial Statements of Argo Group International Holdings, Ltd. and its subsidiaries (“Argo Group,” “we,” “us,” “our” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Argo Group is an underwriter of specialty insurance products in the property and casualty market.
The preparation of interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The major estimates reflected in our Condensed Consolidated Financial Statements include, but are not limited to, reserves for losses and loss adjustment expenses; reinsurance recoverables, including the reinsurance recoverables allowance for expected credit losses; fair value of investments and assessment of potential impairment, including the allowance for credit losses on fixed maturity securities; valuation of goodwill and our deferred tax asset valuation allowance. Actual results could materially differ from those estimates. Certain financial information that is normally included in annual Condensed Consolidated Financial Statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) (the “2022 Form 10-K”).
The interim financial information as of, and for the three and nine months ended, September 30, 2023 and 2022 is unaudited. However, in the opinion of management, the interim information includes all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results presented for the interim periods. The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany amounts have been eliminated in consolidation. Certain reclassifications have been made to financial information presented for prior years to conform to the current year’s presentation.
Loss Portfolio Transfer—U.S.
On November 9, 2022, the U.S. loss portfolio transaction with a wholly owned subsidiary Enstar Group Limited covering a majority of the Company’s U.S. casualty insurance reserves, including construction, for accident years 2011 to 2019 closed.
The financial statement impact of this transaction on the closing date, which was recorded in the fourth quarter of 2022, consisted mainly of ceded premiums for a total of $121.0 million and was reflected in Earned premiums in our Condensed Consolidated Statements of Income (Loss). In 2023, the reserves ceded under the U.S. loss portfolio transfer exceeded the consideration paid by $35.1 million, and is reflected as a deferred gain liability included in Accrued underwriting expenses and other liabilities on the Condensed Consolidated Balance Sheets, net of amortization. The deferred gain is amortized to earnings using the recovery method over the estimated claims settlement period.
Any potential future loss development on the U.S. loss portfolio transfer increases the deferred gain if unfavorable, or decreases the deferred gain if favorable, and a cumulative amortization adjustment based on the change in estimate is recorded to earnings.
Sale of Argo Underwriting Agency Limited
On September 8, 2022, Argo International Holdings Limited (the “Seller”), a wholly-owned subsidiary of the Company, and Ohio Farmers Insurance Company (the “Buyer”), part of the Westfield group of insurance companies, entered into a sale and purchase agreement (the “Transaction”) under which the Seller agreed to sell, and the Buyer agreed to purchase, the entire issued share capital of Argo Underwriting Agency Limited (“AUA”), for which the financial results are reported in our International segment. This transaction simplifies our reporting structure and is intended to drive greater efficiencies.
9
The base cash consideration for the purchase was $125.0 million, which was adjusted to reflect the extent by which AUA’s net assets at completion are greater or lesser than AUA net assets as of March 31, 2022. In the third quarter of 2022, as a result of the sale, an impairment was recorded in the amount of $28.5 million, consisting of $17.3 million of indefinite lived intangible assets and $11.2 million of goodwill, representing the difference between the carrying value and implied fair value as determined by the consideration to be received. In addition, the Buyer was obliged to replace certain funds provided by the Company to support the activities of AUA and certain of its subsidiaries at Lloyd’s of London, which would then be released to the Company.
As of December 31, 2022, the Company reported the assets and liabilities of this block of business as held-for-sale on Condensed Consolidated Balance Sheets with results continuing to be reported within the Condensed Consolidated Statements of Income (Loss) and the International Operations segment. The Company determined that the Transaction did not represent a strategic shift, and therefore, did not meet the requirements for discontinued operations.
On February 2, 2023, the Seller completed the sale of the entire issued share capital of AUA. At the closing, the Company received total consideration of $155.7 million, which included cash proceeds of $125.1 million as base consideration and an additional $30.6 million which was placed in escrow by the Buyer related to certain reinsurance-related recoverables. The funds in escrow may be released to the Seller over a period of two years following the closing. At the end of the two-year escrow period, any remaining balance of the escrow will be returned to the Buyer. As a result of the sale, we realized a loss of $20.3 million in the first quarter of 2023, which is included as a component of Net realized investment and other gains (losses) in our Condensed Consolidated Statements of Income (Loss). This loss is due to the realization of unrealized investment losses, which was previously a component of accumulated other comprehensive income.
Through the third quarter of 2023, $7.8 million of the consideration placed in escrow was released to the Company. In addition, the total consideration was adjusted to $161.3 million based on a mutually agreed final closing balance sheet, which resulted in an additional $5.6 million of cash proceeds received by the Company in July 2023.
Sale of ArgoGlobal SE
On June 22, 2022, we completed the sale of our Malta operations, ArgoGlobal Holdings (Malta) Ltd. and subsidiaries (“AGSE”) to RiverStone Holdings Limited (part of the RiverStone International Group) for €4.9 million (approximately $5.2 million), subject to the terms and conditions set forth in the purchase agreement. AGSE is one of the business units within our International Operations reporting segment. As a result, we realized a loss on the sale of AGSE of $21.3 million, which is included as a component of Net realized investment and other gains (losses) in our Condensed Consolidated Statements of Income (Loss). This amount includes $4.5 million of losses from the realization of historical foreign currency translation, which was previously a component of accumulated other comprehensive income.
Loss Portfolio Transfer
In April 2022, Argo Managing Agency Limited, for and on behalf of Lloyd’s Syndicate 1200, reached an agreement to enter into a loss portfolio transfer of the 2018 and 2019 years of account to Riverstone Managing Agency Limited, for and on behalf of Lloyd’s Syndicate 3500, retrospectively from January 1, 2022.
Sale of Argo Seguros Brasil S.A.
On February 15, 2022, we completed the sale of our Brazilian operations, Argo Seguros Brasil S.A. (“Argo Seguros”), to Spice Private Equity Ltd., an investment company focused on global private equity investments, for a purchase price of 160 million Brazilian Reais (approximately $30.5 million), subject to the terms and conditions set forth in the purchase agreement. Argo Seguros was one of the units within our International Operations reporting segment. As a result, we realized a loss on the sale of Argo Seguros of $28.5 million, which is included as a component of Net realized investment and other gains (losses) in our Condensed Consolidated Statements of Income (Loss). This loss was primarily attributable to the realization of historical foreign currency translation, which was previously a component of accumulated other comprehensive income. We previously recognized a $6.3 million loss during 2021 as we adjusted the carrying value of Argo Seguros to its fair value.
In third quarter of 2022, a final purchase price was established in the amount of 140 million Brazilian Reais (approximately $26.9 million). As a result, we realized a loss on the sale of Argo Seguros of $33.8 million in 2022, which is included as a component of Net realized investment and other gains (losses) in our Condensed Consolidated Statements of Income (Loss).
10
| 2. | Recently Issued Accounting Pronouncements |
On October 9, 2023, the Financial Accounting Standards Board issued Accounting Standards Update 2023-06—Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”). The amendments modify the disclosure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to or technical corrections of the current requirements and also facilitate the comparison of entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the SEC’s requirements. Further, the amendments align the requirements in the Codification with the SEC’s regulations.
The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The amendments in this Update should be applied prospectively.
We are currently evaluating the requirements of ASU 2023-06. However, as they apply to disclosure requirements, the adoption of the standard is not anticipated to have a material impact on our profitability, financial position or cash flows.
| 3. | Investments |
Included in our Assets held-for-sale at December 31, 2022 in our Condensed Consolidated Balance Sheets is $55.9 million of assets managed on behalf of the trade capital providers, who are third-party participants that provide underwriting capital to the operations of Syndicates 1200 and 1910. At September 30, 2023, the Company did not have any assets managed on behalf of the trade capital providers due the sale of AUA as described in Note 1, “Business and Significant Accounting Policies.”
11
Fixed Maturities
The amortized cost, gross unrealized gains, gross unrealized losses, allowance for credit losses, and fair value of fixed maturity investments were as follows:
September 30, 2023
| (in millions) | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Allowance for Credit Losses |
Fair Value |
|||||||||||||||
| Fixed maturities |
||||||||||||||||||||
| U.S. Governments |
$ | 392.6 | $ | — | $ | 28.1 | $ | — | $ | 364.5 | ||||||||||
| Foreign Governments |
36.7 | 0.3 | 8.0 | 1.1 | 27.9 | |||||||||||||||
| Obligations of states and political subdivisions |
105.4 | — | 10.1 | 0.5 | 94.8 | |||||||||||||||
| Corporate bonds |
1,324.7 | 0.5 | 144.8 | 2.7 | 1,177.7 | |||||||||||||||
| Commercial mortgage-backed securities |
328.1 | — | 56.7 | — | 271.4 | |||||||||||||||
| Residential mortgage-backed securities |
300.4 | 0.1 | 60.8 | — | 239.7 | |||||||||||||||
| Asset-backed securities |
142.7 | — | 12.3 | 0.1 | 130.3 | |||||||||||||||
| Collateralized loan obligations |
242.6 | 0.4 | 11.9 | — | 231.1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total fixed maturities |
$ | 2,873.2 | $ | 1.3 | $ | 332.7 | $ | 4.4 | $ | 2,537.4 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2022
| (in millions) | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Allowance for Credit Losses |
Fair Value |
|||||||||||||||
| Fixed maturities |
||||||||||||||||||||
| U.S. Governments |
$ | 410.9 | $ | — | $ | 30.2 | $ | — | $ | 380.7 | ||||||||||
| Foreign Governments |
35.6 | 0.3 | 6.7 | 0.8 | 28.4 | |||||||||||||||
| Obligations of states and political subdivisions |
109.9 | 0.4 | 10.1 | 0.4 | 99.8 | |||||||||||||||
| Corporate bonds |
1,394.8 | 0.9 | 160.0 | 1.6 | 1,234.1 | |||||||||||||||
| Commercial mortgage-backed securities |
337.4 | — | 52.0 | — | 285.4 | |||||||||||||||
| Residential mortgage-backed securities |
320.0 | 0.2 | 50.2 | — | 270.0 | |||||||||||||||
| Asset-backed securities |
153.4 | — | 14.2 | — | 139.2 | |||||||||||||||
| Collateralized loan obligations |
254.4 | 0.3 | 16.8 | — | 237.9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total fixed maturities |
$ | 3,016.4 | $ | 2.1 | $ | 340.2 | $ | 2.8 | $ | 2,675.5 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Contractual Maturity
The amortized cost and fair values of fixed maturity investments as of September 30, 2023, by contractual maturity, were as follows:
| (in millions) | Amortized Cost |
Fair Value |
||||||
| Due in one year or less |
$ | 244.2 | $ | 237.9 | ||||
| Due after one year through five years |
1,150.7 | 1,050.8 | ||||||
| Due after five years through ten years |
422.2 | 344.7 | ||||||
| Due after ten years |
42.3 | 31.5 | ||||||
| Structured securities |
1,013.8 | 872.5 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 2,873.2 | $ | 2,537.4 | ||||
|
|
|
|
|
|||||
The actual maturities may differ from the contractual maturities because debtors may have the right to call or prepay obligations.
12
Other Investments
Details regarding the carrying value and unfunded investment commitments of other investments as of September 30, 2023 and December 31, 2022 were as follows:
September 30, 2023
| (in millions) | Carrying Value |
Unfunded Commitments |
||||||
| Investment Type |
||||||||
| Hedge funds |
$ | 56.3 | $ | — | ||||
| Private equity |
264.8 | 96.9 | ||||||
| Other |
5.2 | — | ||||||
|
|
|
|
|
|||||
| Total other investments |
$ | 326.3 | $ | 96.9 | ||||
|
|
|
|
|
|||||
December 31, 2022
| (in millions) | Carrying Value |
Unfunded Commitments |
||||||
| Investment Type |
||||||||
| Hedge funds |
$ | 54.0 | $ | — | ||||
| Private equity |
264.6 | 108.9 | ||||||
| Other |
4.6 | — | ||||||
|
|
|
|
|
|||||
| Total other investments |
$ | 323.2 | $ | 108.9 | ||||
|
|
|
|
|
|||||
The following describes each investment type:
| • | Hedge funds: Hedge funds, carried at net asset value (“NAV”) as a practical expedient of fair value, include funds that primarily buy and sell stocks, including short sales, multi-strategy credit, relative value credit and distressed credit. |
| • | Private equity: Private equity includes buyout funds, real asset/infrastructure funds, credit special situations funds, mezzanine lending funds and direct investments and strategic non-controlling minority investments in private companies that are principally accounted for using the equity method of accounting. |
| • | Other: Other includes participation in investment pools. |
13
Unrealized Losses
An aging of unrealized losses on our investments in fixed maturities is presented below:
| September 30, 2023 | Less Than One Year | One Year or Greater | Total | |||||||||||||||||||||
| (in millions) | Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
| Fixed maturities |
| |||||||||||||||||||||||
| U.S. Governments |
$ | 3.9 | $ | 0.1 | $ | 360.5 | $ | 28.0 | $ | 364.4 | $ | 28.1 | ||||||||||||
| Foreign Governments |
10.3 | 1.7 | 13.8 | 6.3 | 24.1 | 8.0 | ||||||||||||||||||
| Obligations of states and political subdivisions |
8.9 | 0.2 | 84.8 | 9.9 | 93.7 | 10.1 | ||||||||||||||||||
| Corporate bonds |
26.2 | 1.8 | 1,129.2 | 143.0 | 1,155.4 | 144.8 | ||||||||||||||||||
| Commercial mortgage-backed securities |
0.6 | — | 270.7 | 56.7 | 271.3 | 56.7 | ||||||||||||||||||
| Residential mortgage-backed securities |
3.8 | 0.2 | 234.8 | 60.6 | 238.6 | 60.8 | ||||||||||||||||||
| Asset-backed securities |
1.5 | 0.1 | 125.2 | 12.2 | 126.7 | 12.3 | ||||||||||||||||||
| Collateralized loan obligations |
11.7 | 0.2 | 203.6 | 11.7 | 215.3 | 11.9 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total fixed maturities |
$ | 66.9 | $ | 4.3 | $ | 2,422.6 | $ | 328.4 | $ | 2,489.5 | $ | 332.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 31, 2022 | Less Than One Year | One Year or Greater | Total | |||||||||||||||||||||
| (in millions) | Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
| Fixed maturities |
||||||||||||||||||||||||
| U.S. Governments |
$ | 271.0 | $ | 18.1 | $ | 109.8 | $ | 12.1 | $ | 380.8 | $ | 30.2 | ||||||||||||
| Foreign Governments |
16.7 | 4.9 | 2.6 | 1.8 | 19.3 | 6.7 | ||||||||||||||||||
| Obligations of states and political subdivisions |
67.4 | 4.1 | 24.3 | 6.0 | 91.7 | 10.1 | ||||||||||||||||||
| Corporate bonds |
695.1 | 68.3 | 519.6 | 91.7 | 1,214.7 | 160.0 | ||||||||||||||||||
| Commercial mortgage-backed securities |
144.2 | 18.6 | 141.2 | 33.4 | 285.4 | 52.0 | ||||||||||||||||||
| Residential mortgage-backed securities |
88.7 | 8.8 | 178.8 | 41.4 | 267.5 | 50.2 | ||||||||||||||||||
| Asset-backed securities |
93.3 | 7.5 | 45.9 | 6.7 | 139.2 | 14.2 | ||||||||||||||||||
| Collateralized loan obligations |
181.1 | 13.3 | 44.2 | 3.5 | 225.3 | 16.8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total fixed maturities |
$ | 1,557.5 | $ | 143.6 | $ | 1,066.4 | $ | 196.6 | $ | 2,623.9 | $ | 340.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
We hold a total of 1,474 fixed maturity securities, of which 233 were in an unrealized loss position for less than one year and 1,225 were in an unrealized loss position for a period one year or greater as of September 30, 2023. The unrealized losses as of September 30, 2023 are primarily driven from interest rate movements.
Allowance for Credit Losses
For fixed maturities with a decline in fair value below the amortized cost due to credit-related factors, an allowance is established for the difference between the estimated recoverable value and amortized cost with a corresponding charge to Net investment and other gains (losses) in the Condensed Consolidated Statements of Income (Loss). The allowance is limited to the difference between amortized cost and fair value. The estimated recoverable value is the present value of cash flows expected to be collected, as determined by management. The difference between fair value and amortized cost that is not associated with credit-related factors is recognized in the Condensed Consolidated Statements of Comprehensive Income (Loss). Accrued interest is excluded from the measurement of the allowance for credit losses. When determining if a credit loss has been incurred, we may consider the historical performance of the security, available market information and security specific considerations such as the priority payment of the security. In addition, inputs used in our analysis include, but are not limited to, credit ratings and downgrades, delinquency rates, missed scheduled interest or principal payments, purchase yields, underlying asset performance, collateral types, modeled default rates, modeled severity rates, call/prepayment rates, expected cash flows, industry concentrations, and potential or filed bankruptcies or restructurings.
14
In cooperation with our investment managers, we evaluate for credit losses each quarter utilizing a bottom up review approach. At the security level, a determination is made as to whether a decline in fair value below the amortized cost basis is due to credit-related or noncredit-related factors. If we determine that all or a portion of a fixed maturity is uncollectible, the uncollectible amortized cost is written off with a corresponding reduction to the allowance for credit losses. If we collect cash flows that were previously written off, the recovery is recognized in Net investment and other gains (losses). We also consider whether we intend to sell an available-for-sale security or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost. In these instances, a decline in fair value is recognized in Net investment and other gains (losses) in the Condensed Consolidated Statements of Income (Loss) based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security.
The following table presents a roll-forward of the changes in allowance for credit losses on available-for-sale fixed maturities by industry category for the three and nine months ending September 30, 2023 and 2022, respectively:
| (in millions) | Foreign Governments |
Obligations of states and political subdivisions |
Corporate bonds |
Asset backed securities |
Total | |||||||||||||||
| Beginning balance, June 30, 2023 |
$ | 1.0 | $ | — | $ | 1.4 | $ | 0.1 | $ | 2.5 | ||||||||||
| Securities for which allowance was not previously recorded |
— | 0.5 | 1.4 | — | 1.9 | |||||||||||||||
| Securities sold during the period |
— | — | (0.1 | ) | — | (0.1 | ) | |||||||||||||
| Reductions for credit impairments |
— | — | — | — | — | |||||||||||||||
| Additional net increases (decreases) in existing allowance |
0.1 | — | — | — | 0.1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Ending balance, September 30, 2023 |
$ | 1.1 | $ | 0.5 | $ | 2.7 | $ | 0.1 | $ | 4.4 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (in millions) | Foreign Governments |
Obligations of states and political subdivisions |
Corporate bonds |
Asset backed securities |
Total | |||||||||||||||
| Beginning balance, June 30, 2022 |
$ | 0.5 | $ | 0.4 | $ | 1.0 | $ | 0.1 | $ | 2.0 | ||||||||||
| Securities for which allowance was not previously recorded |
0.1 | — | 1.1 | — | 1.2 | |||||||||||||||
| Securities sold during the period |
— | — | — | — | — | |||||||||||||||
| Reductions for credit impairments |
— | — | — | — | — | |||||||||||||||
| Additional net increases (decreases) in existing allowance |
0.1 | — | — | — | 0.1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Ending balance, September 30, 2022 |
$ | 0.7 | $ | 0.4 | $ | 2.1 | $ | 0.1 | $ | 3.3 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (in millions) | Foreign Governments |
Obligations of states and political subdivisions |
Corporate bonds |
Asset backed securities |
Total | |||||||||||||||
| Beginning balance, January 1, 2023 |
$ | 0.7 | $ | 0.4 | $ | 1.6 | $ | 0.1 | $ | 2.8 | ||||||||||
| Securities for which allowance was not previously recorded |
0.1 | 0.5 | 2.1 | — | 2.7 | |||||||||||||||
| Securities sold during the period |
— | — | (0.5 | ) | — | (0.5 | ) | |||||||||||||
| Reductions for credit impairments |
— | — | — | — | — | |||||||||||||||
| Additional net increases (decreases) in existing allowance |
0.3 | (0.4 | ) | (0.5 | ) | — | (0.6 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Ending balance, September 30, 2023 |
$ | 1.1 | $ | 0.5 | $ | 2.7 | $ | 0.1 | $ | 4.4 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
15
| (in millions) | Foreign Governments |
Obligations of states and political subdivisions |
Corporate bonds |
Asset backed securities |
Total | |||||||||||||||
| Beginning balance, January 1, 2022 |
$ | 0.2 | $ | — | $ | 2.2 | $ | 0.1 | $ | 2.5 | ||||||||||
| Securities for which allowance was not previously recorded |
0.4 | — | 1.6 | — | 2.0 | |||||||||||||||
| Securities sold during the period |
(0.1 | ) | — | (0.6 | ) | — | (0.7 | ) | ||||||||||||
| Reductions for credit impairments |
— | — | (1.4 | ) | — | (1.4 | ) | |||||||||||||
| Additional net increases (decreases) in existing allowance |
0.2 | 0.4 | 0.3 | — | 0.9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Ending balance, September 30, 2022 |
$ | 0.7 | $ | 0.4 | $ | 2.1 | $ | 0.1 | $ | 3.3 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
The change in allowance for credit losses on fixed maturity securities, included in Net investment and other gains (losses) in the Condensed Consolidated Statements of Income (Loss) was $2.0 million and $2.1 million for the three and nine months ended September 30, 2023, respectively. The change in allowance for credit losses on fixed maturity securities, included in Net investment and other gains (losses) in the Condensed Consolidated Statements of Income (Loss) was $1.3 million and $2.9 million for the three and nine months ended September 30, 2022.
For commercial mortgage loans an allowance for credit losses is established at the time of origination or purchase, as necessary, and is updated each reporting period. Changes in the allowance for credit losses are recorded in Net investment and other gains (losses). This allowance reflects the risk of loss, even when that risk is remote, that is expected over the remaining contractual life of the loan. The allowance for credit losses considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts of future economic conditions.
16
Commercial Mortgage Loans
Commercial mortgage loan investments are composed of participation interests in a portfolio of commercial mortgage loans. Loan collateral is diversified with regard to property type and geography. The following table presents loans by property type:
| September 30, 2023 | ||||||||||||
| (in millions) | Cost | Composition | Loan Count | |||||||||
| Apartments |
$ | 87.4 | 54.7 | % | 16 | |||||||
| Hotel |
25.0 | 15.6 | % | 4 | ||||||||
| Industrial |
26.2 | 16.4 | % | 4 | ||||||||
| Retail |
21.3 | 13.3 | % | 4 | ||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 159.9 | 100.0 | % | 28 | |||||||
|
|
|
|
|
|
|
|||||||
| December 31, 2022 | ||||||||||||
| (in millions) | Cost | Composition | Loan Count | |||||||||
| Apartments |
$ | 87.4 | 54.5 | % | 16 | |||||||
| Hotel |
25.0 | 15.6 | % | 4 | ||||||||
| Industrial |
26.0 | 16.3 | % | 4 | ||||||||
| Retail |
21.5 | 13.6 | % | 4 | ||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 159.9 | 100.0 | % | 28 | |||||||
|
|
|
|
|
|
|
|||||||
The following table presents our loans by Debt Service Coverage Ratio (“DSCR”):
| September 30, 2023 | ||||||||
| (in millions) | Cost | Loan Count | ||||||
| Less than 1.00 |
$ | 40.8 | 8 | |||||
| 1.00 to 1.50 |
20.1 | 4 | ||||||
| Greater than 1.5 to 2.0 |
36.3 | 6 | ||||||
| Greater than 2.0 to 3.0 |
47.7 | 8 | ||||||
| Greater than 3.0 to 4.0 |
15.0 | 2 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 159.9 | 28 | |||||
|
|
|
|
|
|||||
| December 31, 2022 | ||||||||
| (in millions) | Cost | Loan Count | ||||||
| 1.00 to 1.50 |
$ | 10.4 | 2 | |||||
| Greater than 1.5 to 2.0 |
60.4 | 10 | ||||||
| Greater than 2.0 to 3.0 |
52.0 | 10 | ||||||
| Greater than 3.0 to 4.0 |
25.8 | 4 | ||||||
| Greater than 4.0 |
11.3 | 2 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 159.9 | 28 | |||||
|
|
|
|
|
|||||
17
The following table presents loans by Loan To Value (“LTV”):
| September 30, 2023 | ||||||||
| (in millions) | Cost | Loan Count | ||||||
| Equal to or less than 50.0% |
$ | 15.0 | 2 | |||||
| Greater than 50.0% to 55.0% |
9.1 | 2 | ||||||
| Greater than 55.0% to 60.0% |
31.8 | 6 | ||||||
| Greater than 60.0% to 70.0% |
62.9 | 10 | ||||||
| Greater than 70.0% |
41.1 | 8 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 159.9 | 28 | |||||
|
|
|
|
|
|||||
| December 31, 2022 | ||||||||
| (in millions) | Cost | Loan Count | ||||||
| Equal to or less than 50.0% |
$ | 36.7 | 6 | |||||
| Greater than 50.0% to 55.0% |
9.1 | 2 | ||||||
| Greater than 55.0% to 60.0% |
42.6 | 8 | ||||||
| Greater than 60.0% to 70.0% |
71.5 | 12 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 159.9 | 28 | |||||
|
|
|
|
|
|||||
The following table presents loans by maturity:
| September 30, 2023 | ||||||||
| (in millions) | Cost | Loan Count | ||||||
| One Year or Less |
$ | 19.8 | 4 | |||||
| Greater than One Year and Less than Three |
35.0 | 6 | ||||||
| Greater than Three Years and Less than Five Years |
33.8 | 6 | ||||||
| Greater than Five Years and Less than Seven Years |
20.4 | 4 | ||||||
| Greater than Seven Years and Less than Ten Years |
50.9 | 8 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 159.9 | 28 | |||||
|
|
|
|
|
|||||
| December 31, 2022 | ||||||||
| (in millions) | Cost | Loan Count | ||||||
| Greater than One Year and Less than Three |
54.8 | 10 | ||||||
| Greater than Three Years and Less than Five Years |
33.8 | 6 | ||||||
| Greater than Five Years and Less than Seven Years |
20.4 | 4 | ||||||
| Greater than Seven Years and Less than Ten Years |
50.9 | 8 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 159.9 | 28 | |||||
|
|
|
|
|
|||||
18
Investment Gains and Losses
The following table presents our gross realized investment gains and losses:
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Realized gains on fixed maturities and other: |
||||||||||||||||
| Fixed maturities |
$ | — | $ | 1.1 | $ | 0.6 | $ | 17.0 | ||||||||
| Other investments, including short-term investments |
2.9 | 7.8 | 13.1 | 19.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total realized gains on fixed maturities and other |
2.9 | 8.9 | 13.7 | 36.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Realized losses on fixed maturities and other: |
||||||||||||||||
| Fixed maturities |
(1.4 | ) | (3.5 | ) | (25.1 | ) | (24.9 | ) | ||||||||
| Other investments, including short-term investments |
(4.1 | ) | (12.1 | ) | (10.9 | ) | (40.1 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total realized losses on fixed maturities and other |
(5.5 | ) | (15.6 | ) | (36.0 | ) | (65.0 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Other net losses recognized on fixed maturities and other: |
||||||||||||||||
| Credit losses on fixed maturities |
(2.0 | ) | (1.5 | ) | (5.0 | ) | (4.9 | ) | ||||||||
| Impairment related to change in intent |
— | (34.2 | ) | — | (34.2 | ) | ||||||||||
| Other(1) |
(3.2 | ) | (1.4 | ) | (6.7 | ) | (55.1 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total other net losses recognized on fixed maturities and other |
(5.2 | ) | (37.1 | ) | (11.7 | ) | (94.2 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Equity securities: |
||||||||||||||||
| Net realized gains (losses) on equity securities |
9.2 | 0.2 | 6.9 | 0.2 | ||||||||||||
| Change in unrealized gains (losses) on equity securities held at the end of the period |
(6.1 | ) | (1.1 | ) | 6.1 | 2.5 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net gains (losses) on equity securities |
3.1 | (0.9 | ) | 13.0 | 2.7 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net investment and other gains (losses) before income taxes |
(4.7 | ) | (44.7 | ) | (21.0 | ) | (119.6 | ) | ||||||||
| Income tax (benefit) provision |
(0.5 | ) | (7.0 | ) | (5.8 | ) | (8.8 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net investment and other gains (losses), net of income taxes |
$ | (4.2 | ) | $ | (37.7 | ) | $ | (15.2 | ) | $ | (110.8 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | For the three and nine months ended September 30, 2022, refer to the sale of AGSE and Argo Seguros in Note 1, “Business and Significant Accounting Policies” for additional information. |
The cost of securities sold is based on the specific identification method.
Changes in unrealized gains (losses) related to fixed maturity investments are summarized as follows:
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Change in unrealized gains (losses) |
||||||||||||||||
| Fixed maturities |
$ | (19.5 | ) | $ | (88.9 | ) | $ | 26.9 | $ | (417.6 | ) | |||||
| Other and short-term investments |
0.3 | (1.2 | ) | (0.2 | ) | (0.3 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net unrealized investment gains (losses) before income taxes |
(19.2 | ) | (90.1 | ) | 26.7 | (417.9 | ) | |||||||||
| Income tax provision (benefit) |
(3.7 | ) | (14.2 | ) | 4.7 | (77.3 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net unrealized investment gains (losses), net of income taxes |
$ | (15.5 | ) | $ | (75.9 | ) | $ | 22.0 | $ | (340.6 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
19
Foreign Currency Exchange Forward Contracts
We enter into foreign currency exchange forward contracts to manage operational currency exposure from our non-USD insurance operations, and to hedge certain non-USD investment portfolio securities. The currency forward contracts are carried at fair value in our Condensed Consolidated Balance Sheets in Other liabilities and Other assets at September 30, 2023 and December 31, 2022, respectively. The net realized gains and (losses) are included in Net realized investment and other gains (losses) in our Condensed Consolidated Statements of Income (Loss).
The fair value of our foreign currency exchange forward contracts as of September 30, 2023 and December 31, 2022 was as follows:
| September 30, 2023 |
December 31, 2022 | |||||||||||||||
| (in millions) | Notional Amount |
Fair Value |
Notional Amount |
Fair Value |
||||||||||||
| Operational currency |
||||||||||||||||
| Open contracts in a gain position |
$ | 77.0 | $ | 0.4 | $ | 108.4 | $ | 6.3 | ||||||||
| Open contracts in a loss position |
45.7 | (0.1 | ) | 39.7 | (0.5 | ) | ||||||||||
|
|
|
|
|
|||||||||||||
| Net open contracts for operational currency |
$ | 0.3 | $ | 5.8 | ||||||||||||
|
|
|
|
|
|||||||||||||
| Asset manager investment exposure |
||||||||||||||||
| Open contracts in a gain position |
$ | 43.7 | $ | 0.9 | $ | 42.1 | $ | 42.1 | ||||||||
| Open contracts in a loss position |
— | — | 39.5 | (42.7 | ) | |||||||||||
|
|
|
|
|
|||||||||||||
| Net open contracts for asset manager investment exposure |
|
0.9 | (0.6 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Total |
|
$ | 1.2 | $ | 5.2 | |||||||||||
|
|
|
|
|
|||||||||||||
The following table presents our gross realized investment gains and losses on our foreign currency exchange forward contracts:
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Realized gains |
||||||||||||||||
| Operational currency exposure |
$ | 0.7 | $ | 4.7 | $ | 9.6 | $ | 12.5 | ||||||||
| Asset manager investment exposure |
1.6 | 3.1 | 1.5 | 7.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Gross realized investment gains |
2.3 | 7.8 | 11.1 | 19.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Realized losses |
||||||||||||||||
| Operational currency exposure |
(3.8 | ) | (11.2 | ) | (10.6 | ) | (36.7 | ) | ||||||||
| Asset manager investment exposure |
— | — | — | (1.0 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Gross realized investment losses |
(3.8 | ) | (11.2 | ) | (10.6 | ) | (37.7 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net realized investment (losses) gains on foreign currency exchange forward contracts |
$ | (1.5 | ) | $ | (3.4 | ) | $ | 0.5 | $ | (17.9 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
Regulatory Deposits, Pledged Securities and Letters of Credit
We are required to maintain assets on deposit with various regulatory authorities to support our insurance and reinsurance operations. We maintain assets pledged as collateral in support of irrevocable letters of credit issued under the terms of certain reinsurance agreements for reported loss and loss expense reserves. The following table presents our components of restricted assets:
| (in millions) | September 30, 2023 | December 31, 2022 | ||||||
| Securities on deposit for regulatory and other purposes |
$ | 141.2 | $ | 149.3 | ||||
| Securities pledged as collateral for letters of credit and other |
104.5 | 169.8 | ||||||
| Securities on deposit supporting Lloyd’s business (1) |
— | 171.4 | ||||||
|
|
|
|
|
|||||
| Total restricted investments |
$ | 245.7 | $ | 490.5 | ||||
|
|
|
|
|
|||||
| (1) | During the second quarter 2023, the funds at Lloyd’s (FAL) previously used to support the activities of AUA and its subsidiaries, were released to the Company. |
20
Fair Value Measurements
Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market. Market participants are buyers and sellers in the principal (or most advantageous) market that are independent, knowledgeable, able to transact for the asset or liability and willing to transfer the asset or liability.
Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value. The inputs of these valuation techniques are categorized into three levels.
| • | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the reporting date. We define actively traded as a security that has traded in the past seven days. |
| • | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. We receive one quote per instrument for Level 2 inputs. |
| • | Level 3 inputs are unobservable inputs. Unobservable inputs reflect our own judgments about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. To validate the fair value of investments in the Company’s Condensed Consolidated Financial Statements, we receive prices from multiple sources including third-party pricing services and our outside investment managers. Through a comparative analysis, the Company validates the reasonableness of its valuations. These prices are determined using observable market information such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. We have reviewed the processes used by the third-party providers for pricing the securities and have determined that these processes result in fair values consistent with GAAP requirements. In addition, we review these prices for reasonableness, and have not adjusted any prices received from the third-party providers as of September 30, 2023 and December 31, 2022. A description of the valuation techniques we use to measure assets at fair value is as follows: |
Fixed Maturities (Available-for-Sale) Levels 1 and 2:
| • | United States Treasury securities are typically valued using Level 1 inputs. For these securities, we obtain fair value measurements from third-party pricing services using quoted prices (unadjusted) in active markets at the reporting date. |
| • | United States Government agencies, non-U.S. Government securities, obligations of states and political subdivisions, credit securities and foreign denominated government and credit securities are reported at fair value using Level 2 inputs. For these securities, we obtain fair value measurements from third-party pricing services. Observable data may include dealer quotes, market spreads, yield curves, live trading levels, trade execution data, credit information and the security’s terms and conditions, among other things. |
| • | Asset and mortgage-backed securities and collateralized loan obligations are reported at fair value using Level 2 inputs. For these securities, we obtain fair value measurements from third-party pricing services. Observable data may include dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. |
Fixed Maturities (Available-for-Sale) Levels 3: We own term loans and asset-back securities that are valued using unobservable inputs.
Equity Securities Level 1: Equity securities are principally reported at fair value using Level 1 inputs. For these securities, we obtain fair value measurements from a third-party pricing service using quoted prices (unadjusted) in active markets at the reporting date.
Equity Securities Level 3: We own certain equity securities that are reported at fair value using Level 3 inputs. The valuation techniques for these securities include the following:
| • | Fair value measurements for an investment in an equity fund obtained by applying final prices provided by the administrator of the fund, which is based upon certain estimates and assumptions. |
| • | Fair value measurements from brokers and independent valuation services, both based upon estimates, assumptions and other unobservable inputs. |
21
Other Investments Level 2: Foreign regulatory deposits are assets held in trust in jurisdictions where there is a legal and regulatory requirement to maintain funds locally in order to protect policyholders. Lloyd’s is the appointed investment manager for the funds. These assets are invested in short-term government securities, agency securities and corporate bonds and are valued using Level 2 inputs based upon values obtained from Lloyd’s.
Short-term Investments: Short-term investments are principally reported at fair value using Level 1 inputs, with the exception of short-term corporate and governmental bonds reported at fair value using Level 2 inputs as described in the fixed maturities section above. Values for the investments categorized as Level 1 are obtained from various financial institutions as of the reporting date.
Based on an analysis of the inputs, our financial assets and liabilities measured at fair value on a recurring basis have been categorized as follows:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| (in millions) | September 30, 2023 |
Level 1 (1) | Level 2 (2) | Level 3 (3) | ||||||||||||
| Fixed maturities |
||||||||||||||||
| U.S. Governments |
$ | 364.5 | $ | 362.4 | $ | 2.1 | $ | — | ||||||||
| Foreign Governments |
27.9 | — | 27.9 | — | ||||||||||||
| Obligations of states and political subdivisions |
94.8 | — | 94.8 | — | ||||||||||||
| Corporate bonds |
1,177.7 | — | 1,155.6 | 22.1 | ||||||||||||
| Commercial mortgage-backed securities |
271.4 | — | 271.4 | — | ||||||||||||
| Residential mortgage-backed securities |
239.7 | — | 239.7 | — | ||||||||||||
| Asset-backed securities |
130.3 | — | 112.6 | 17.7 | ||||||||||||
| Collateralized loan obligations |
231.1 | — | 231.1 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total fixed maturities |
2,537.4 | 362.4 | 2,135.2 | 39.8 | ||||||||||||
| Equity securities |
11.6 | 4.4 | — | 7.2 | ||||||||||||
| Other investments |
0.9 | — | 0.9 | — | ||||||||||||
| Short-term investments |
1,222.7 | 1,222.5 | 0.2 | — | ||||||||||||
| Derivatives |
1.2 | — | 1.2 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total assets |
$ | 3,773.8 | $ | 1,589.3 | $ | 2,137.5 | $ | 47.0 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Quoted prices in active markets for identical assets |
| (2) | Significant other observable inputs |
| (3) | Significant unobservable inputs |
22
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| (in millions) | December 31, 2022 |
Level 1 (1) | Level 2 (2) | Level 3 (3) | ||||||||||||
| Fixed maturities |
| |||||||||||||||
| U.S. Governments |
$ | 380.7 | $ | 378.7 | $ | 2.0 | $ | — | ||||||||
| Foreign Governments |
28.4 | — | 28.4 | — | ||||||||||||
| Obligations of states and political subdivisions |
99.8 | — | 99.8 | — | ||||||||||||
| Corporate bonds |
1,234.1 | — | 1,212.1 | 22.0 | ||||||||||||
| Commercial mortgage-backed securities |
285.4 | — | 285.4 | — | ||||||||||||
| Residential mortgage-backed securities |
270.0 | — | 270.0 | — | ||||||||||||
| Asset-backed securities |
139.2 | — | 120.5 | 18.7 | ||||||||||||
| Collateralized loan obligations |
237.9 | — | 237.9 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total fixed maturities |
2,675.5 | 378.7 | 2,256.1 | 40.7 | ||||||||||||
| Equity securities |
43.9 | 28.4 | — | 15.5 | ||||||||||||
| Other investments |
0.3 | — | 0.3 | — | ||||||||||||
| Short-term investments |
449.6 | 449.3 | 0.3 | — | ||||||||||||
| Derivatives |
5.2 | — | 5.2 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total assets |
$ | 3,174.5 | $ | 856.4 | $ | 2,261.9 | $ | 56.2 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Quoted prices in active markets for identical assets |
| (2) | Significant other observable inputs |
| (3) | Significant unobservable inputs |
The fair value measurements in the tables above do not equal Total investments on our Condensed Consolidated Balance Sheets as they primarily exclude other investments that are accounted for under the equity-method of accounting as well as hedge funds which are carried at NAV as a practical expedient.
A reconciliation of the beginning and ending balances for the investments categorized as Level 3 are as follows:
Fair Value Measurements Using Unobservable Inputs (Level 3)
| (in millions) | Credit Financial |
Equity Securities |
Total | |||||||||
| Beginning balance, January 1, 2023 |
$ | 40.7 | $ | 15.5 | $ | 56.2 | ||||||
| Transfers into Level 3 |
5.6 | — | 5.6 | |||||||||
| Transfers out of Level 3 |
(5.6 | ) | (7.6 | ) | (13.2 | ) | ||||||
| Total gains or losses (realized/unrealized): |
||||||||||||
| Included in net income |
(0.2 | ) | 0.4 | 0.2 | ||||||||
| Included in other comprehensive income |
0.3 | — | 0.3 | |||||||||
| Purchases, issuances, sales, and settlements: |
||||||||||||
| Purchases |
0.6 | — | 0.6 | |||||||||
| Issuances |
— | — | — | |||||||||
| Sales |
(0.5 | ) | (1.1 | ) | (1.6 | ) | ||||||
| Settlements |
(1.1 | ) | — | (1.1 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Ending balance, September 30, 2023 |
$ | 39.8 | $ | 7.2 | $ | 47.0 | ||||||
|
|
|
|
|
|
|
|||||||
| Amount of total gains or losses for the year included in net income attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2023 |
$ | — | ||||||||||
23
| (in millions) | Credit Financial |
Equity Securities |
Total | |||||||||
| Beginning balance, January 1, 2022 |
$ | 2.8 | $ | 14.7 | $ | 17.5 | ||||||
| Transfers into Level 3 |
36.1 | 1.5 | 37.6 | |||||||||
| Transfers out of Level 3 |
— | — | — | |||||||||
| Total gains or losses (realized/unrealized): |
||||||||||||
| Included in net income |
(0.4 | ) | (0.7 | ) | (1.1 | ) | ||||||
| Included in other comprehensive loss |
(4.8 | ) | — | (4.8 | ) | |||||||
| Purchases, issuances, sales, and settlements: |
||||||||||||
| Purchases |
9.0 | 1.0 | 10.0 | |||||||||
| Issuances |
— | — | — | |||||||||
| Sales |
(2.0 | ) | (1.0 | ) | (3.0 | ) | ||||||
| Settlements |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Ending balance, December 31, 2022 |
$ | 40.7 | $ | 15.5 | $ | 56.2 | ||||||
|
|
|
|
|
|
|
|||||||
| Amount of total gains or losses for the year included in net income attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2022 |
$ | — | $ | (4.4 | ) | $ | (4.4 | ) | ||||
At September 30, 2023 and December 31, 2022, we did not have any financial assets or financial liabilities measured at fair value on a nonrecurring basis or any financial liabilities on a recurring basis.
The Company holds investments in commercial mortgage loans reported at cost, less an allowance for expected credit losses, on the Condensed Consolidated Balance Sheets. The fair value of the Company’s investments in commercial mortgage loans is estimated using a discounted cash flow analysis. Due to the level of unobservable inputs factored into the estimation of fair value, the valuation would be categorized as Level 3. The cost and estimated fair value of the investments in commercial mortgage loans were:
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| (in millions) | Cost | Fair Value | Cost | Fair Value | ||||||||||||
| Commercial mortgage loans |
$ | 159.9 | $ | 149.1 | $ | 159.9 | $ | 150.7 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
24
| 4. | Allowance for Credit Losses |
Premiums receivable
The following table presents the balances of premiums receivable, net of allowance for expected credit losses, at September 30, 2023, December 31, 2022, and December 31, 2021 and the changes in the allowance for expected credit losses for the nine months ended September 30, 2023 and the year ended December 31, 2022.
| (in millions) | Premiums Receivable, Net of Allowance for Estimated Uncollectible Premiums |
Allowance for Estimated Uncollectible Premiums |
||||||
| Balance, December 31, 2021 |
$ | 648.6 | $ | 5.7 | ||||
|
|
|
|||||||
| Current period change for estimated uncollectible premiums |
0.2 | |||||||
| Write-offs of uncollectible premiums receivable |
(1.2 | ) | ||||||
|
|
|
|||||||
| Balance, December 31, 2022 |
$ | 292.0 | $ | 4.7 | ||||
|
|
|
|||||||
| Current period change for estimated uncollectible premiums |
5.1 | |||||||
| Write-offs of uncollectible premiums receivable |
(2.4 | ) | ||||||
|
|
|
|||||||
| Balance, September 30, 2023 |
$ | 269.7 | $ | 7.4 | ||||
|
|
|
|||||||
Reinsurance Recoverables
The following table presents the balances of reinsurance recoverables, net of the allowance for estimated uncollectible reinsurance, at September 30, 2023, December 31, 2022, and December 31, 2021 and the changes in the allowance for estimated uncollectible reinsurance for the nine months ended September 30, 2023 and the year ended December 31, 2022.
| (in millions) | Reinsurance Recoverables, Net of Allowance for Estimated Uncollectible Reinsurance |
Allowance for Estimated Uncollectible Reinsurance |
||||||
| Balance, December 31, 2021 |
$ | 2,966.4 | $ | 3.8 | ||||
|
|
|
|||||||
| Current period change for estimated uncollectible premiums |
1.7 | |||||||
| Reclassified to assets held-for-sale |
(0.8 | ) | ||||||
|
|
|
|||||||
| Balance, December 31, 2022 |
$ | 3,029.1 | $ | 4.7 | ||||
|
|
|
|||||||
| Balance, September 30, 2023 |
$ | 2,889.6 | $ | 4.7 | ||||
|
|
|
|||||||
We primarily utilize A.M. Best credit ratings when determining the allowance and adjust as needed based on our historical experience with the reinsurers. A portion of our reinsurance recoverables are collateralized by letters of credit, funds held or trust agreements.
25
| 5. | Reserves for Losses and Loss Adjustment Expenses |
The following table provides a reconciliation of reserves for losses and loss adjustment expenses (“LAE”):
| For the Nine Months Ended September 30, |
||||||||
| (in millions) | 2023 | 2022 | ||||||
| Net reserves—beginning of the year |
$ | 2,213.1 | $ | 3,123.2 | ||||
|
|
|
|
|
|||||
| Add: |
||||||||
| Losses and LAE incurred during current calendar year, net of reinsurance: |
||||||||
| Current accident year |
680.9 | 826.8 | ||||||
| Prior accident years |
126.0 | 31.6 | ||||||
|
|
|
|
|
|||||
| Losses and LAE incurred during calendar year, net of reinsurance |
806.9 | 858.4 | ||||||
| Deduct: |
||||||||
| Losses and LAE payments made during current calendar year, net of reinsurance: |
||||||||
| Current accident year |
94.9 | 112.0 | ||||||
| Prior accident years |
361.6 | 623.2 | ||||||
|
|
|
|
|
|||||
| Losses and LAE payments made during current calendar year, net of reinsurance: |
456.5 | 735.2 | ||||||
| Add/(Deduct): |
||||||||
| Divestitures (1) |
24.4 | (35.2 | ) | |||||
| Retroactive reinsurance (2) |
21.7 | — | ||||||
| Deferred gain on U.S. loss portfolio transfer, net of amortization |
(16.8 | ) | — | |||||
| Syndicate 1200 loss portfolio transfer (for years of account 2018 and 2019) (3) |
— | (175.5 | ) | |||||
| Change in participation interest (4) |
— | 32.2 | ||||||
|
|
|
|
|
|||||
| Total net reserve adjustments |
29.3 | (178.5 | ) | |||||
| Foreign exchange adjustments |
0.9 | (10.6 | ) | |||||
|
|
|
|
|
|||||
| Net reserves—end of period |
2,593.7 | 3,057.3 | ||||||
| Add: |
||||||||
| Reinsurance recoverables on unpaid losses and LAE, end of period |
2,735.0 | 2,674.1 | ||||||
|
|
|
|
|
|||||
| Gross reserves—end of period |
$ | 5,328.7 | $ | 5,731.4 | ||||
|
|
|
|
|
|||||
| (1) | For the nine months ended September 30, 2023, the adjustment relates to the year-to-date activity of Syndicate 1200 and on reinsurance contracts with AUA subsidiaries. Refer to the sale of AUA in Note 1, “Business and Significant Accounting Policies” for additional information. For the nine months ended September 30, 2022, refer to the sale of Argo Seguros and AGSE in Note 1, “Business and Significant Accounting Policies” for additional information. |
| (2) | In connection with the sale of AUA, the Company entered into two retroactive reinsurance agreements with AUA subsidiaries. |
| (3) | Loss portfolio transfer on Syndicate 1200’s reserves for the 2018 and 2019 years of account. Refer to Note 1, “Business and Significant Accounting Policies” for additional information. |
| (4) | Amount represents the change in reserves due to changing our participation in Syndicates 1200 and 1910. For the nine months ended September 30, 2023, the balance has been reduced to zero as a result of the sale of AUA. |
Reserves for losses and LAE represent the estimated indemnity cost and related adjustment expenses necessary to investigate and settle claims. Such estimates are based upon individual case estimates for reported claims, estimates from ceding companies for reinsurance assumed and actuarial estimates for losses that have been incurred but not yet reported to the insurer. Any change in probable ultimate liabilities is reflected in current operating results.
26
The impact from the (favorable) unfavorable development of prior accident years’ loss and LAE reserves on each reporting segment is presented below:
| For the Nine Months Ended September 30, |
||||||||
| (in millions) | 2023 | 2022 | ||||||
| U.S. Operations |
$ | 111.7 | $ | 27.9 | ||||
| International Operations |
11.7 | 0.8 | ||||||
| Run-off Lines |
2.6 | 2.9 | ||||||
|
|
|
|
|
|||||
| Total (favorable) unfavorable prior-year development |
$ | 126.0 | $ | 31.6 | ||||
|
|
|
|
|
|||||
The following describes the primary factors behind each segment’s net prior accident year reserve development for the nine months ended September 30, 2023 and 2022:
Nine months ended September 30, 2023:
| • | U.S. Operations: Net unfavorable development primarily related to liability and professional lines partially offset by favorable development in specialty lines. The liability lines development was driven by actual losses greater than expected including the impact of large claims with a significant portion of the unfavorable development coming from businesses we have exited. The professional lines development was driven by movements on individual management liability claims. The favorable development in specialty lines was due to a lack of claim activity in surety business. |
| • | International Operations: Net unfavorable development primarily related to movements on claims in professional and liability lines in our Bermuda operations partially offset by favorable development in runoff Reinsurance lines. |
| • | Run-off Lines: Net unfavorable loss reserve development on prior accident years in other run-off lines. |
Nine months ended September 30, 2022:
| • | U.S. Operations: Unfavorable development primarily related to liability and property lines, including the impact of large losses, partially offset by favorable development in specialty lines. The unfavorable prior year development was largely driven by businesses we have exited, and relates to accident years 2019 and prior partially offset by favorable prior year development on accident years 2020 and 2021. |
| • | International Operations: Unfavorable development primarily related to unfavorable movements in professional lines in Argo Insurance Bermuda, partially offset by favorable development in Syndicate 1200 property and liability lines. |
| • | Run-off Lines: Unfavorable loss reserve development on prior accident years in other run-off lines. |
Our reserves represent the best estimate of our ultimate liabilities, based on currently known facts, current law, current technology and reasonable assumptions where facts are not known. Due to the significant uncertainties and related management judgments, there can be no assurance that future favorable or unfavorable loss development, which may be material, will not occur.
| 6. | Disclosures About Fair Value of Financial Instruments |
Cash. The carrying amount approximates fair value.
Investment securities, commercial mortgage loan investments, and short-term investments. See Note 3, “Investments,” for additional information.
Premiums receivable and reinsurance recoverables on paid losses. The carrying value of current receivables and reinsurance recoverables on paid losses approximates fair value due to short term nature.
Debt. At September 30, 2023 and December 31, 2022, the fair value of our debt instruments is determined using both Level 1 and Level 2 inputs, as previously defined in Note 3, “Investments.”
27
We receive fair value prices for similar financial instruments being traded in active markets. These prices are determined using observable market information such as publicly traded quoted prices, and trading prices for similar financial instruments actively being traded in the current market. We have reviewed the processes used by the third-party providers for pricing the instruments and have determined that these processes result in fair values consistent with GAAP requirements. In addition, we review these prices for reasonableness, and have not adjusted any prices received from the third-party providers as of September 30, 2023 and December 31, 2022. A description of the valuation techniques we use to measure these liabilities at fair value is as follows:
Senior Unsecured Fixed Rate Notes Level 1:
| • | Our senior unsecured fixed rate notes are valued using Level 1 inputs. For these securities, we obtain fair value measurements from a third-party pricing service using quoted prices (unadjusted) in active markets at the reporting date. |
Junior Subordinated Debentures and Floating Rate Loan Stock Level 2:
| • | Our trust preferred debentures, subordinated debentures and floating rate loan stock are typically valued using Level 2 inputs. For these securities, we obtain fair value measurements using quoted prices for similar securities being traded in active markets at the reporting date, as our specific debt instruments are less frequently traded. |
A summary of our financial instruments whose carrying value did not equal fair value is shown below:
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| (in millions) | Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||||||||||
| Junior subordinated debentures: |
||||||||||||||||
| Trust preferred debentures |
$ | 172.6 | $ | 160.6 | $ | 172.7 | $ | 165.8 | ||||||||
| Subordinated debentures |
86.2 | 80.4 | 85.9 | 88.1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total junior subordinated debentures |
258.8 | 241.0 | 258.6 | 253.9 | ||||||||||||
| Senior unsecured fixed rate notes |
140.6 | 126.7 | 140.5 | 112.7 | ||||||||||||
| Floating rate loan stock (1) |
— | — | 54.7 | 52.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 399.4 | $ | 367.7 | $ | 453.8 | $ | 419.1 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | At December 31, 2022, floating rate loan stock reclassified to liabilities held-for-sale. See Note 1, “Business and Significant Accounting Policies” for additional information. |
Based on an analysis of the inputs, our financial instruments measured at fair value for disclosure purposes have been categorized as follows:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| (in millions) | September 30, 2023 |
Level 1 (1) | Level 2 (2) | Level 3 (3) | ||||||||||||
| Junior subordinated debentures: |
||||||||||||||||
| Trust preferred debentures |
$ | 160.6 | $ | — | $ | 160.6 | $ | — | ||||||||
| Subordinated debentures |
80.4 | — | 80.4 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total junior subordinated debentures |
241.0 | — | 241.0 | — | ||||||||||||
| Senior unsecured fixed rate notes |
126.7 | 126.7 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 367.7 | $ | 126.7 | $ | 241.0 | $ | — | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Quoted prices in active markets for identical assets |
| (2) | Significant other observable inputs |
| (3) | Significant unobservable inputs |
28
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| (in millions) | December 31, 2022 |
Level 1 (1) | Level 2 (2) | Level 3 (3) | ||||||||||||
| Junior subordinated debentures: |
||||||||||||||||
| Trust preferred debentures |
$ | 165.8 | $ | — | $ | 165.8 | $ | — | ||||||||
| Subordinated debentures |
88.1 | — | 88.1 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total junior subordinated debentures |
253.9 | — | 253.9 | — | ||||||||||||
| Senior unsecured fixed rate notes |
112.7 | 112.7 | — | — | ||||||||||||
| Floating rate loan stock |
52.5 | — | 52.5 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 419.1 | $ | 112.7 | $ | 306.4 | $ | — | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Quoted prices in active markets for identical assets |
| (2) | Significant other observable inputs |
| (3) | Significant unobservable inputs |
| 7. | Shareholders’ Equity |
Dividends
Common Shares
On February 8, 2023, the Company entered into a definitive agreement and plan of merger (the “Merger Agreement”) with Brookfield Reinsurance Ltd. (“Brookfield Reinsurance”) and BNRE Bermuda Merger Sub Ltd., a wholly owned subsidiary of Brookfield Reinsurance (“Merger Sub”). As part of the Merger Agreement, the Company has agreed to suspend common stock dividends that would otherwise be declared and paid on the Company shares during the period from the date of the Merger Agreement through the earlier of the closing of the transaction and the termination of the Merger Agreement.
On August 4, 2022, our Board of Directors declared a quarterly cash dividend in the amount of $0.31 on each common share outstanding. On September 15, 2022, we paid $11.2 million to our shareholders of record on August 31, 2022.
Preferred Shares
On August 2, 2023, our Board of Directors declared a quarterly cash dividend in the amount of $437.50 per share on our 7.00% Resettable Fixed Rate Preference Shares, Series A, par value of $1.00 per share, with a liquidation preference of $25,000 per share (the “Series A Preference Shares”). Holders of depositary shares, each representing a 1/1,000th interest in a Series A Preference Share (the “Depositary Shares”), received $0.43750 per Depositary Share. On September 15, 2023, we paid $2.6 million to our shareholders of record of Series A Preference Shares on August 31, 2023.
On August 4, 2022, our Board of Directors declared a quarterly cash dividend in the amount of $437.50 per share on our 7.00% Resettable Fixed Rate Preference Shares, Series A, par value of $1.00 per share, with a liquidation preference of $25,000 per share (the “Series A Preference Shares”). Holders of depositary shares, each representing a 1/1,000th interest in a Series A Preference Share (the “Depositary Shares”), received $0.43750 per Depositary Share. On September 15, 2022, we paid $2.6 million to our shareholders of record of Series A Preference Shares on August 31, 2022.
Stock Repurchases
On May 3, 2016, our Board of Directors authorized the repurchase of up to $150.0 million of our common shares (“2016 Repurchase Authorization”). The 2016 Repurchase Authorization supersedes all previous repurchase authorizations. As of September 30, 2023, availability under the 2016 Repurchase Authorization for future repurchases of our common shares was $53.3 million. However, the Company does not anticipate repurchasing shares at this time.
We did not repurchase any common shares for the nine months ended September 30, 2023 and September 30, 2022.
29
| 8. | Accumulated Other Comprehensive Income (Loss) |
A summary of changes in accumulated other comprehensive (loss) income, net of taxes (where applicable) by component for the nine months ended September 30, 2023 and 2022 is presented below:
| (in millions) | Foreign Currency Translation Adjustments |
Unrealized Holding Gains (Losses) on Securities |
Defined Benefit Pension Plans |
Total | ||||||||||||
| Balance, January 1, 2023 |
$ | (4.2 | ) | $ | (293.1 | ) | $ | (7.8 | ) | $ | (305.1 | ) | ||||
| Other comprehensive income before reclassifications |
1.0 | (0.4 | ) | 0.8 | 1.4 | |||||||||||
| Amounts reclassified from accumulated other comprehensive loss |
— | 22.4 | — | 22.4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net current-period other comprehensive income (loss) |
1.0 | 22.0 | 0.8 | 23.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance, September 30, 2023 |
$ | (3.2 | ) | $ | (271.1 | ) | $ | (7.0 | ) | $ | (281.3 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| (in millions) | Foreign Currency Translation Adjustments |
Unrealized Holding Gains (Losses) on Securities |
Defined Benefit Pension Plans |
Total | ||||||||||||
| Balance, January 1, 2022 |
$ | (35.3 | ) | $ | 19.7 | $ | (7.1 | ) | $ | (22.7 | ) | |||||
| Other comprehensive income (loss) before reclassifications |
(1.4 | ) | (373.9 | ) | — | (375.3 | ) | |||||||||
| Amounts reclassified from accumulated other comprehensive loss |
31.8 | 33.3 | — | 65.1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net current-period other comprehensive income (loss) |
30.4 | (340.6 | ) | — | (310.2 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance, September 30, 2022 |
$ | (4.9 | ) | $ | (320.9 | ) | $ | (7.1 | ) | $ | (332.9 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
The amounts reclassified from accumulated other comprehensive income (loss) shown in the above table have been included in the following captions in our Condensed Consolidated Statements of Income (Loss):
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Unrealized gains and losses on securities: |
||||||||||||||||
| Net realized investment and other gains (losses) |
$ | (1.5 | ) | $ | (47.5 | ) | $ | (27.4 | ) | $ | (42.1 | ) | ||||
| Provision for income taxes |
(0.4 | ) | 9.8 | 5.0 | 8.8 | |||||||||||
| Foreign currency translation adjustments: |
||||||||||||||||
| Net realized investment and other gains (losses) (1) |
— | — | — | (31.8 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total, net of taxes |
$ | (1.9 | ) | $ | (37.7 | ) | $ | (22.4 | ) | $ | (65.1 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Foreign currency translation losses were realized as a result of the sale of Argo Seguros and AGSE. Refer to the sale of Argo Seguros and AGSE in Note 1, “Business and Significant Accounting Policies” for additional information. |
Income tax effects are released from accumulated other comprehensive income (loss) for unrealized gains or losses when the gains or losses are realized, and are taxed at the statutory rate based on jurisdiction of the underlying transaction.
30
| 9. | Net Income (Loss) Per Common Share |
The following table presents the calculation of net income (loss) per common share on a basic and diluted basis:
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| (in millions, except number of shares and per share amounts) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net income (loss) |
$ | (46.9 | ) | $ | (48.8 | ) | $ | (78.5 | ) | $ | (66.0 | ) | ||||
| Less: Preferred share dividends |
2.6 | 2.6 | 7.9 | 7.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income (loss) attributable to common shareholders |
(49.5 | ) | (51.4 | ) | (86.4 | ) | (73.9 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Weighted average common shares outstanding—basic |
35,197,824 | 35,014,182 | 35,158,416 | 34,955,787 | ||||||||||||
| Effect of dilutive securities: |
||||||||||||||||
| Equity compensation awards |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Weighted average common shares outstanding—diluted |
35,197,824 | 35,014,182 | 35,158,416 | 34,955,787 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income (loss) per common share: |
||||||||||||||||
| Basic |
$ | (1.41 | ) | $ | (1.47 | ) | $ | (2.46 | ) | $ | (2.11 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Diluted |
$ | (1.41 | ) | $ | (1.47 | ) | $ | (2.46 | ) | $ | (2.11 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
Excluded from the weighted average common shares outstanding calculation at September 30, 2023 and 2022 are 11,318,339 shares, which are held as treasury shares. The shares are excluded as of their repurchase date. Excluded from the computation of diluted net loss per common shares were 44,499 and 47,571 potentially dilutive shares for the three and nine months ended September 30, 2023, respectively. The potentially dilutive shares were excluded due to the net loss incurred for the periods presented. Excluded from the computation of diluted net loss per common shares were 9,049 and 96,973 potentially dilutive shares for the three and nine months ended September 30, 2022, respectively.
| 10. | Supplemental Cash Flow Information |
Interest paid and income taxes paid (recovered) were as follows:
| For the Nine Months Ended September 30, |
||||||||
| (in millions) | 2023 | 2022 | ||||||
| Senior unsecured fixed rate notes |
$ | 7.0 | $ | 7.0 | ||||
| Junior subordinated debentures |
17.2 | 9.0 | ||||||
| Other indebtedness |
0.8 | 1.0 | ||||||
|
|
|
|
|
|||||
| Total interest paid |
$ | 25.0 | $ | 17.0 | ||||
|
|
|
|
|
|||||
| Income taxes paid |
$ | 0.2 | $ | 26.2 | ||||
| Income taxes recovered |
(0.1 | ) | (0.5 | ) | ||||
|
|
|
|
|
|||||
| Income taxes paid, net |
$ | 0.1 | $ | 25.7 | ||||
|
|
|
|
|
|||||
Our non-cash activity for the nine months September 30, 2023 includes $190.6 million of short-term investments which were purchased through an unsettled trade as of September 30, 3023, and are reflected in Short-term investments, at fair value and Accrued underwriting expenses and other liabilities, respectively, on the Condensed Consolidated Balance Sheets.
11. Share-based Compensation
Argo Group’s 2019 Omnibus Incentive Plan
In May 2019, our shareholders approved the 2019 Omnibus Incentive Plan (the “2019 Plan”), which provides equity-based and cash-based incentives to key employees and non-employee directors. The intent of the 2019 Plan is to encourage and provide for the acquisition of an ownership interest in Argo Group, enabling us to attract and retain qualified and competent persons to serve as members of our management team and Board of Directors. The 2019 Plan authorizes 1,885,000 common shares to be granted as equity-based awards. No further grants will be made under any prior plan; however, any awards under a prior plan that are outstanding as of the effective date shall remain subject to the terms and conditions of, and be governed by, such prior plan.
31
Awards granted under the 2019 Plan may be in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards, other stock-based awards or other cash-based awards. Awards may be granted either alone, in addition to or in tandem with other awards authorized under the 2019 Plan. Awards that are settled in stock will count as one share for the purposes of reducing the share reserve under the 2019 Plan. Shares issued under this plan may be shares that are authorized and unissued or shares that we have reacquired, including shares purchased on the open market.
Stock options and stock appreciation rights are required to have an exercise price that is not less than the fair market value on the date of grant. The term of these awards is not to exceed ten years.
Restricted Shares
A summary of non-vested restricted share activity as of September 30, 2023 and changes during the nine months then ended is as follows:
| Shares | Weighted-Average Grant Date Fair Value |
|||||||
| Outstanding at January 1, 2023 |
341,670 | $ | 42.19 | |||||
|
|
|
|||||||
| Granted |
— | — | ||||||
| Vested and issued |
(114,101 | ) | 41.66 | |||||
| Expired or forfeited |
(86,944 | ) | 43.77 | |||||
|
|
|
|||||||
| Outstanding at September 30, 2023 |
140,625 | $ | 41.65 | |||||
|
|
|
|||||||
The restricted shares generally vest over one to four years. Expense recognized under this plan for the restricted shares was $0.6 million and $2.4 million for the three and nine months ended September 30, 2023, respectively, as compared to $3.2 million and $6.5 million for the three and nine months ended September 30, 2022, respectively. Compensation expense for all share-based compensation awards is included in Underwriting, acquisition and insurance expenses in the accompanying Condensed Consolidated Statements of Income (Loss). As of September 30, 2023, there was $4.4 million of total unrecognized compensation, excluding any potential forfeitures, cost related to restricted share compensation arrangements granted by Argo Group.
Performance Shares
We have issued to certain employees non-vested restricted stock awards whose vesting is subject to the achievement of certain performance measures. The non-vested performance share awards vest over three to four years. Non-vested performance share awards are valued based on the fair market value as of the grant date. Vesting of the awards is subject to the achievement of defined performance measures and the number of shares vested may be adjusted based on the achievement of certain targets. We evaluate the likelihood of the employee achieving the performance condition and include this estimate in the determination of the forfeiture factor for these grants.
A summary of non-vested performance share activity as of September 30, 2023 and changes during the nine months then ended is as follows:
| Shares | Weighted-Average Grant Date Fair Value |
|||||||
| Outstanding at January 1, 2023 |
124,974 | $ | 46.41 | |||||
|
|
|
|||||||
| Granted |
— | — | ||||||
| Vested and issued |
— | — | ||||||
| Expired or forfeited |
(56,762 | ) | 45.01 | |||||
|
|
|
|||||||
| Outstanding at September 30, 2023 |
68,212 | $ | 47.57 | |||||
|
|
|
|||||||
32
Net expense for the three months ended September 30, 2023 was nil. Net expense recouped for the performance shares under this plan was $2.4 million for the nine months ended September 30, 2023. Expense recognized under this plan for the performance shares was $0.5 million for the three months ended September 30, 2022. For the nine months ended September 30, 2022, we recouped expense of $0.1 million. The recoupment of expense in 2023, producing a net benefit to the Condensed Consolidated Statements of Income (Loss), was primarily due to the reduction of the expense for the Company not achieving the required performance measures and the adjustment of the expected forfeitures on the remaining awards. The recoupment of expenses recognized in 2022 was primarily attributable to the forfeiture of awards due to the departure of our former president and chief executive officer. As of September 30, 2023, total unrecognized compensation cost was nil, adjusted for anticipated forfeitures due to not meeting the specified performance measures by Argo Group.
Stock-settled Share Appreciation Rights
In June 2022, we issued 135,000 stock-settled share appreciation rights (“SSARs”) to our Chief Executive Officer. The SSARs vest on a pro rata basis over a three year period, and have an exercise price of $43.80 per share. We valued the shares using the Black Scholes model, which resulted in a grant date fair value of $8.28 per share. For the three and nine months ended September 30, 2023, we recognized $0.1 million and $0.3 million in expense, respectively, compared to $0.1 million for each period ended 2022. Unamortized expense at September 30, 2023 was $0.6 million.
| 12. | Underwriting, Acquisition and Insurance Expenses |
Underwriting, acquisition and insurance expenses were as follows:
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Commissions |
$ | 46.6 | $ | 72.7 | $ | 144.5 | $ | 211.9 | ||||||||
| Other underwriting and insurance expenses |
74.0 | 97.5 | 230.2 | 297.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total underwriting, acquisition and insurance expenses before deferral |
120.6 | 170.2 | 374.7 | 509.8 | ||||||||||||
| Net deferral of policy acquisition costs |
(4.5 | ) | (9.2 | ) | (10.7 | ) | (14.9 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total underwriting, acquisition and insurance expenses |
$ | 116.1 | $ | 161.0 | $ | 364.0 | $ | 494.9 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 13. | Income Taxes |
We are incorporated under the laws of Bermuda and, under current Bermuda law, are not obligated to pay any taxes in Bermuda based upon income or capital gains. We have received an undertaking from the Supervisor of Insurance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax Protection Amendment Act, 2011, which exempts us from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation or any tax in the nature of estate, duty or inheritance tax, at least until the year 2035.
Argo Group International Holdings, Ltd. does not consider itself to be engaged in a trade or business in the U.S. or the U.K. and, accordingly, does not expect to be subject to direct U.S. or U.K. income taxation.
We have a subsidiary based in the U.K. that is subject to the tax laws of that country. Under current law, the subsidiary is taxed at the applicable corporate tax rates. On February 2, 2023, Argo completed the sale of the entire issued share capital of AUA. Refer to the sale of AUA in Note 1, “Business and Significant Accounting Policies” for additional information. Certain of the U.K. subsidiaries included in the AUA sale were deemed to be engaged in business in the U.S., and therefore, subject to U.S. corporate tax in respect of a proportion of their U.S. underwriting business only. Relief was available against the U.K. tax liabilities in respect of overseas taxes paid that arose from the underwriting business. Our U.K. subsidiaries file separate U.K. income tax returns.
We have subsidiaries based in the U.S. that are subject to U.S. tax laws. Under current law, these subsidiaries are taxed at the applicable corporate tax rates. Our U.S. subsidiaries file a consolidated U.S. federal income tax return.
We also have operations in Ireland and Italy which also are subject to income taxes imposed by the jurisdiction in which they operate. Additionally, we have operations in Barbados which is not subject to income tax under the laws of that country.
33
On August 16, 2022, U.S. legislation referred to as the Inflation Reduction Act of 2022 was enacted. This legislation enacted a new Corporate Alternative Minimum Tax and Excise Tax on Repurchases of Corporate Stock. The Company does not anticipate an impact to our financial statements in regard to the recent legislative change.
Our expected income tax provision computed on pre-tax income (loss) at the weighted average tax rate has been calculated as the sum of the pre-tax income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. For the three and nine months ended September 30, 2023 and 2022, pre-tax income (loss) attributable to our operations and the corresponding operations’ effective tax rates were as follows:
| For the Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| (in millions) | Pre-Tax Income (Loss) |
Effective Tax Rate |
Pre-Tax Income (Loss) |
Effective Tax Rate |
||||||||||||
| Bermuda |
(9.8 | ) | — | % | $ | (11.3 | ) | — | % | |||||||
| United States |
(18.1 | ) | (95.5 | )% | (3.2 | ) | 46.3 | % | ||||||||
| United Kingdom |
(1.6 | ) | (22.5 | )% | (37.6 | ) | 6.8 | % | ||||||||
| Barbados |
— | (1) | — | % | — | — | % | |||||||||
| United Arab Emirates |
— | — | % | 0.5 | — | % | ||||||||||
| Ireland |
— | (1) | — | % | (1.3 | ) | — | % | ||||||||
| Italy |
0.2 | 20.0 | % | 0.1 | (1.7 | )% | ||||||||||
| Malta |
— | — | % | — | — | % | ||||||||||
|
|
|
|
|
|||||||||||||
| Pre-tax income (loss) |
(29.3 | ) | (60.1 | )% | (52.8 | ) | 7.6 | % | ||||||||
|
|
|
|
|
|||||||||||||
| (1) | Pre-tax income (loss) for the respective year was less than $0.1 million. |
| For the Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| (in millions) | Pre-Tax Income (Loss) |
Effective Tax Rate |
Pre-Tax Income (Loss) |
Effective Tax Rate |
||||||||||||
| Bermuda |
$ | (21.1 | ) | — | % | $ | (60.3 | ) | — | % | ||||||
| United States |
(31.2 | ) | (32.9 | )% | 81.6 | 20.7 | % | |||||||||
| United Kingdom |
(23.2 | ) | 30.4 | % | (23.9 | ) | (16.2 | )% | ||||||||
| Barbados |
— | (1) | — | % | — | — | % | |||||||||
| Brazil |
— | — | % | (0.1 | ) | (422.4 | )% | |||||||||
| United Arab Emirates |
0.3 | — | % | 1.3 | — | % | ||||||||||
| Ireland |
(0.1 | ) | — | % | (39.3 | ) | — | % | ||||||||
| Italy |
0.1 | 50.3 | % | (0.1 | ) | (46.4 | )% | |||||||||
| Malta |
— | — | % | (4.1 | ) | — | % | |||||||||
|
|
|
|
|
|||||||||||||
| Pre-tax income (loss) |
$ | (75.2 | ) | (4.4 | )% | $ | (44.9 | ) | (47.0 | )% | ||||||
|
|
|
|
|
|||||||||||||
| (1) | Pre-tax income (loss) for the respective year was less than $0.1 million. |
34
Our effective tax rate may vary significantly from period to period depending on the jurisdiction generating the pre-tax income (loss) and its corresponding statutory tax rate. The geographic distribution of pre-tax income (loss) can fluctuate significantly between periods given the inherent nature of our business. The Company is also subject to the Base Erosion and Anti-Abuse Tax liability (“BEAT”) for certain payments made to foreign related parties.
A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate is as follows:
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Income tax provision at expected rate |
$ | (4.1 | ) | $ | (7.8 | ) | $ | (11.0 | ) | $ | 11.1 | |||||
| Tax effect of: |
||||||||||||||||
| Nontaxable investment income |
— | (0.1 | ) | (0.1 | ) | (0.3 | ) | |||||||||
| Foreign exchange adjustments |
— | — | (2.6 | ) | 0.8 | |||||||||||
| Goodwill and Intangibles |
— | 5.5 | — | 5.5 | ||||||||||||
| Base Erosion and Anti-Abuse Tax |
20.4 | — | 16.9 | — | ||||||||||||
| Withholding taxes |
— | — | 0.1 | — | ||||||||||||
| Sale of Brazil and Malta Operations |
— | 0.1 | — | 6.6 | ||||||||||||
| U.S. state tax expense, net of federal income tax effect |
— | — | (1.2 | ) | — | |||||||||||
| Change in uncertain tax position liability |
— | — | 1.2 | 0.6 | ||||||||||||
| Change in valuation allowance |
0.2 | (1.3 | ) | 0.1 | (6.7 | ) | ||||||||||
| Impact of change in tax rate related to Finance Act 2021 |
— | (0.4 | ) | (0.4 | ) | 0.9 | ||||||||||
| Prior period adjustment |
0.2 | (0.5 | ) | 0.1 | 0.3 | |||||||||||
| Other, net |
0.9 | 0.5 | 0.2 | 2.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income tax provision (benefit) |
$ | 17.6 | $ | (4.0 | ) | $ | 3.3 | $ | 21.1 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
Our gross deferred tax assets are supported by taxes paid in previous periods, reversal of taxable temporary differences and recognition of future taxable income. Management regularly evaluates the recoverability of the deferred tax assets and makes any necessary adjustments to them based upon any changes in management’s expectations of future taxable income. Realization of deferred tax assets is dependent upon our generation of future taxable income sufficient to recover tax benefits that cannot be recovered from taxes paid in the carryback period, generally for our U.S. property and casualty insurers two years for net operating losses and for all our U.S. subsidiaries three years for capital losses. If a company determines that any of its deferred tax assets will not result in future tax benefits, a valuation allowance must be established for the portion of these assets that are not expected to be realized. For the three and nine months ended September 30, 2023, the net change in valuation allowance for deferred tax assets was an increase of $0.2 million and $0.1 million, respectively. Existing valuation allowances pertain to the following: Internal Revenue Code Section 382 limited net operating loss carryforwards within the United States, cumulative losses incurred since inception, and valuation allowances acquired through or related to acquisitions or disposals. Based upon a review of our available evidence, both positive and negative discussed above, our management concluded that it is more-likely-than-not that the other deferred tax assets will be realized.
For any uncertain tax positions not meeting the “more-likely-than-not” recognition threshold, accounting standards require recognition, measurement and disclosure in a company’s Condensed Consolidated Financial Statements. For the three and nine months ended September 30, 2023, the Company had a net increase of uncertain tax positions in the amount of $0.0 million and $1.2 million related to federal or state income tax liability. A net increase of interest in the amount of $0.1 million and $0.3 million has been recorded in the line item Interest expense in our Condensed Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2023. No change to penalties were recorded for the three and nine months ended September 30, 2023.
Our U.S. subsidiaries are no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2019. Our U.K. subsidiary is no longer subject to U.K. income tax examinations by His Majesty’s Revenue and Customs for years before 2021.
35
| 14. | Commitments and Contingencies |
Legal Actions
Argo Group’s subsidiaries are parties to legal actions incidental to their business. As of September 30, 2023, management believes that the resolution of these matters would not materially affect our financial condition or results of operations.
Federal Securities Class Action
The Police & Fire Retirement System City of Detroit v. Argo Group International Holdings, Ltd., et al., No. 22-cv-8971 (S.D.N.Y.)
On October 20, 2022, a securities class action lawsuit was filed in the United States District Court for the Southern District of New York against the Company and certain of its current and former officers, alleging securities fraud violations under sections 10(b) and 20(a) of the Securities Exchange Act of 1934. On January 18, 2023, U.S. District Judge Lewis A. Kaplan granted the Police and Fire Retirement System City of Detroit and the Oklahoma Law Enforcement Retirement System’s joint motion for appointment as lead plaintiff. On March 27, 2023, lead plaintiffs filed an Amended Class Action Complaint, which alleges that from June 11, 2018 through August 9, 2022, defendants made false and misleading statements concerning the Company’s reserves and underwriting standards. Defendants moved to dismiss the amended complaint on May 26, 2023. Lead plaintiffs filed an opposition to said motion on July 13, 2023, after which Defendants filed a reply on August 14, 2023.
The Company is not able at this time to determine or predict the ultimate outcome of this proceeding or provide a reasonable estimate or range of estimates of the possible outcome or loss, if any, in this matter.
Transaction-Related Shareholder Litigation
Following the announcement of the proposed transaction with Brookfield Reinsurance Ltd. and BNRE Bermuda Merger Sub Ltd., complaints were filed in the United Stated District Court for the Southern District of New York: Stein v. Argo Group Int’l Holdings. Ltd., et al., 1:23-cv -01947 (S.D.N.Y); O’Dell v. Argo Group Int’l Holdings, Ltd., et al., C.A. No. 1:23-cv-1999 (S.D.N.Y.); Jones v. Argo Group Int’l Holdings. Ltd., et al., 1:23-cv-02606 (S.D.N.Y); Ballard v. Argo Group Int’l Holdings, Ltd., et al., 1:23-cv-02635 (S.D.N.Y); Montgomery v. Argo Group Int’l Holdings, Ltd., et al., 1:23-cv-02749 (S.D.N.Y). The complaints each asserted violations of Section 14(a) and Section 20(a) of the Exchange Act and alleged that the proxy statement filed in connection with the proposed transaction between the Company and Brookfield Reinsurance Ltd. and BNRE Bermuda Merger Sub Ltd. omitted certain purportedly material information that rendered the proxy statement incomplete and misleading. The complaints sought, among other things, an order to enjoin the transaction unless additional disclosures were issued; and, if the transaction closes, damages. All of the complaints have been voluntarily dismissed.
Contractual Commitments
We have contractual commitments to invest up to $96.9 million related to our limited partnership investments at September 30, 2023, as further disclosed in Note 3, “Investments.” These commitments will be funded as required by the partnership agreements which can be called to be fulfilled at any time, not to exceed twelve years.
| 15. | Segment Information |
We are primarily engaged in underwriting property and casualty insurance. We have two ongoing reporting segments: U.S. Operations and International Operations. Additionally, we have Run-off Lines for certain products that we no longer underwrite.
We consider many factors, including the nature of each segment’s insurance and reinsurance products, production sources, distribution strategies and the regulatory environment, in determining how to aggregate reporting segments. In evaluating the operating performance of our segments, we focus on core underwriting and investing results before the consideration of realized gains or losses from investments. Net investment and other gains (losses) are reported as a component of the Corporate and Other segment, as decisions regarding the acquisition and disposal of securities reside with the corporate investment function and are not under the control of the individual business segments. Identifiable assets by segment are those assets used in the operation of each segment.
36
Revenue and income (loss) before income taxes for each segment were as follows:
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Revenue: |
||||||||||||||||
| Earned premiums |
||||||||||||||||
| U.S. Operations |
$ | 314.1 | $ | 329.3 | $ | 950.9 | $ | 998.5 | ||||||||
| International Operations |
28.5 | 125.2 | 111.4 | 390.7 | ||||||||||||
| Run-off Lines |
0.1 | 0.5 | 0.2 | 0.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total earned premiums |
342.7 | 455.0 | 1,062.5 | 1,389.9 | ||||||||||||
| Net investment income |
||||||||||||||||
| U.S. Operations |
33.2 | 23.1 | 84.7 | 68.7 | ||||||||||||
| International Operations |
6.2 | 10.3 | 15.8 | 30.4 | ||||||||||||
| Run-off Lines |
1.0 | 0.6 | 2.4 | 1.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total net investment income |
40.4 | 34.0 | 102.9 | 100.9 | ||||||||||||
| Net investment and other gains (losses) |
(4.7 | ) | (44.7 | ) | (21.0 | ) | (119.6 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total revenue |
$ | 378.4 | $ | 444.3 | $ | 1,144.4 | $ | 1,371.2 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Income (loss) before income taxes |
||||||||||||||||
| U.S. Operations |
$ | (14.0 | ) | $ | 26.6 | $ | (23.2 | ) | $ | 113.5 | ||||||
| International Operations |
(2.6 | ) | 3.3 | 9.3 | 28.6 | |||||||||||
| Run-off Lines |
— | 0.7 | (1.0 | ) | (1.9 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total segment income (loss) before income taxes |
(16.6 | ) | 30.6 | (14.9 | ) | 140.2 | ||||||||||
| Corporate and Other |
(11.3 | ) | (19.3 | ) | (39.2 | ) | (53.5 | ) | ||||||||
| Net investment and other gains (losses) |
(4.7 | ) | (44.7 | ) | (21.0 | ) | (119.6 | ) | ||||||||
| Foreign currency exchange gains (losses) |
3.3 | 9.1 | (0.1 | ) | 16.5 | |||||||||||
| Impairment of goodwill |
— | (28.5 | ) | — | (28.5 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total income (loss) before income taxes |
$ | (29.3 | ) | $ | (52.8 | ) | $ | (75.2 | ) | $ | (44.9 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
The table below presents earned premiums by geographic location for the three and nine months ended September 30, 2023 and 2022. For this disclosure, we determine geographic location by the country of domicile of our subsidiaries that underwrite the business and not by the location of insureds or reinsureds from whom the business was generated.
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| United States |
$ | 314.2 | $ | 329.8 | $ | 951.1 | $ | 999.2 | ||||||||
| United Kingdom |
— | 113.8 | 48.3 | 349.8 | ||||||||||||
| Bermuda |
28.5 | 11.4 | 63.1 | 28.8 | ||||||||||||
| Malta |
— | — | — | 3.7 | ||||||||||||
| All other jurisdictions |
— | — | — | 8.4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total earned premiums |
$ | 342.7 | $ | 455.0 | $ | 1,062.5 | $ | 1,389.9 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
37
The following table represents identifiable assets:
| (in millions) | September 30, 2023 |
December 31, 2022 |
||||||
| U.S. Operations |
$ | 6,377.0 | $ | 5,815.0 | ||||
| International Operations |
1,776.4 | 3,791.6 | ||||||
| Run-off Lines |
188.5 | 284.4 | ||||||
| Corporate and Other |
97.6 | 143.4 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 8,439.5 | $ | 10,034.4 | ||||
|
|
|
|
|
|||||
Included in total assets at December 31, 2022 are $303.7 million in assets associated with trade capital providers.
| 16. | Subsequent Events |
There were no subsequent events as of the date of this report.
Exhibit 99.3
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
(Unaudited)
| September 30, 2023 | December 31, 2022 (a) | |||||||
| Assets |
||||||||
| Investments: |
||||||||
| Fixed maturity securities, available for sale, at fair value (amortized cost of $37,813,550 as of 2023 and $44,866,019 as of 2022; allowance for credit losses of $3,618 as of 2023 and $3,347 as of 2022) |
$ | 32,084,932 | $ | 39,804,617 | ||||
| Mortgage loans on real estate (net of allowance for credit losses of $45,082 as of 2023 and $36,972 as of 2022) |
7,494,983 | 6,949,027 | ||||||
| Real estate investments related to consolidated variable interest entities |
1,302,185 | 1,056,063 | ||||||
| Limited partnerships and limited liability companies (2023 and 2022 include $1,172,525 and $684,834 related to consolidated variable interest entities) |
1,763,551 | 1,266,779 | ||||||
| Derivative instruments |
733,784 | 431,727 | ||||||
| Other investments |
1,207,672 | 1,817,085 | ||||||
|
|
|
|
|
|||||
| Total investments |
44,587,107 | 51,325,298 | ||||||
| Cash and cash equivalents (2023 and 2022 include $41,982 and $27,235 related to consolidated variable interest entities) |
10,188,438 | 1,919,669 | ||||||
| Coinsurance deposits (net of allowance for credit losses of $5,490 as of 2023 and $8,737 as of 2022) |
14,628,884 | 13,254,956 | ||||||
| Market risk benefits |
346,515 | 229,871 | ||||||
| Accrued investment income (2023 and 2022 include $2,658 and $3,444 related to consolidated variable interest entities) |
443,642 | 497,851 | ||||||
| Deferred policy acquisition costs |
2,933,304 | 2,773,643 | ||||||
| Deferred sales inducements |
2,257,064 | 2,045,683 | ||||||
| Deferred income taxes |
425,398 | 438,434 | ||||||
| Income taxes recoverable |
55,498 | 55,498 | ||||||
| Other assets (2023 and 2022 include $17,426 and $10,690 related to consolidated variable interest entities) |
847,047 | 642,696 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 76,712,897 | $ | 73,183,599 | ||||
|
|
|
|
|
|||||
2
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
(Unaudited)
| September 30, 2023 | December 31, 2022 (a) | |||||||
| Liabilities and Stockholders’ Equity |
||||||||
| Liabilities: |
||||||||
| Policy benefit reserves |
$ | 60,226,094 | $ | 58,781,836 | ||||
| Market risk benefits |
2,552,907 | 2,455,492 | ||||||
| Other policy funds and contract claims |
196,299 | 512,790 | ||||||
| Notes and loan payable |
787,098 | 792,073 | ||||||
| Subordinated debentures |
79,017 | 78,753 | ||||||
| Funds withheld for reinsurance liabilities |
8,139,724 | 6,577,426 | ||||||
| Other liabilities (2023 and 2022 include $91,734 and $78,644 related to consolidated variable interest entities) |
2,655,213 | 1,614,479 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
74,636,352 | 70,812,849 | ||||||
|
|
|
|
|
|||||
| Stockholders’ equity: |
| |||||||
| Preferred stock, Series A; par value $1 per share; $400,000 aggregate liquidation preference; 20,000 shares authorized; issued and outstanding: 2023 and 2022 - 16,000 shares |
16 | 16 | ||||||
| Preferred stock, Series B; par value $1 per share; $300,000 aggregate liquidation preference; 12,000 shares authorized; issued and outstanding: 2023 and 2022 - 12,000 shares |
12 | 12 | ||||||
| Common stock; par value $1 per share; 200,000,000 shares authorized; issued and outstanding: |
||||||||
| 2023 - 78,974,095 shares (excluding 30,971,013 treasury shares); 2022 - 84,810,255 shares (excluding 24,590,353 treasury shares) |
78,974 | 84,810 | ||||||
| Additional paid-in capital |
1,071,907 | 1,325,316 | ||||||
| Accumulated other comprehensive loss |
(4,425,695 | ) | (3,746,230 | ) | ||||
| Retained earnings |
5,328,362 | 4,685,593 | ||||||
|
|
|
|
|
|||||
| Total stockholders’ equity attributable to American Equity Investment Life Holding Company |
2,053,576 | 2,349,517 | ||||||
| Noncontrolling interests |
22,969 | 21,233 | ||||||
|
|
|
|
|
|||||
| Total stockholders’ equity |
2,076,545 | 2,370,750 | ||||||
|
|
|
|
|
|||||
| Total liabilities and stockholders’ equity |
$ | 76,712,897 | $ | 73,183,599 | ||||
|
|
|
|
|
|||||
| (a) | Certain prior period amounts have been recast. See Note 1—Significant Accounting Policies for more information. |
See accompanying notes to unaudited consolidated financial statements.
3
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 (a) | 2023 | 2022 (a) | |||||||||||||
| Revenues: |
||||||||||||||||
| Premiums and other considerations |
$ | 2,657 | $ | 2,839 | $ | 9,310 | $ | 16,748 | ||||||||
| Annuity product charges |
84,316 | 60,819 | 218,549 | 168,688 | ||||||||||||
| Net investment income |
586,614 | 609,737 | 1,690,622 | 1,769,468 | ||||||||||||
| Change in fair value of derivatives |
(383,026 | ) | (176,671 | ) | (94,397 | ) | (1,160,371 | ) | ||||||||
| Net realized losses on investments |
(44,672 | ) | (15,860 | ) | (97,138 | ) | (62,259 | ) | ||||||||
| Other revenue |
20,763 | 10,988 | 53,893 | 29,213 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total revenues |
266,652 | 491,852 | 1,780,839 | 761,487 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Benefits and expenses: |
||||||||||||||||
| Insurance policy benefits and change in future policy benefits (remeasurement gains (losses) of future policy benefit reserves of $463 and $369 for three months ended and $1,814 and $1,144 for nine months ended September 30, 2023 and 2022, respectively) |
2,193 | 6,659 | 14,526 | 27,272 | ||||||||||||
| Interest sensitive and index product benefits |
193,686 | 68,982 | 373,984 | 497,245 | ||||||||||||
| Market risk benefits (gains) losses |
(296,114 | ) | 77,579 | (256,544 | ) | (29,806 | ) | |||||||||
| Amortization of deferred sales inducements |
48,354 | 46,223 | 141,906 | 136,004 | ||||||||||||
| Change in fair value of embedded derivatives |
(451,806 | ) | (415,374 | ) | 166,398 | (2,695,007 | ) | |||||||||
| Interest expense on notes and loan payable |
12,003 | 8,984 | 34,248 | 21,870 | ||||||||||||
| Interest expense on subordinated debentures |
1,340 | 1,333 | 4,014 | 3,996 | ||||||||||||
| Amortization of deferred policy acquisition costs |
70,561 | 71,726 | 207,272 | 217,180 | ||||||||||||
| Other operating costs and expenses |
76,630 | 59,470 | 226,331 | 177,137 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total benefits and expenses |
(343,153 | ) | (74,418 | ) | 912,135 | (1,644,109 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income before income taxes |
609,805 | 566,270 | 868,704 | 2,405,596 | ||||||||||||
| Income tax expense |
133,691 | 121,380 | 193,335 | 517,952 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income |
476,114 | 444,890 | 675,369 | 1,887,644 | ||||||||||||
| Less: Net income (loss) available to noncontrolling interests |
(42 | ) | 1 | (156 | ) | (3 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income available to American Equity Investment Life Holding Company stockholders |
476,156 | 444,889 | 675,525 | 1,887,647 | ||||||||||||
| Less: Preferred stock dividends |
10,918 | 10,918 | 32,756 | 32,756 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income available to American Equity Investment Life Holding Company common stockholders |
$ | 465,238 | $ | 433,971 | $ | 642,769 | $ | 1,854,891 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Earnings per common share |
$ | 5.96 | $ | 4.95 | $ | 8.06 | $ | 20.09 | ||||||||
| Earnings per common share—assuming dilution |
$ | 5.82 | $ | 4.90 | $ | 7.92 | $ | 19.89 | ||||||||
| Weighted average common shares outstanding (in thousands): |
||||||||||||||||
| Earnings per common share |
78,034 | 87,707 | 79,719 | 92,339 | ||||||||||||
| Earnings per common share—assuming dilution |
79,952 | 88,581 | 81,191 | 93,270 | ||||||||||||
| (a) | Certain prior period amounts have been recast. See Note 1—Significant Accounting Policies for more information. |
See accompanying notes to unaudited consolidated financial statements.
4
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 (a) | 2023 | 2022 (a) | |||||||||||||
| Net income |
$ | 476,114 | $ | 444,890 | $ | 675,369 | $ | 1,887,644 | ||||||||
| Other comprehensive loss: |
||||||||||||||||
| Change in net unrealized investment gains/losses |
(1,057,565 | ) | (2,267,314 | ) | (627,163 | ) | (9,702,989 | ) | ||||||||
| Change in current discount rate for liability for future policy benefits |
6,919 | 17,558 | 7,470 | 74,239 | ||||||||||||
| Change in instrument-specific credit risk for market risk benefits |
(176,701 | ) | 40,787 | (205,605 | ) | 576,262 | ||||||||||
| Reclassification of unrealized investment gains/losses to net income |
(38,484 | ) | (9,903 | ) | (34,226 | ) | (31,990 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Other comprehensive loss before income tax |
(1,265,831 | ) | (2,218,872 | ) | (859,524 | ) | (9,084,478 | ) | ||||||||
| Income tax effect related to other comprehensive loss |
265,384 | 465,970 | 180,059 | 1,907,435 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Other comprehensive loss |
(1,000,447 | ) | (1,752,902 | ) | (679,465 | ) | (7,177,043 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Comprehensive loss |
$ | (524,333 | ) | $ | (1,308,012 | ) | $ | (4,096 | ) | $ | (5,289,399 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) | Certain prior period amounts have been recast. See Note 1—Significant Accounting Policies for more information. |
See accompanying notes to unaudited consolidated financial statements.
5
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)
| Preferred Stock |
Common Stock |
Additional Paid-in Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Noncontrolling Interest |
Total Stockholders’ Equity |
||||||||||||||||||||||
| For the three months ended September 30, 2023 |
||||||||||||||||||||||||||||
| Balance at June 30, 2023 |
$ | 28 | $ | 78,048 | $ | 1,055,963 | $ | (3,425,248 | ) | $ | 4,863,124 | $ | 23,126 | $ | 2,595,041 | |||||||||||||
| Net income (loss) for period |
— | — | — | — | 476,156 | (42 | ) | 476,114 | ||||||||||||||||||||
| Other comprehensive loss |
— | — | — | (1,000,447 | ) | — | — | (1,000,447 | ) | |||||||||||||||||||
| Share-based compensation |
— | — | 10,263 | — | — | — | 10,263 | |||||||||||||||||||||
| Issuance of common stock |
— | 926 | 19,188 | — | — | — | 20,114 | |||||||||||||||||||||
| Treasury stock acquired, common |
— | — | (13,507 | ) | — | — | — | (13,507 | ) | |||||||||||||||||||
| Dividends on preferred stock |
— | — | — | — | (10,918 | ) | — | (10,918 | ) | |||||||||||||||||||
| Contributions (distributions) from noncontrolling interests |
— | — | — | — | — | (115 | ) | (115 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance at September 30, 2023 |
$ | 28 | $ | 78,974 | $ | 1,071,907 | $ | (4,425,695 | ) | $ | 5,328,362 | $ | 22,969 | $ | 2,076,545 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Preferred Stock |
Common Stock |
Additional Paid-in Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Noncontrolling Interest |
Total Stockholders’ Equity |
||||||||||||||||||||||
| For the three months ended September 30, 2022 (a) |
||||||||||||||||||||||||||||
| Balance at June 30, 2022 |
$ | 28 | $ | 90,169 | $ | 1,507,601 | $ | (2,231,594 | ) | $ | 4,260,174 | $ | 1,169 | $ | 3,627,547 | |||||||||||||
| Net income for period |
— | — | — | — | 444,889 | 1 | 444,890 | |||||||||||||||||||||
| Other comprehensive loss |
— | — | — | (1,752,902 | ) | — | — | (1,752,902 | ) | |||||||||||||||||||
| Share-based compensation |
— | — | 4,288 | — | — | — | 4,288 | |||||||||||||||||||||
| Issuance of common stock |
— | 19 | — | — | — | — | 19 | |||||||||||||||||||||
| Treasury stock acquired, common |
— | (4,221 | ) | (149,867 | ) | — | — | — | (154,088 | ) | ||||||||||||||||||
| Dividends on preferred stock |
— | — | — | — | (10,918 | ) | — | (10,918 | ) | |||||||||||||||||||
| Contributions (distributions) from noncontrolling interests |
— | — | — | — | — | 1,760 | 1,760 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance at September 30, 2022 |
$ | 28 | $ | 85,967 | $ | 1,362,022 | $ | (3,984,496 | ) | $ | 4,694,145 | $ | 2,930 | $ | 2,160,596 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
6
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)
| Preferred Stock |
Common Stock |
Additional Paid-in Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Noncontrolling Interest |
Total Stockholders’ Equity |
||||||||||||||||||||||
| For the nine months ended September 30, 2023 |
||||||||||||||||||||||||||||
| Balance at December 31, 2022 |
$ | 28 | $ | 84,810 | $ | 1,325,316 | $ | (3,746,230 | ) | $ | 4,685,593 | $ | 21,233 | $ | 2,370,750 | |||||||||||||
| Net income (loss) for period |
— | — | — | — | 675,525 | (156 | ) | 675,369 | ||||||||||||||||||||
| Other comprehensive loss |
— | — | — | (679,465 | ) | — | — | (679,465 | ) | |||||||||||||||||||
| Share-based compensation |
— | — | 31,140 | — | — | — | 31,140 | |||||||||||||||||||||
| Issuance of common stock |
— | 1,432 | 17,815 | — | — | — | 19,247 | |||||||||||||||||||||
| Treasury stock acquired, common |
— | (7,268 | ) | (302,364 | ) | — | — | — | (309,632 | ) | ||||||||||||||||||
| Dividends on preferred stock |
— | — | — | — | (32,756 | ) | — | (32,756 | ) | |||||||||||||||||||
| Contributions (distributions) from noncontrolling interests |
— | — | — | — | — | 1,892 | 1,892 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance at September 30, 2023 |
$ | 28 | $ | 78,974 | $ | 1,071,907 | $ | (4,425,695 | ) | $ | 5,328,362 | $ | 22,969 | $ | 2,076,545 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Preferred Stock |
Common Stock |
Additional Paid-in Capital |
Accumulated Other Comprehensive Income (Loss) |
Retained Earnings |
Noncontrolling Interest |
Total Stockholders’ Equity |
||||||||||||||||||||||
| For the nine months ended September 30, 2022 (a) |
||||||||||||||||||||||||||||
| Balance at December 31, 2021 |
$ | 28 | $ | 92,514 | $ | 1,614,374 | $ | 3,192,547 | $ | 2,839,254 | $ | — | $ | 7,738,717 | ||||||||||||||
| Net income (loss) for period |
— | — | — | — | 1,887,647 | (3 | ) | 1,887,644 | ||||||||||||||||||||
| Other comprehensive loss |
— | — | — | (7,177,043 | ) | — | — | (7,177,043 | ) | |||||||||||||||||||
| Share-based compensation |
— | — | 10,708 | — | — | — | 10,708 | |||||||||||||||||||||
| Issuance of common stock |
— | 7,071 | 245,790 | — | — | — | 252,861 | |||||||||||||||||||||
| Treasury stock acquired, common |
— | (13,618 | ) | (508,850 | ) | — | — | — | (522,468 | ) | ||||||||||||||||||
| Dividends on preferred stock |
— | — | — | — | (32,756 | ) | — | (32,756 | ) | |||||||||||||||||||
| Contributions (distributions) from noncontrolling interests |
— | — | — | — | — | 2,933 | 2,933 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance at September 30, 2022 |
$ | 28 | $ | 85,967 | $ | 1,362,022 | $ | (3,984,496 | ) | $ | 4,694,145 | $ | 2,930 | $ | 2,160,596 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (a) | Certain prior period amounts have been recast. See Note 1—Significant Accounting Policies for more information. |
See accompanying notes to unaudited consolidated financial statements.
7
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Nine Months Ended September 30, |
||||||||
| 2023 | 2022 (a) | |||||||
| Operating activities |
| |||||||
| Net income |
$ | 675,369 | $ | 1,887,644 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Interest sensitive and index product benefits |
373,984 | 497,245 | ||||||
| Amortization of deferred sales inducements |
141,906 | 136,004 | ||||||
| Annuity product charges |
(218,549 | ) | (168,688 | ) | ||||
| Change in fair value of embedded derivatives |
166,398 | (2,695,007 | ) | |||||
| Change in traditional life and accident and health insurance reserves |
(20,483 | ) | (79,410 | ) | ||||
| Policy acquisition costs deferred |
(366,933 | ) | (146,934 | ) | ||||
| Amortization of deferred policy acquisition costs |
207,272 | 217,180 | ||||||
| Provision for depreciation and other amortization |
6,067 | 12,845 | ||||||
| Amortization of discounts and premiums on investments |
111,158 | 637 | ||||||
| Realized gains/losses on investments |
97,138 | 62,259 | ||||||
| Distributions from equity method investments |
74,279 | 5,098 | ||||||
| Change in fair value of derivatives |
94,397 | 1,160,371 | ||||||
| Deferred income taxes |
193,095 | 467,262 | ||||||
| Share-based compensation |
31,140 | 10,708 | ||||||
| Change in accrued investment income |
54,209 | (71,552 | ) | |||||
| Change in income taxes recoverable/payable |
— | 62,748 | ||||||
| Change in other assets |
(265,443 | ) | (40,000 | ) | ||||
| Change in other policy funds and contract claims |
(320,461 | ) | 35,328 | |||||
| Change in market risk benefits, net |
(259,303 | ) | 28,154 | |||||
| Change in collateral held for derivatives |
305,709 | (905,799 | ) | |||||
| Change in funds withheld from reinsurers |
1,646,394 | 629,251 | ||||||
| Change in other liabilities |
341,031 | 166,999 | ||||||
| Other |
(38,772 | ) | (147,248 | ) | ||||
|
|
|
|
|
|||||
| Net cash provided by operating activities |
3,029,602 | 1,125,095 | ||||||
|
|
|
|
|
|||||
| Investing activities |
||||||||
| Sales, maturities, or repayments of investments: |
||||||||
| Fixed maturity securities, available for sale |
10,450,819 | 5,136,412 | ||||||
| Mortgage loans on real estate |
1,155,655 | 1,572,420 | ||||||
| Real estate investments sold |
2,973 | — | ||||||
| Derivative instruments |
296,933 | 577,772 | ||||||
| Other investments |
1,145,777 | 440,079 | ||||||
| Acquisitions of investments: |
||||||||
| Fixed maturity securities, available for sale |
(3,079,148 | ) | (5,238,533 | ) | ||||
| Mortgage loans on real estate |
(1,814,544 | ) | (2,408,977 | ) | ||||
| Real estate investments acquired |
(260,101 | ) | (611,881 | ) | ||||
| Derivative instruments |
(723,356 | ) | (586,804 | ) | ||||
| Other investments |
(1,344,537 | ) | (1,123,295 | ) | ||||
| Purchases of property, furniture and equipment |
(36,034 | ) | (34,215 | ) | ||||
|
|
|
|
|
|||||
| Net cash provided by (used in) investing activities |
5,794,437 | (2,277,022 | ) | |||||
|
|
|
|
|
|||||
8
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
| Nine Months Ended September 30, |
||||||||
| 2023 | 2022 (a) | |||||||
| Financing activities |
| |||||||
| Receipts credited to annuity policyholder account balances |
$ | 5,608,928 | $ | 2,416,692 | ||||
| Coinsurance deposits |
(824,085 | ) | (241,746 | ) | ||||
| Return of annuity policyholder account balances |
(5,027,817 | ) | (3,724,169 | ) | ||||
| Repayment of loan payable |
(5,475 | ) | (1,875 | ) | ||||
| Proceeds from issuance of loan payable |
— | 300,000 | ||||||
| Acquisition of treasury stock |
(309,632 | ) | (522,468 | ) | ||||
| Proceeds from issuance of common stock, net |
19,247 | 252,861 | ||||||
| Change in checks in excess of cash balance |
16,320 | 4,538 | ||||||
| Dividends paid on preferred stock |
(32,756 | ) | (32,756 | ) | ||||
|
|
|
|
|
|||||
| Net cash used in financing activities |
(555,270 | ) | (1,548,923 | ) | ||||
|
|
|
|
|
|||||
| Increase (decrease) in cash and cash equivalents |
8,268,769 | (2,700,850 | ) | |||||
| Cash and cash equivalents at beginning of period |
1,919,669 | 4,508,982 | ||||||
|
|
|
|
|
|||||
| Cash and cash equivalents at end of period |
$ | 10,188,438 | $ | 1,808,132 | ||||
|
|
|
|
|
|||||
| Supplemental disclosures of cash flow information |
||||||||
| Cash paid during period for: |
||||||||
| Interest expense |
$ | 31,098 | $ | 16,250 | ||||
| Income taxes |
1,899 | 4,873 | ||||||
| Income tax refunds received |
53 | 17,187 | ||||||
| Non-cash operating activity: |
||||||||
| Deferral of sales inducements |
353,287 | 74,074 | ||||||
| (a) | Certain prior period amounts have been recast. See Note 1—Significant Accounting Policies for more information. |
See accompanying notes to unaudited consolidated financial statements.
9
AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
1. Significant Accounting Policies
Consolidation and Basis of Presentation
The accompanying consolidated financial statements of American Equity Investment Life Holding Company (“we”, “us”, “our” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated financial statements include variable interest entities (“VIE”) in which we are the primary beneficiary. All of the adjustments in the consolidated financial statements are normal recurring items which are necessary to present fairly our financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for the three and nine month periods ended September 30, 2023 are not necessarily indicative of the results that may be expected for any other period, including for the year ended December 31, 2023. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires management estimates and assumptions using subjective and complex judgments that frequently require assumptions about matters that are inherently uncertain. Our actual results could differ from these estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand our financial position and results of operations, refer to the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Adopted Accounting Pronouncements
Troubled Debt Restructurings and Vintage Disclosures
In March 2022, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) on troubled debt restructurings (“TDR”) and vintage disclosures related to current period gross write-offs and recoveries. This guidance eliminates the accounting guidance for TDRs by creditors and enhances disclosure requirements for certain refinancing and restructuring of loans by creditors when a borrower is experiencing financial difficulty. The guidance also requires companies to disclosure current-period gross write-offs by year of origination for financing receivables and net investments in leases. This ASU was adopted on January 1, 2023 and will be applied prospectively. This guidance did not have a material impact on our consolidated financial statements.
Targeted Improvements to the Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued an ASU that revises certain aspects of the measurement models and disclosure requirements for long duration insurance and investment contracts. The FASB’s objective in issuing this ASU is to improve, simplify, and enhance the accounting for long-duration contracts. The revisions include updating cash flow assumptions in the calculation of the liability for traditional life products, introducing the term ‘market risk benefit’ (“MRB”) and requiring all contract features meeting the definition of an MRB to be measured at fair value with the change in fair value recognized in net income excluding the change in fair value related to our own-credit risk which is recognized in AOCI and simplifying the method used to amortize deferred policy acquisition costs and deferred sales inducements to a constant level basis over the expected term of the related contracts rather than based on actual and estimated gross profits and enhancing disclosure requirements. While this ASU was effective for us January 1, 2023, the transition date (the remeasurement date) was January 1, 2021. We adopted the guidance for the liability for future policyholder benefits, deferred acquisition costs, and deferred sales inducements on a modified retrospective basis such that those balances were adjusted to conform to ASU 2018-12 on January 1, 2021. The guidance for market risk benefits was applied retrospectively. Below are the transition date impacts for each of these items.
| Liability for Future Policy Benefits for Payout Annuity With Life Contingency |
||||
| (Dollars in thousands) | ||||
| Pre-adoption 1/1/2021 balance |
$ | 337,467 | ||
| Adjustment to opening retained earnings for expected future policy benefits |
2,566 | |||
| Adjustment for the effect of remeasurement of liability at current single A rate |
68,717 | |||
|
|
|
|||
| Post adoption 1/1/2021 balance |
$ | 408,750 | ||
|
|
|
|||
10
| Market Risk Benefit Liability |
||||
| (Dollars in thousands) | ||||
| Pre-adoption 1/1/2021 carrying amount for features now classified as MRBs |
$ | 2,547,231 | ||
| Adjustment for the removal of shadow adjustments |
(584,636 | ) | ||
| Adjustment for the cumulative effect of the changes in the instrument-specific credit risk between the original contract issuance date and the transition date |
229,108 | |||
| Adjustment for the remaining difference between previous carrying amount and fair value measurement for the MRB, exclusive of the instrument specific credit risk |
33,781 | |||
|
|
|
|||
| Post adoption 1/1/2021 MRB balance |
$ | 2,225,484 | ||
|
|
|
|||
| Ceded Market Risk Benefit (a) |
||||
| (Dollars in thousands) | ||||
| Pre-adoption 1/1/2021 carrying amount for features now classified as MRBs |
$ | 62,108 | ||
| Adjustment for the difference between previous carrying amount and fair value measurement for the MRB, exclusive of the instrument specific credit risk |
27,230 | |||
|
|
|
|||
| Post adoption 1/1/2021 ceded MRB balance |
$ | 89,338 | ||
|
|
|
|||
| (a) | The ceded market risk benefit is recognized in coinsurance deposits on the Consolidated Balance Sheets. |
| Deferred Policy Acquisition Costs |
||||
| Fixed Index Annuities and Fixed Rate Annuities |
||||
| (Dollars in thousands) | ||||
| Pre-adoption 1/1/2021 balance |
$ | 2,225,199 | ||
| Adjustments for the removal of shadow adjustments |
1,183,306 | |||
|
|
|
|||
| Post adoption 1/1/2021 balance |
$ | 3,408,505 | ||
|
|
|
|||
| Deferred Sales Inducements |
||||
| Fixed Index Annuities and Fixed Rate Annuities |
||||
| (Dollars in thousands) | ||||
| Pre-adoption 1/1/2021 balance |
$ | 1,448,375 | ||
| Adjustments for the removal of shadow adjustments |
768,310 | |||
|
|
|
|||
| Post adoption 1/1/2021 balance |
$ | 2,216,685 | ||
|
|
|
|||
For deferred acquisition costs, the Company removed shadow adjustments previously recorded in accumulated other comprehensive income for the impact of unrealized gains and losses that were included in the pre-ASU 2018-12 expected gross profits amortization calculation as of the transition date.
As a result of the adoption of ASU 2018-12, the Company decreased beginning retained earnings by $7.2 million and increased accumulated other comprehensive income by $1.8 billion as of January 1, 2021.
Certain amounts in the prior years’ consolidated financial statements and related footnotes thereto have been recast, to the extent impacted by ASU 2018-12, to conform to the new guidance.
Market Risk Benefits Accounting Policy
Market risk benefits (MRBs) are contracts or contract features that both provide protection to the policyholder from other-than-nominal capital market risk and expose the Company to other-than-nominal capital market risk. We issue certain fixed indexed annuity and fixed rate annuity contracts that provide minimum guarantees to policyholders including guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum death benefits (GMDB) that are MRBs.
MRBs are measured at fair value, at the individual contract level, and can be either an asset or a liability. Contracts which contain more than one MRB feature are combined into one single MRB. The fair value is calculated using stochastic models that include a risk margin and incorporate a spread for our instrument specific credit risk. At contract inception, attributed fees are calculated based on the present value of the fees and assessments collectible from the policyholder relative to the present value of expected benefits paid attributable to the MRB. The attributed fees remain static over the life of the MRB and is used to calculate the fair value of the MRB using a risk neutral valuation method. The attributed fees cannot be negative and cannot exceed the total explicit fees collectible from the policyholder.
11
The MRB assets and liabilities are presented separately on the Consolidated Balance Sheets. The ceded MRB assets are presented in coinsurance deposits on the Consolidated Balance Sheets. Changes in fair value of the MRB are recognized in market risk benefits (gains) losses on the Consolidated Statements of Operations each period with the exception of the portion of the change in fair value related to a changes in our nonperformance risk, which is recognized in other comprehensive income (OCI). See Note 8—Policyholder Liabilities for more information on MRBs.
Deferred Policy Acquisition Costs (DAC) and Deferred Sales Inducements (DSI) Accounting Policy
The Company incurs costs in connection with acquiring new and renewal business. The portion of these costs which are incremental and direct to the acquisition of a new or renewal policy are deferred as they are incurred. DAC and DSI are amortized on a constant level basis over the expected term of the contracts based on projected policy counts. Contracts are grouped consistent with the grouping used in the estimating of the liability. The assumptions used in the calculation of DAC and DSI include full surrenders, partial withdrawals, mortality, utilization and reset assumptions associated with lifetime income benefit riders, and the option budget assumption. If the actual experience is different from our expectations, the amortization pattern is adjusted prospectively. See Note 7—Deferred Policy Acquisition Costs and Deferred Sales Inducements for more information on DAC and DSI.
Liability for Future Policy Benefits Accounting Policy
A liability for future policy benefits is recorded for our traditional limited-payment insurance contracts and is generally equal to the present value of expected future policy benefit payments. The present value calculation uses assumptions for mortality, morbidity, termination, and expense. The contracts are grouped into cohorts based on issue year and product type.
The liability for future policy benefits is discounted using an upper-medium grade fixed-income instrument yield that reflects the duration characteristics of the liabilities and maximizes the use of observable data. The discount rate is updated each reporting period and any changes in the liability resulting from changes in the upper medium grade fixed income instrument yield are recognized in AOCI. Any changes to the liability as a result of assumption changes will be recognized as remeasurement gains (losses) in insurance policy benefits and change in future policy benefits in the Consolidated Statement of Operations. See Note 8—Policyholder Liabilities for more information on the liability for future policy benefits.
ASU 2018-12 also requires disaggregated roll forwards for the liability for future policy benefits, MRBs, DAC and DSI. We disaggregated the roll forwards by product type consistent with how we internally view our business.
Agreement and Plan of Merger
On July 4, 2023, American Equity Investment Life Holding Company entered into an Agreement and Plan of Merger (the “Agreement”) with Brookfield Reinsurance Ltd. The Agreement provides that each issued and outstanding share of AEL common stock will be converted into the right to receive $38.85 per share in cash and a number of fully-paid and nonassessable share of class A limited voting shares of Brookfield Asset Management Ltd (BAM) equal to the Exchange Ratio as defined in the Agreement. The Exchange Ratio is subject to adjustment based on the 10-day volume-weighted average share price of BAM Class A Stock with total consideration ranging between $54.00 and $56.50 per share. The Agreement does not provide for the payment of any consideration with respect to the issued and outstanding shares of AEL Series A and Series B preferred stock. As such, these shares will be unaffected by the Agreement and will remain outstanding.
The closing of the Agreement is subject to a number of contingencies, including (1) receipt of American Equity Investment Life Holding Company shareholder approval, (2) receipt of certain regulatory approvals, (3) the absence of any injunction or restraint making illegal or otherwise prohibiting the consummation of the merger, (4) the effectiveness of the applicable registration statement on Form F-4 to be filed by BAM and (5) listing approval of the shares of BAM Class A Stock on the New York Stock Exchange and the Toronto Stock Exchange. BAM’s obligations to close the merger are also conditioned upon the absence of a Company Material Adverse Effect (as defined in the Agreement) and the absence of the imposition of a Burdensome Condition (as defined in the Agreement) by any regulator as part of the regulatory approval process. The Agreement contains Company representations and warranties and provides for pre-closing covenants, including, subject to certain exceptions, covenants relating to the conduct by the Company in the ordinary course consistent with past practice.
The closing of the merger may not occur prior to January 5, 2024, unless BAM’s parent agrees otherwise. The Agreement also provides termination rights for each of the Company and BAM, including, among others, in the event the closing of the merger does not occur on or before April 4, 2024, subject to extension under certain circumstances be extended. Should the Agreement be terminated under certain circumstances, the Company may be required to pay BAM’s parent a termination fee of $102 million.
12
2. Fair Values of Financial Instruments
The following sets forth a comparison of the carrying amounts and fair values of our financial instruments:
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Assets |
||||||||||||||||
| Fixed maturity securities, available for sale |
$ | 32,084,932 | $ | 32,084,932 | $ | 39,804,617 | $ | 39,804,617 | ||||||||
| Mortgage loans on real estate |
7,494,983 | 6,920,180 | 6,949,027 | 6,502,463 | ||||||||||||
| Real estate investments |
1,191,255 | 1,191,255 | 1,056,063 | 1,056,063 | ||||||||||||
| Limited partnerships and limited liability companies |
1,172,525 | 1,172,525 | 684,835 | 684,835 | ||||||||||||
| Derivative instruments |
733,784 | 733,784 | 431,727 | 431,727 | ||||||||||||
| Other investments |
1,207,672 | 1,207,672 | 1,817,085 | 1,817,085 | ||||||||||||
| Cash and cash equivalents |
10,188,438 | 10,188,438 | 1,919,669 | 1,919,669 | ||||||||||||
| Coinsurance deposits |
14,628,884 | 13,723,689 | 13,254,956 | 12,640,797 | ||||||||||||
| Market risk benefits |
346,515 | 346,515 | 229,871 | 229,871 | ||||||||||||
| Liabilities |
||||||||||||||||
| Policy benefit reserves |
59,884,652 | 56,592,975 | 58,419,911 | 55,572,896 | ||||||||||||
| Market risk benefits |
2,552,907 | 2,552,907 | 2,455,492 | 2,455,492 | ||||||||||||
| Single premium immediate annuity (SPIA) benefit reserves |
195,757 | 204,102 | 212,119 | 221,130 | ||||||||||||
| Other policy funds—FHLB |
— | — | 300,000 | 300,000 | ||||||||||||
| Notes and loan payable |
787,098 | 761,550 | 792,073 | 774,220 | ||||||||||||
| Subordinated debentures |
79,017 | 80,060 | 78,753 | 87,293 | ||||||||||||
Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.
We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated balance sheets as follows:
| Level 1 – | Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price. |
| Level 2 – | Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are observable. |
| Level 3 – | Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected future cash flows with our own assumptions about what a market participant would use in determining fair value. |
| NAV – | Our consolidated limited partnership funds are typically measured using NAV as a practical expedient in determining fair value and are not classified in the fair value hierarchy. Our carrying value reflects our pro rata ownership percentage as indicated by NAV in the investment fund financial statements and is recorded on a quarter lag due to the timing of when financial statements are available. |
Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security. We record transfers between levels as of the beginning of the reporting period.
13
Our assets and liabilities which are measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 are presented below based on the fair value hierarchy levels:
| Total Fair Value |
NAV | Quoted Prices in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| September 30, 2023 |
||||||||||||||||||||
| Assets |
||||||||||||||||||||
| Fixed maturity securities, available for sale: |
||||||||||||||||||||
| U.S. Government and agencies |
$ | 162,885 | $ | — | $ | 27,068 | $ | 135,817 | $ | — | ||||||||||
| States, municipalities and territories |
2,564,670 | — | — | 2,442,796 | 121,874 | |||||||||||||||
| Foreign corporate securities and foreign governments |
428,227 | — | — | 428,227 | — | |||||||||||||||
| Corporate securities |
19,211,380 | — | — | 18,959,540 | 251,840 | |||||||||||||||
| Residential mortgage backed securities |
1,342,984 | — | — | 1,342,984 | — | |||||||||||||||
| Commercial mortgage backed securities |
2,983,030 | — | — | 2,983,030 | — | |||||||||||||||
| Other asset backed securities |
5,391,756 | — | — | 4,638,696 | 753,060 | |||||||||||||||
| Other investments |
724,223 | — | 390,923 | 333,300 | — | |||||||||||||||
| Real estate investments |
1,191,255 | — | — | — | 1,191,255 | |||||||||||||||
| Limited partnerships and limited liability companies |
1,172,525 | 1,023,691 | — | — | 148,834 | |||||||||||||||
| Derivative instruments |
733,784 | — | — | 733,784 | — | |||||||||||||||
| Cash and cash equivalents |
10,188,438 | — | 10,188,438 | — | — | |||||||||||||||
| Market risk benefits (a) |
346,515 | — | — | — | 346,515 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 46,441,672 | $ | 1,023,691 | $ | 10,606,429 | $ | 31,998,174 | $ | 2,813,378 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Liabilities |
||||||||||||||||||||
| Funds withheld liability—embedded derivative |
$ | (525,960 | ) | $ | — | $ | — | $ | — | $ | (525,960 | ) | ||||||||
| Fixed index annuities—embedded derivatives |
4,604,191 | — | — | — | 4,604,191 | |||||||||||||||
| Market risk benefits (a) |
2,552,907 | — | — | — | 2,552,907 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 6,631,138 | $ | — | $ | — | $ | — | $ | 6,631,138 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| December 31, 2022 |
||||||||||||||||||||
| Assets |
||||||||||||||||||||
| Fixed maturity securities, available for sale: |
||||||||||||||||||||
| U.S. Government and agencies |
$ | 169,071 | $ | — | $ | 26,184 | $ | 142,887 | $ | — | ||||||||||
| States, municipalities and territories |
3,822,982 | — | — | 3,822,982 | — | |||||||||||||||
| Foreign corporate securities and foreign governments |
676,852 | — | — | 676,852 | — | |||||||||||||||
| Corporate securities |
24,161,921 | — | — | 23,759,573 | 402,348 | |||||||||||||||
| Residential mortgage backed securities |
1,377,611 | — | — | 1,377,611 | — | |||||||||||||||
| Commercial mortgage backed securities |
3,687,478 | — | — | 3,687,478 | — | |||||||||||||||
| Other asset backed securities |
5,908,702 | — | — | 5,465,784 | 442,918 | |||||||||||||||
| Other investments |
1,013,297 | — | 398,280 | 615,017 | — | |||||||||||||||
| Real estate investments |
940,559 | — | — | — | 940,559 | |||||||||||||||
| Limited partnerships and limited liability companies |
684,835 | 620,626 | — | — | 64,209 | |||||||||||||||
| Derivative instruments |
431,727 | — | — | 431,727 | — | |||||||||||||||
| Cash and cash equivalents |
1,919,669 | — | 1,919,669 | — | — | |||||||||||||||
| Market risk benefits (a) |
229,871 | — | — | — | 229,871 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 45,024,575 | $ | 620,626 | $ | 2,344,133 | $ | 39,979,911 | $ | 2,079,905 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Liabilities |
||||||||||||||||||||
| Funds withheld liability—embedded derivative |
$ | (441,864 | ) | $ | — | $ | — | $ | — | $ | (441,864 | ) | ||||||||
| Fixed index annuities—embedded derivatives |
4,820,845 | — | — | — | 4,820,845 | |||||||||||||||
| Market risk benefits (a) |
2,455,492 | — | — | — | 2,455,492 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 6,834,473 | $ | — | $ | — | $ | — | $ | 6,834,473 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (a) | See Note 8—Policyholder Liabilities for additional information related to market risk benefits, including the balances of and changes in market risk benefits as well as significant inputs and assumptions used in the fair value measurements of market risk benefits. |
14
The following methods and assumptions were used in estimating the fair values of financial instruments during the periods presented in these consolidated financial statements.
Fixed maturity securities
The fair values of fixed maturity securities in an active and orderly market are determined by utilizing independent pricing services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:
| • | reported trading prices, |
| • | benchmark yields, |
| • | broker-dealer quotes, |
| • | benchmark securities, |
| • | bids and offers, |
| • | credit ratings, |
| • | relative credit information, and |
| • | other reference data. |
The independent pricing services also take into account perceived market movements and sector news, as well as a security’s terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity. When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing service. In situations where a price is not available from this service, we may obtain quotes or prices from additional parties as needed. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, comparison of the prices to a secondary pricing source, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from time to time as a result of these validation procedures, we did not make any significant adjustments as of September 30, 2023 and December 31, 2022.
Fixed maturity security valuations that include at least one significant unobservable input are reflected in Level 3 in the fair value hierarchy and can include fixed maturity securities across all asset classes. Quantitative information about the significant unobservable inputs used are provided below for fixed maturity securities that were either valued internally or were valued by a third party and the inputs were reasonably available. The fair value of corporate securities that utilized at least one significant unobservable input were $77.7 million and $84.7 million as of September 30, 2023 and December 31, 2022, respectively. A discounted cash flow methodology was utilized in the valuation, which included an unobservable liquidity premium of 20 basis points being incorporated along with other observable market data. The fair value of other asset backed securities that utilized at least one significant unobservable input was $604.5 million and $296.8 million as of September 30, 2023 and December 31, 2022, respectively. A discounted cash flow methodology was utilized in the valuation, which included unobservable discount rates and weighted average lives being incorporated along with other observable market data. At September 30, 2023, the discount rates used in the fair value calculations ranged from 5.87% to 25.00% with a weighted average rate of 7.31%. The weighted average lives used in the fair value calculations ranged from 1.20 years to 12.27 years with a weighted average of 5.91 years. At December 31, 2022, the discount rates used in the fair value calculations ranged from 4.04% to 28.58% with a weighted average rate of 4.36%. The weighted average lives used in the fair value calculations ranged from 8.79 years to 12.48 years with an average of 9.29 years.
Mortgage loans on real estate
Mortgage loans on real estate are not measured at fair value on a recurring basis. The fair values of mortgage loans on real estate are calculated using discounted expected cash flows using competitive market interest rates currently being offered for similar loans. The fair values of impaired mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral (based on appraised values) less estimated costs to sell. The inputs utilized to determine fair value of all mortgage loans are unobservable market data (competitive market interest rates); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.
15
Real estate investments
The fair values of residential real estate investments held through consolidation of investment company VIEs are initially calculated based on the cost to purchase the properties and subsequently calculated based on a discounted cash flow methodology. Under the discounted cash flow method, net operating income is forecasted assuming a 10-year hold period commencing as of the valuation date. An additional year is forecasted in order to determine the residual sale price at the end of the hold period, using a residual (terminal) capitalization rate. The significant inputs into the fair value calculation under the discounted cash flow method include the residual capitalization rate and discount rate. These inputs are unobservable market data; therefore, fair value of residential real estate investments falls into Level 3 in the fair value hierarchy. As of September 30, 2023, the residual capitalization rates used in the fair value calculations ranged from 4.75% to 6.50% with an average rate of 5.41%. As of December 31, 2022, the residual capitalization rates used in the fair value calculations ranged from 4.75% to 6.50% with an average rate of 5.44%. As of September 30, 2023, the discount rates used in the fair value calculations ranged from 6.00% to 7.88% with an average rate of 6.84%. As of December 31, 2022, the discount rates used in the fair value calculations ranged from 6.00% to 8.00% with an average rate of 6.91%.
Limited partnerships and limited liability companies
Two of our consolidated variable interest entities, which are fair valued on a recurring basis, invest in limited liability companies that invest in operating entities which hold multifamily real estate properties. The fair value of these variable interest entities were $49.8 million and $64.2 million as of September 30, 2023 and December 31, 2022, respectively, and falls within Level 3 of the fair value hierarchy. The fair value of the limited liability companies was obtained from a third party and is based on the fair value of the underlying real estate held by the various operating entities. The real estate is initially calculated based on the cost to purchase the properties and subsequently calculated based on a discounted cash flow methodology. As of September 30, 2023, the residual capitalization rates used in the fair value calculations of the underlying real estate ranged from 5.00% to 5.00% with a weighted average rate of 5.00%. As of December 31, 2022, the residual capitalization rates used in the fair value calculations of the underlying real estate ranged from 4.25% to 4.75% with a weighted average rate of 4.46%. As of September 30, 2023, the discount rates used in the fair value calculations of the underlying real estate ranged from 6.50% to 6.50% with a weighted average rate of 6.50%. As of December 31, 2022, the discount rates used in the fair value calculations of the underlying real estate ranged from 5.75% to 6.00% with a weighted average rate of 5.86%. The fair value of this investment falls within Level 3 of the fair value hierarchy.
During the year, we purchased an investment in an infrastructure limited liability company through a consolidated VIE that is measured at fair value on a recurring basis. There have been no significant changes to inputs since the purchase date, and therefore, the cost to purchase the investment of $100 million approximates fair value as of September 30, 2023, and falls within Level 3 of the fair value hierarchy.
Each of our consolidated limited partnership funds, which are measured using NAV as a practical expedient, are closed-end funds that invest in infrastructure credit assets and tech-centric middle-market loans, respectively. Redemptions are not allowed until the funds’ termination dates and liquidations begin. As of September 30, 2023 and December 31, 2022, our unfunded commitments for our consolidated limited partnership funds were $510.6 million and $926.3 million, respectively.
Derivative instruments
The fair values of our call options are based upon the amount of cash that we will receive to settle each derivative instrument on the reporting date. These amounts are determined by our investment team using industry accepted valuation models and are adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index annuity policy liabilities.
The fair values of our pay fixed/receive float interest rate swaps are determined using internal valuation models that generate discounted expected future cash flows by constructing a projected Secured Overnight Financing Rate (SOFR) curve over the term of the swap.
Other investments
Certain financial instruments included in other investments are measured at fair value on a recurring basis. The fair value for these investments are determined using the same methods discussed above for fixed maturity securities.
Financial instruments included in other investments that are not measured at fair value on a recurring basis are FHLB common stock, short-term loans, collateral loans and company owned life insurance (“COLI”). FHLB common stock is carried at cost which approximates fair value. FHLB common stock was $10.0 million and $22.0 million as of September 30, 2023 and December 31, 2022, respectively, and falls within Level 2 of the fair value hierarchy. Due to the short-term nature of the investments, the fair value of a portion of our short-term loans approximates the carrying value. We had no short-term loans as of September 30, 2023. The fair value of short-term loans was $316.4 million as of December 31, 2022. Our short-term loans fall within Level 2 of the fair value hierarchy. For our collateral loans, we have concluded the carrying value approximates fair value and falls within Level 2 of the fair value hierarchy. The fair value of collateral loans was $64.6 million as of September 30, 2023 and December 31, 2022. The fair value of our COLI approximates the cash surrender value of the policies and falls within Level 2 of the fair value hierarchy. The fair value of COLI was $404.9 million and $397.7 million as of September 30, 2023 and December 31, 2022, respectively.
16
Cash and cash equivalents
Amounts reported in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.
Policy benefit reserves, coinsurance deposits and SPIA benefit reserves
The fair values of the liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated at the cost we would incur to extinguish the liability (i.e., the cash surrender value) as these contracts are generally issued without an annuitization date. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. For period-certain annuity benefit contracts, the fair value is determined by discounting the benefits at the interest rates currently in effect for newly issued immediate annuity contracts. We are not required to and have not estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosures of fair value. Policy benefit reserves, coinsurance deposits and SPIA benefit reserves without life contingencies are not measured at fair value on a recurring basis. SPIA benefit reserves without life contingencies are recognized in other policy funds and contract claims on the Consolidated Balance Sheets. All of the fair values presented within these categories fall within Level 3 of the fair value hierarchy as most of the inputs are unobservable market data.
Other policy funds—FHLB
The fair values of the Company’s funding agreements with the FHLB are estimated using discounted cash flow calculations based on interest rates currently being offered for similar agreements with similar maturities.
Notes and loan payable
The fair value of our senior unsecured notes is based upon quoted market prices. The carrying value of the term loan approximates fair value as the interest rate is reset on a quarterly basis utilizing SOFR adjusted for a credit spread. Both of these are categorized as Level 2 within the fair value hierarchy, and are not remeasured at fair value on a recurring basis.
Subordinated debentures
Fair values for subordinated debentures are estimated using discounted cash flow calculations based principally on observable inputs including our incremental borrowing rates, which reflect our credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. These fair values are categorized as Level 2 within the fair value hierarchy. Subordinated debentures are not measured at fair value on a recurring basis.
Funds withheld liability—embedded derivative
We estimate the fair value of the embedded derivative based on the fair value of the assets supporting the funds withheld payable under modified coinsurance and funds withheld coinsurance reinsurance agreements. The fair value of the embedded derivative is classified as Level 3 based on valuation methods used for the assets held supporting the reinsurance agreements.
Fixed index annuities—embedded derivatives
We estimate the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each valuation date by (i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (ii) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance risk related to those liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth and future policy decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credit on the next policy anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
Within this determination we have the following significant unobservable inputs: 1) the expected cost of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary and 2) our best estimates for future policy decrements, primarily lapse rates. As of both September 30, 2023 and December 31, 2022, we utilized an estimate of 2.35% and 2.40%, respectively, for the long-term expected cost of annual call options, which is based on estimated long-term account value growth and a historical review of our actual option costs.
17
Our best estimate assumptions for lapse rates are based on our actual experience and our outlook as to future expectations for such assumptions. These assumptions are reviewed on a quarterly basis and are updated as our experience develops and/or as future expectations change. The following table presents average lapse rate assumptions, by contract duration, used in estimating the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each reporting date:
| Average Lapse Rates | ||||||||
| Contract Duration (Years) |
September 30, 2023 | December 31, 2022 | ||||||
| 1 - 5 |
2.00 | % | 2.17 | % | ||||
| 6 - 10 |
3.60 | % | 3.28 | % | ||||
| 11 - 15 |
3.75 | % | 3.63 | % | ||||
| 16 - 20 |
9.35 | % | 8.55 | % | ||||
| 20+ |
4.91 | % | 4.90 | % | ||||
Lapse rates are generally expected to increase as surrender charge percentages decrease for policies without a lifetime income benefit rider. Lapse expectations reflect a significant increase in the year in which the surrender charge period on a contract ends.
The following table provides a reconciliation of the beginning and ending balances for our Level 3 assets and liabilities, which are measured at fair value on a recurring basis using significant unobservable inputs for the three and nine months ended September 30, 2023 and 2022:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Fixed maturity securities, available for sale—States, municipalities and territories |
||||||||||||||||
| Beginning balance |
$ | 129,303 | $ | — | $ | — | $ | — | ||||||||
| Purchases and sales, net |
— | — | — | — | ||||||||||||
| Transfers in |
— | — | 108,823 | — | ||||||||||||
| Transfers out |
— | — | — | — | ||||||||||||
| Total realized/unrealized gains (losses) |
||||||||||||||||
| Included in net income |
— | — | — | — | ||||||||||||
| Included in other comprehensive income (loss) |
(7,429 | ) | — | 13,051 | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Ending balance |
$ | 121,874 | $ | — | $ | 121,874 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Fixed maturity securities, available for sale—Corporate securities |
||||||||||||||||
| Beginning balance |
$ | 251,137 | $ | 77,726 | $ | 402,348 | $ | — | ||||||||
| Purchases and sales, net |
— | — | (26,278 | ) | — | |||||||||||
| Transfers in |
17,281 | 241,878 | 66,954 | 319,604 | ||||||||||||
| Transfers out |
— | — | (172,174 | ) | — | |||||||||||
| Total realized/unrealized gains (losses): |
||||||||||||||||
| Included in net income |
— | — | — | — | ||||||||||||
| Included in other comprehensive income (loss) |
(16,578 | ) | (72 | ) | (19,010 | ) | (72 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Ending balance |
$ | 251,840 | $ | 319,532 | $ | 251,840 | $ | 319,532 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Fixed maturity securities, available for sale—Other asset backed securities |
||||||||||||||||
| Beginning balance |
$ | 742,924 | $ | 64,550 | $ | 442,918 | $ | — | ||||||||
| Purchases and sales, net |
— | — | 227,032 | — | ||||||||||||
| Transfers in |
23,244 | 37,151 | 153,746 | 101,701 | ||||||||||||
| Transfers out |
— | — | (20,817 | ) | — | |||||||||||
| Total realized/unrealized gains (losses): |
||||||||||||||||
| Included in net income |
— | — | — | — | ||||||||||||
| Included in other comprehensive income (loss) |
(13,108 | ) | (3,456 | ) | (49,819 | ) | (3,456 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Ending balance |
$ | 753,060 | $ | 98,245 | $ | 753,060 | $ | 98,245 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
18
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Other investments |
| |||||||||||||||
| Beginning balance |
$ | 23,244 | $ | — | $ | — | $ | 6,349 | ||||||||
| Transfers in |
— | — | 9,821 | — | ||||||||||||
| Transfers out |
(23,244 | ) | — | (23,244 | ) | (3,867 | ) | |||||||||
| Total realized/unrealized gains (losses): |
| |||||||||||||||
| Included in net income |
— | — | — | (2,482 | ) | |||||||||||
| Included in other comprehensive income (loss) |
— | — | 13,423 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Ending balance |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Real estate investments |
| |||||||||||||||
| Beginning balance |
$ | 1,158,772 | $ | 672,475 | $ | 940,559 | $ | 337,939 | ||||||||
| Purchases and sales, net |
27,396 | 250,062 | 257,129 | 553,628 | ||||||||||||
| Change in fair value |
5,087 | (24,864 | ) | (6,433 | ) | 6,106 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Ending balance |
$ | 1,191,255 | $ | 897,673 | $ | 1,191,255 | $ | 897,673 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Limited partnerships and limited liability companies |
| |||||||||||||||
| Beginning balance |
$ | 151,040 | $ | — | $ | 64,209 | $ | — | ||||||||
| Purchases and sales, net |
1,260 | — | 98,736 | — | ||||||||||||
| Change in fair value |
(3,466 | ) | — | (14,111 | ) | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Ending balance |
$ | 148,834 | $ | — | $ | 148,834 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Funds withheld liability—embedded derivative |
| |||||||||||||||
| Beginning balance |
$ | (397,234 | ) | $ | — | $ | (441,864 | ) | $ | — | ||||||
| Transfers in |
— | (520,458 | ) | — | (520,458 | ) | ||||||||||
| Change in fair value |
(128,726 | ) | — | (84,096 | ) | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Ending balance |
$ | (525,960 | ) | $ | (520,458 | ) | $ | (525,960 | ) | $ | (520,458 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Fixed index annuities—embedded derivatives |
| |||||||||||||||
| Beginning balance |
$ | 5,014,697 | $ | 5,836,312 | $ | 4,820,845 | $ | 7,964,961 | ||||||||
| Premiums less benefits |
(23,488 | ) | (92,242 | ) | (176,978 | ) | (28,759 | ) | ||||||||
| Change in fair value, net |
(387,018 | ) | (466,244 | ) | (39,676 | ) | (2,658,376 | ) | ||||||||
| Reserve release related to in-force ceded reinsurance |
— | (20,784 | ) | — | (20,784 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Ending balance |
$ | 4,604,191 | $ | 5,257,042 | $ | 4,604,191 | $ | 5,257,042 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Transfers into and out of Level 3 during the three and nine months ended September 30, 2023 and 2022 were primarily the result of changes in observable pricing information.
The fair value of our fixed index annuities embedded derivatives is net of coinsurance ceded of $1,074.4 million and $1,173.4 million as of September 30, 2023 and December 31, 2022, respectively. Change in fair value, net for each period in our embedded derivatives is included in Change in fair value of embedded derivatives in the Consolidated Statements of Operations.
Certain derivatives embedded in our fixed index annuity contracts are our most significant financial instrument measured at fair value that are categorized as Level 3 in the fair value hierarchy. The contractual obligations for future annual index credits within our fixed index annuity contracts are treated as a “series of embedded derivatives” over the expected life of the applicable contracts. We estimate the fair value of these embedded derivatives at each valuation date by the method described above under fixed index annuities—embedded derivatives. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract values at September 30, 2023, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $307.9 million recorded through operations as a decrease in the change in fair value of embedded derivatives. A decrease by 100 basis points in the discount rates used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $352.2 million recorded through operations as an increase in the change in fair value of embedded derivatives.
19
3. Investments
At September 30, 2023 and December 31, 2022, the amortized cost and fair value of fixed maturity securities were as follows:
| Amortized Cost (1) |
Gross Unrealized Gains |
Gross Unrealized Losses (2) |
Allowance for Credit Losses |
Fair Value | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| September 30, 2023 |
||||||||||||||||||||
| Fixed maturity securities, available for sale: |
||||||||||||||||||||
| U.S. Government and agencies |
$ | 172,650 | $ | 7 | $ | (9,772 | ) | $ | — | $ | 162,885 | |||||||||
| States, municipalities and territories |
3,198,091 | 5,049 | (638,470 | ) | — | 2,564,670 | ||||||||||||||
| Foreign corporate securities and foreign governments |
535,008 | 37 | (106,818 | ) | — | 428,227 | ||||||||||||||
| Corporate securities |
23,271,192 | 45,571 | (4,102,472 | ) | (2,911 | ) | 19,211,380 | |||||||||||||
| Residential mortgage backed securities |
1,501,200 | 5,030 | (163,149 | ) | (97 | ) | 1,342,984 | |||||||||||||
| Commercial mortgage backed securities |
3,520,832 | 443 | (538,245 | ) | — | 2,983,030 | ||||||||||||||
| Other asset backed securities |
5,614,577 | 21,760 | (243,971 | ) | (610 | ) | 5,391,756 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 37,813,550 | $ | 77,897 | $ | (5,802,897 | ) | $ | (3,618 | ) | $ | 32,084,932 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| December 31, 2022 |
||||||||||||||||||||
| Fixed maturity securities, available for sale: |
||||||||||||||||||||
| U.S. Government and agencies |
$ | 173,638 | $ | 70 | $ | (4,637 | ) | $ | — | $ | 169,071 | |||||||||
| States, municipalities and territories |
4,356,251 | 41,565 | (574,834 | ) | — | 3,822,982 | ||||||||||||||
| Foreign corporate securities and foreign governments |
748,770 | 11,661 | (83,579 | ) | — | 676,852 | ||||||||||||||
| Corporate securities |
27,706,440 | 146,065 | (3,687,370 | ) | (3,214 | ) | 24,161,921 | |||||||||||||
| Residential mortgage backed securities |
1,492,242 | 11,870 | (126,368 | ) | (133 | ) | 1,377,611 | |||||||||||||
| Commercial mortgage backed securities |
4,098,755 | 493 | (411,770 | ) | — | 3,687,478 | ||||||||||||||
| Other asset backed securities |
6,289,923 | 14,068 | (395,289 | ) | — | 5,908,702 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 44,866,019 | $ | 225,792 | $ | (5,283,847 | ) | $ | (3,347 | ) | $ | 39,804,617 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) | Amortized cost excludes accrued interest receivable of $370.6 million and $425.4 million as of September 30, 2023 and December 31, 2022, respectively. |
| (2) | Gross unrealized losses are net of allowance for credit losses. |
The amortized cost and fair value of fixed maturity securities at September 30, 2023, by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their lives and are shown below as separate lines.
| Available for sale | ||||||||
| Amortized Cost |
Fair Value | |||||||
| (Dollars in thousands) | ||||||||
| Due in one year or less |
$ | 1,425,811 | $ | 1,423,194 | ||||
| Due after one year through five years |
4,298,107 | 4,048,402 | ||||||
| Due after five years through ten years |
4,868,547 | 4,242,544 | ||||||
| Due after ten years through twenty years |
7,384,698 | 6,057,753 | ||||||
| Due after twenty years |
9,199,778 | 6,595,269 | ||||||
|
|
|
|
|
|||||
| 27,176,941 | 22,367,162 | |||||||
| Residential mortgage backed securities |
1,501,200 | 1,342,984 | ||||||
| Commercial mortgage backed securities |
3,520,832 | 2,983,030 | ||||||
| Other asset backed securities |
5,614,577 | 5,391,756 | ||||||
|
|
|
|
|
|||||
| $ | 37,813,550 | $ | 32,084,932 | |||||
|
|
|
|
|
|||||
20
Net unrealized losses on investments reported as a separate component of stockholders’ equity were comprised of the following:
| September 30, 2023 | December 31, 2022 | |||||||
| (Dollars in thousands) | ||||||||
| Net unrealized losses on investments |
$ | (5,726,811 | ) | $ | (5,065,422 | ) | ||
| Deferred income tax valuation allowance reversal |
22,534 | 22,534 | ||||||
| Deferred income tax expense |
1,201,891 | 1,063,441 | ||||||
|
|
|
|
|
|||||
| Net unrealized losses reported as accumulated other comprehensive loss |
$ | (4,502,386 | ) | $ | (3,979,447 | ) | ||
|
|
|
|
|
|||||
The National Association of Insurance Commissioners (“NAIC”) assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given by the Nationally Recognized Statistical Rating Organizations (“NRSRO’s”). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 designations are considered “investment grade” while NAIC Class 3 through 6 designations are considered “non-investment grade.” Based on the NAIC designations, we had 98% of our fixed maturity portfolio rated investment grade at both September 30, 2023 and December 31, 2022, respectively.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| NAIC Designation (1) |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 |
$ | 22,103,730 | $ | 18,644,092 | $ | 27,061,903 | $ | 24,211,086 | ||||||||
| 2 |
14,909,260 | 12,739,371 | 17,023,157 | 14,944,131 | ||||||||||||
| 3 |
554,568 | 469,819 | 595,193 | 510,392 | ||||||||||||
| 4 |
116,264 | 98,929 | 109,409 | 91,495 | ||||||||||||
| 5 |
61,334 | 45,253 | 61,721 | 36,738 | ||||||||||||
| 6 |
10,000 | 7,127 | 14,636 | 10,775 | ||||||||||||
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|||||||||
| $ | 37,755,156 | $ | 32,004,591 | $ | 44,866,019 | $ | 39,804,617 | |||||||||
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| (1) | The table excludes residual tranche securities that are not rated with an amortized cost of $58,394 and fair value of $80,341 as of September 30, 2023. |
21
The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 4,059 and 4,510 securities, respectively) have been in a continuous unrealized loss position, at September 30, 2023 and December 31, 2022:
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| Fair Value | Unrealized Losses (1) |
Fair Value | Unrealized Losses (1) |
Fair Value | Unrealized Losses (1) |
|||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| September 30, 2023 |
| |||||||||||||||||||||||
| Fixed maturity securities, available for sale: |
| |||||||||||||||||||||||
| U.S. Government and agencies |
$ | 116,484 | $ | (6,223 | ) | $ | 45,991 | $ | (3,549 | ) | $ | 162,475 | $ | (9,772 | ) | |||||||||
| States, municipalities and territories |
229,082 | (19,688 | ) | 2,168,957 | (618,782 | ) | 2,398,039 | (638,470 | ) | |||||||||||||||
| Foreign corporate securities and foreign governments |
14,610 | (70 | ) | 393,715 | (106,748 | ) | 408,325 | (106,818 | ) | |||||||||||||||
| Corporate securities |
2,888,535 | (163,562 | ) | 14,312,197 | (3,938,910 | ) | 17,200,732 | (4,102,472 | ) | |||||||||||||||
| Residential mortgage backed securities |
487,935 | (25,263 | ) | 772,581 | (137,886 | ) | 1,260,516 | (163,149 | ) | |||||||||||||||
| Commercial mortgage backed securities |
181,256 | (7,607 | ) | 2,734,129 | (530,639 | ) | 2,915,385 | (538,246 | ) | |||||||||||||||
| Other asset backed securities |
1,182,339 | (45,678 | ) | 3,307,085 | (198,292 | ) | 4,489,424 | (243,970 | ) | |||||||||||||||
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| $ | 5,100,241 | $ | (268,091 | ) | $ | 23,734,655 | $ | (5,534,806 | ) | $ | 28,834,896 | $ | (5,802,897 | ) | ||||||||||
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| December 31, 2022 |
| |||||||||||||||||||||||
| Fixed maturity securities, available for sale: |
| |||||||||||||||||||||||
| U.S. Government and agencies |
$ | 160,201 | $ | (4,512 | ) | $ | 908 | $ | (125 | ) | $ | 161,109 | $ | (4,637 | ) | |||||||||
| States, municipalities and territories |
2,595,122 | (537,313 | ) | 95,184 | (37,521 | ) | 2,690,306 | (574,834 | ) | |||||||||||||||
| Foreign corporate securities and foreign governments |
522,826 | (76,957 | ) | 21,816 | (6,622 | ) | 544,642 | (83,579 | ) | |||||||||||||||
| Corporate securities |
18,784,181 | (3,218,323 | ) | 1,411,177 | (469,047 | ) | 20,195,358 | (3,687,370 | ) | |||||||||||||||
| Residential mortgage backed securities |
992,783 | (101,100 | ) | 116,388 | (25,268 | ) | 1,109,171 | (126,368 | ) | |||||||||||||||
| Commercial mortgage backed securities |
2,941,293 | (302,513 | ) | 651,923 | (109,257 | ) | 3,593,216 | (411,770 | ) | |||||||||||||||
| Other asset backed securities |
2,561,390 | (162,821 | ) | 1,924,026 | (232,468 | ) | 4,485,416 | (395,289 | ) | |||||||||||||||
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| $ | 28,557,796 | $ | (4,403,539 | ) | $ | 4,221,422 | $ | (880,308 | ) | $ | 32,779,218 | $ | (5,283,847 | ) | ||||||||||
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| (1) | Unrealized losses have been reduced to reflect the allowance for credit losses of $3.6 million and $3.3 million as of September 30, 2023 and December 31, 2022, respectively. |
The unrealized losses at September 30, 2023 are principally related to the timing of the purchases of certain securities, which carry less yield than those available at September 30, 2023. Approximately 98% of the unrealized losses on fixed maturity securities shown in the above table for both September 30, 2023 and December 31, 2022 are on securities that are rated investment grade, defined as being the highest two NAIC designations.
We expect to recover our amortized cost on all securities except for those securities on which we recognized an allowance for credit loss. In addition, because we did not have the intent to sell fixed maturity securities with unrealized losses and it was not more likely than not that we would be required to sell these securities prior to recovery of the amortized cost, which may be maturity, we did not write down these investments to fair value through the consolidated statements of operations.
Changes in net unrealized gains/losses on investments for the three and nine months ended September 30, 2023 and 2022 are as follows:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Fixed maturity securities available for sale carried at fair value |
$ | (1,096,049 | ) | $ | (2,277,217 | ) | $ | (661,389 | ) | $ | (9,734,979 | ) | ||||
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| Adjustment for effect on other balance sheet accounts: |
||||||||||||||||
| Deferred income tax asset/liability |
229,729 | 478,223 | 138,450 | 2,044,070 | ||||||||||||
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| 229,729 | 478,223 | 138,450 | 2,044,070 | |||||||||||||
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| Change in net unrealized gains/losses on investments carried at fair value |
$ | (866,320 | ) | $ | (1,798,994 | ) | $ | (522,939 | ) | $ | (7,690,909 | ) | ||||
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Proceeds from sales of available for sale fixed maturity securities for the nine months ended September 30, 2023 and 2022 were $9.0 billion and $3.2 billion, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the nine months ended September 30, 2023 and 2022 were $1.4 billion and $2.0 billion, respectively.
22
Net realized losses on investments for the three and nine months ended September 30, 2023 and 2022, are as follows:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Available for sale fixed maturity securities: |
||||||||||||||||
| Gross realized gains |
$ | 52,700 | $ | 23,978 | $ | 137,744 | $ | 27,950 | ||||||||
| Gross realized losses |
(91,184 | ) | (33,881 | ) | (171,970 | ) | (59,940 | ) | ||||||||
| Net credit loss (provision) release |
537 | (1,487 | ) | (46,565 | ) | (14,341 | ) | |||||||||
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|||||||||
| (37,947 | ) | (11,390 | ) | (80,791 | ) | (46,331 | ) | |||||||||
| Other investments: |
||||||||||||||||
| Gross realized gains |
29 | — | 2,239 | — | ||||||||||||
| Gross realized losses |
— | — | (5,061 | ) | — | |||||||||||
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|||||||||
| 29 | — | (2,822 | ) | — | ||||||||||||
| Mortgage loans on real estate: |
||||||||||||||||
| Increase in allowance for credit losses |
(4,687 | ) | (4,716 | ) | (8,110 | ) | (13,309 | ) | ||||||||
| Recovery of specific allowance |
— | 1,086 | — | 1,315 | ||||||||||||
| Loss on sale of mortgage loans |
(2,067 | ) | (840 | ) | (5,415 | ) | (3,934 | ) | ||||||||
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| (6,754 | ) | (4,470 | ) | (13,525 | ) | (15,928 | ) | |||||||||
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| $ | (44,672 | ) | $ | (15,860 | ) | $ | (97,138 | ) | $ | (62,259 | ) | |||||
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Realized losses on available for sale fixed maturity securities in 2023 and 2022 were realized primarily due to strategies to reposition the fixed maturity security portfolio that result in improved net investment income, credit risk or duration profiles as they pertain to our asset liability management. Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date.
We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes analyzing our ability to recover the amortized cost basis of each investment that has a fair value that is materially lower than its amortized cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for credit loss is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process to identify securities that could potentially have credit loss. This process involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
| • | the extent to which the fair value has been less than amortized cost or cost; |
| • | whether the issuer is current on all payments and all contractual payments have been made as agreed; |
| • | the remaining payment terms and the financial condition and near-term prospects of the issuer; |
| • | the lack of ability to refinance due to liquidity problems in the credit market; |
| • | the fair value of any underlying collateral; |
| • | the existence of any credit protection available; |
| • | our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities; |
| • | consideration of rating agency actions; and |
| • | changes in estimated cash flows of mortgage and asset backed securities. |
We determine whether an allowance for credit loss should be established for debt securities by assessing pertinent facts and circumstances surrounding each security. Where the decline in fair value of debt securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider these investments to have credit loss because we do not intend to sell these investments and it is not more likely than not we will be required to sell these investments before a recovery of amortized cost, which may be maturity.
If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized cost basis, credit loss has occurred and the difference between amortized cost and fair value will be recognized as a loss in operations.
If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the entire amortized cost basis of the security, a credit loss would be recognized in operations for the amount of the expected credit loss. We determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each security’s acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in operations. The recognized credit loss is limited to the total unrealized loss on the security (i.e., the fair value floor).
23
The determination of the credit loss component of a mortgage backed security is based on a number of factors. The primary consideration in this evaluation process is the issuer’s ability to meet current and future interest and principal payments as contractually stated at time of purchase. Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default, loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.
We utilize models from a leading structured product software specialist serving institutional investors. These models incorporate each security’s seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future, we use the “best estimate” cash flow projection discounted at the security’s effective yield at acquisition to determine the amount of our potential credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of the expected recovery when compared to the amortized cost of the security will be recorded as credit loss.
The determination of the credit loss component of a corporate bond is based on the underlying financial performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited to, credit rating changes, financial statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of financial covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer appears unlikely to meet its future obligation, an estimate of credit loss is determined. Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the amount of credit loss associated with the security.
We do not measure a credit loss allowance on accrued interest receivable as we write off any accrued interest receivable balance to net investment income in a timely manner when we have concerns regarding collectability.
Amounts on available for sale fixed maturities that are deemed to be uncollectible are written off and removed from the allowance for credit loss. A write-off may also occur if we intend to sell a security or when it is more likely than not we will be required to sell the security before the recovery of its amortized cost.
The following table provides a rollforward of the allowance for credit loss:
| Three Months Ended September 30, 2023 | ||||||||||||||||||||
| States, Municipalities and Territories |
Corporate Securities |
Residential Mortgage Backed Securities |
Other Asset Backed Securities |
Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Beginning balance |
$ | — | $ | 3,132 | $ | 67 | $ | 947 | $ | 4,146 | ||||||||||
| Additions for credit losses not previously recorded |
— | — | 97 | — | 97 | |||||||||||||||
| Change in allowance on securities with previous allowance |
— | (221 | ) | (67 | ) | (337 | ) | (625 | ) | |||||||||||
| Reduction for securities sold during the period |
— | — | — | — | — | |||||||||||||||
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| Ending balance |
$ | — | $ | 2,911 | $ | 97 | $ | 610 | $ | 3,618 | ||||||||||
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| Three Months Ended September 30, 2022 | ||||||||||||||||||||
| States, Municipalities and Territories |
Corporate Securities |
Residential Mortgage Backed Securities |
Other Asset Backed Securities |
Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Beginning balance |
$ | 1,834 | $ | 3,743 | $ | 610 | $ | — | $ | 6,187 | ||||||||||
| Additions for credit losses not previously recorded |
— | — | 439 | — | 439 | |||||||||||||||
| Change in allowance on securities with previous allowance |
(1,834 | ) | (529 | ) | 657 | — | (1,706 | ) | ||||||||||||
| Reduction for securities sold during the period |
— | — | — | — | — | |||||||||||||||
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|
|||||||||||
| Ending balance |
$ | — | $ | 3,214 | $ | 1,706 | $ | — | $ | 4,920 | ||||||||||
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24
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||
| States, Municipalities and Territories |
Corporate Securities |
Residential Mortgage Backed Securities |
Other Asset Backed Securities |
Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Beginning balance |
$ | — | $ | 3,214 | $ | 133 | $ | — | $ | 3,347 | ||||||||||
| Additions for credit losses not previously recorded |
— | — | 97 | 947 | 1,044 | |||||||||||||||
| Change in allowance on securities with previous allowance |
— | (303 | ) | (133 | ) | (337 | ) | (773 | ) | |||||||||||
| Reduction for securities sold during the period |
— | — | — | — | — | |||||||||||||||
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|
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| Ending balance |
$ | — | $ | 2,911 | $ | 97 | $ | 610 | $ | 3,618 | ||||||||||
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| Nine Months Ended September 30, 2022 | ||||||||||||||||||||
| States, Municipalities and Territories |
Corporate Securities |
Residential Mortgage Backed Securities |
Other Asset Backed Securities |
Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Beginning balance |
$ | 2,776 | $ | — | $ | 70 | $ | — | $ | 2,846 | ||||||||||
| Additions for credit losses not previously recorded |
— | 3,825 | 1,070 | — | 4,895 | |||||||||||||||
| Change in allowance on securities with previous allowance |
(2,776 | ) | (611 | ) | 994 | — | (2,393 | ) | ||||||||||||
| Reduction for securities sold during the period |
— | — | (428 | ) | — | (428 | ) | |||||||||||||
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| Ending balance |
$ | — | $ | 3,214 | $ | 1,706 | $ | — | $ | 4,920 | ||||||||||
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4. Mortgage Loans on Real Estate
Our financing receivables consist of the following three portfolio segments: commercial mortgage loans, agricultural mortgage loans and residential mortgage loans. Our mortgage loan portfolios are summarized in the following table. There were commitments outstanding of $750.5 million at September 30, 2023.
| September 30, 2023 | December 31, 2022 | |||||||
| (Dollars in thousands) | ||||||||
| Commercial mortgage loans: |
| |||||||
| Principal outstanding |
$ | 3,534,502 | $ | 3,560,903 | ||||
| Deferred fees and costs, net |
(3,903 | ) | (6,345 | ) | ||||
| Unamortized discounts and premiums, net |
(1,593 | ) | — | |||||
|
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|
|||||
| Amortized cost |
3,529,006 | 3,554,558 | ||||||
| Valuation allowance |
(21,802 | ) | (22,428 | ) | ||||
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|
|||||
| Commercial mortgage loans, carrying value |
3,507,204 | 3,532,130 | ||||||
| Agricultural mortgage loans: |
||||||||
| Principal outstanding |
585,020 | 567,630 | ||||||
| Deferred fees and costs, net |
(1,707 | ) | (1,667 | ) | ||||
|
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|
|||||
| Amortized cost |
583,313 | 565,963 | ||||||
| Valuation allowance |
(1,105 | ) | (1,021 | ) | ||||
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|||||
| Agricultural mortgage loans, carrying value |
582,208 | 564,942 | ||||||
| Residential mortgage loans: |
||||||||
| Principal outstanding |
3,359,939 | 2,807,652 | ||||||
| Deferred fees and costs, net |
669 | 1,909 | ||||||
| Unamortized discounts and premiums, net |
67,138 | 55,917 | ||||||
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|
|||||
| Amortized cost |
3,427,746 | 2,865,478 | ||||||
| Valuation allowance |
(22,175 | ) | (13,523 | ) | ||||
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|||||
| Residential mortgage loans, carrying value |
3,405,571 | 2,851,955 | ||||||
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| Mortgage loans, carrying value |
$ | 7,494,983 | $ | 6,949,027 | ||||
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25
Our commercial mortgage loan portfolio consists of loans collateralized by the related properties and diversified as to property type, location and loan size. Our lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce the risk of default. The commercial mortgage loan portfolio is summarized by geographic region and property type as follows:
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| Principal | Percent | Principal | Percent | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Geographic distribution |
|
|||||||||||||||
| East |
$ | 490,286 | 13.9 | % | $ | 502,659 | 14.1 | % | ||||||||
| Middle Atlantic |
276,679 | 7.8 | % | 280,993 | 7.9 | % | ||||||||||
| Mountain |
395,301 | 11.2 | % | 416,307 | 11.7 | % | ||||||||||
| New England |
82,566 | 2.3 | % | 73,631 | 2.1 | % | ||||||||||
| Pacific |
840,127 | 23.8 | % | 858,812 | 24.1 | % | ||||||||||
| South Atlantic |
939,397 | 26.6 | % | 934,007 | 26.2 | % | ||||||||||
| West North Central |
185,743 | 5.2 | % | 205,568 | 5.8 | % | ||||||||||
| West South Central |
324,403 | 9.2 | % | 288,926 | 8.1 | % | ||||||||||
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|
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| $ | 3,534,502 | 100.0 | % | $ | 3,560,903 | 100.0 | % | |||||||||
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| Property type distribution |
||||||||||||||||
| Office |
$ | 366,874 | 10.4 | % | $ | 388,978 | 10.9 | % | ||||||||
| Retail |
824,708 | 23.3 | % | 896,351 | 25.2 | % | ||||||||||
| Industrial/Warehouse |
925,806 | 26.2 | % | 866,623 | 24.3 | % | ||||||||||
| Apartment |
1,015,703 | 28.7 | % | 912,984 | 25.6 | % | ||||||||||
| Hotel |
324,271 | 9.2 | % | 285,271 | 8.0 | % | ||||||||||
| Mixed Use/Other |
77,140 | 2.2 | % | 210,696 | 6.0 | % | ||||||||||
|
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|
|
|
|
|
|
|||||||||
| $ | 3,534,502 | 100.0 | % | $ | 3,560,903 | 100.0 | % | |||||||||
|
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|
|
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Our agricultural mortgage loan portfolio consists of loans with an outstanding principal balance of $585.0 million and $567.6 million as of September 30, 2023 and December 31, 2022, respectively. These loans are collateralized by agricultural land and are diversified as to location within the United States. Our residential mortgage loan portfolio consists of loans with an outstanding principal balance of $3.4 billion and $2.8 billion as of September 30, 2023 and December 31, 2022, respectively. These loans are collateralized by the related properties and diversified as to location within the United States.
Mortgage loans on real estate are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Interest income is included in Net investment income on our Consolidated Statements of Operations. Accrued interest receivable, which was $66.3 million and $58.2 million as of September 30, 2023 and December 31, 2022, respectively, is included in Accrued investment income on our Consolidated Balance Sheets.
Loan Valuation Allowance
We establish a valuation allowance to provide for the risk of credit losses inherent in our mortgage loan portfolios. The valuation allowance is maintained at a level believed adequate by management to absorb estimated expected credit losses. The valuation allowance is based on amortized cost, which excludes accrued interest receivable. We do not measure a credit loss allowance on accrued interest receivable as we write off any uncollectible accrued interest receivable balances to net investment income in a timely manner. We did not charge off any uncollectible accrued interest receivable on our commercial, agricultural or residential mortgage loan portfolios for the three and nine month periods ended September 30, 2023 or 2022, respectively.
The valuation allowances for each of our mortgage loan portfolios are estimated by deriving probability of default and recovery rate assumptions based on the characteristics of the loans in each portfolio, historical economic data and loss information, and current and forecasted economic conditions. Key loan characteristics impacting the estimate for our commercial mortgage loan portfolio include the current state of the borrower’s credit quality, which considers factors such as loan-to-value (“LTV”) and debt service coverage (“DSC”) ratios, loan performance, underlying collateral type, delinquency status, time to maturity, and original credit scores. Key loan characteristics impacting the estimate for our agricultural and residential mortgage loan portfolios include the current state of the borrowers’ credit quality, delinquency status, time to maturity and original credit scores.
26
The following table represents a rollforward of the valuation allowance on our mortgage loan portfolios:
| Three Months Ended September 30, 2023 | ||||||||||||||||
| Commercial | Agricultural | Residential | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Beginning allowance balance |
$ | (21,330 | ) | $ | (895 | ) | $ | (18,170 | ) | $ | (40,395 | ) | ||||
| Charge-offs |
— | — | — | — | ||||||||||||
| Recoveries |
— | — | — | — | ||||||||||||
| Change in provision for credit losses |
(472 | ) | (210 | ) | (4,005 | ) | (4,687 | ) | ||||||||
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| Ending allowance balance |
$ | (21,802 | ) | $ | (1,105 | ) | $ | (22,175 | ) | $ | (45,082 | ) | ||||
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| Three Months Ended September 30, 2022 | ||||||||||||||||
| Commercial | Agricultural | Residential | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Beginning allowance balance |
$ | (24,244 | ) | $ | (664 | ) | $ | (7,480 | ) | $ | (32,388 | ) | ||||
| Charge-offs |
414 | — | — | 414 | ||||||||||||
| Recoveries |
1,086 | — | — | 1,086 | ||||||||||||
| Change in provision for credit losses |
(869 | ) | (146 | ) | (3,701 | ) | (4,716 | ) | ||||||||
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| Ending allowance balance |
$ | (23,613 | ) | $ | (810 | ) | $ | (11,181 | ) | $ | (35,604 | ) | ||||
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| Nine Months Ended September 30, 2023 | ||||||||||||||||
| Commercial | Agricultural | Residential | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Beginning allowance balance |
$ | (22,428 | ) | $ | (1,021 | ) | $ | (13,523 | ) | $ | (36,972 | ) | ||||
| Charge-offs |
— | — | — | — | ||||||||||||
| Recoveries |
— | — | — | — | ||||||||||||
| Change in provision for credit losses |
626 | (84 | ) | (8,652 | ) | (8,110 | ) | |||||||||
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|||||||||
| Ending allowance balance |
$ | (21,802 | ) | $ | (1,105 | ) | $ | (22,175 | ) | $ | (45,082 | ) | ||||
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| Nine Months Ended September 30, 2022 | ||||||||||||||||
| Commercial | Agricultural | Residential | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Beginning allowance balance |
$ | (17,926 | ) | $ | (519 | ) | $ | (5,579 | ) | $ | (24,024 | ) | ||||
| Charge-offs |
414 | — | — | 414 | ||||||||||||
| Recoveries |
1,315 | — | — | 1,315 | ||||||||||||
| Change in provision for credit losses |
(7,416 | ) | (291 | ) | (5,602 | ) | (13,309 | ) | ||||||||
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| Ending allowance balance |
$ | (23,613 | ) | $ | (810 | ) | $ | (11,181 | ) | $ | (35,604 | ) | ||||
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Charge-offs include allowances that have been established on loans that were satisfied either by taking ownership of the collateral or by some other means such as discounted pay-off or loan sale. When ownership of the property is taken it is recorded at the lower of the loan’s carrying value or the property’s fair value (based on appraised values) less estimated costs to sell. The real estate owned is recorded as a component of Other investments and the loan is recorded as fully paid, with any allowance for credit loss that has been established charged off. Fair value of the real estate is determined by third party appraisal. There were three real estate properties totaling $876 thousand at September 30, 2023. There were no real estate properties in which ownership of the property was taken to satisfy an outstanding loan at December 31, 2022. Recoveries are situations where we have received a payment from the borrower in an amount greater than the carrying value of the loan (principal outstanding less specific allowance).
Credit Quality Indicators
We evaluate the credit quality of our commercial and agricultural mortgage loans by analyzing LTV and DSC ratios and loan performance. We evaluate the credit quality of our residential mortgage loans by analyzing loan performance.
LTV and DSC ratios for our commercial mortgage loans are originally calculated at the time of loan origination and are updated annually for each loan using information such as rent rolls, assessment of lease maturity dates and property operating statements, which are reviewed in the context of current leasing and in place rents compared to market leasing and market rents. A DSC ratio of less than 1.0 indicates that a property’s operations do not generate sufficient income to cover debt payments. An LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. All of our commercial mortgage loans that have a debt service coverage ratio of less than 1.0 are performing under the original contractual loan terms at September 30, 2023 and December 31, 2022.
27
The amortized cost of our commercial mortgage loan portfolio by LTV and DSC ratios based on the most recent information collected was as follows at September 30, 2023 and December 31, 2022 (by year of origination):
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
|||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| As of September 30, 2023: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Service Coverage |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Greater than or equal to 1.5 |
$ | — | — | % | $ | 285,725 | 62 | % | $ | 273,012 | 57 | % | $ | 380,956 | 53 | % | $ | 461,587 | 55 | % | $ | 1,098,330 | 44 | % | $ | 2,499,610 | 51 | % | ||||||||||||||||||||||||||||
| Greater than or equal to 1.2 and less than 1.5 |
— | — | % | — | — | % | 4,547 | 56 | % | 55,321 | 54 | % | 94,038 | 68 | % | 178,773 | 58 | % | 332,679 | 60 | % | |||||||||||||||||||||||||||||||||||
| Greater than or equal to 1.0 and less than 1.2 |
34,618 | 32 | % | 214,899 | 42 | % | 321,776 | 45 | % | 39,223 | 62 | % | — | — | % | 29,780 | 69 | % | 640,296 | 46 | % | |||||||||||||||||||||||||||||||||||
| Less than 1.0 |
— | — | % | — | — | % | — | — | % | — | — | % | 2,557 | 80 | % | 53,864 | 53 | % | 56,421 | 54 | % | |||||||||||||||||||||||||||||||||||
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| Total |
$ | 34,618 | 32 | % | $ | 500,624 | 53 | % | $ | 599,335 | 51 | % | $ | 475,500 | 53 | % | $ | 558,182 | 57 | % | $ | 1,360,747 | 47 | % | $ | 3,529,006 | 51 | % | ||||||||||||||||||||||||||||
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| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
|||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2022: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Service Coverage |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Greater than or equal to 1.5 |
$ | 249,328 | 63 | % | $ | 257,746 | 61 | % | $ | 421,391 | 57 | % | $ | 429,596 | 58 | % | $ | 325,117 | 53 | % | $ | 813,319 | 44 | % | $ | 2,496,497 | 53 | % | ||||||||||||||||||||||||||||
| Greater than or equal to 1.2 and less than 1.5 |
6,488 | 70 | % | 123,038 | 55 | % | 46,804 | 58 | % | 115,977 | 66 | % | 67,642 | 67 | % | 145,703 | 60 | % | 505,652 | 62 | % | |||||||||||||||||||||||||||||||||||
| Greater than or equal to 1.0 and less than 1.2 |
170,059 | 52 | % | 211,684 | 43 | % | 18,144 | 79 | % | 39,396 | 73 | % | 10,348 | 76 | % | 58,021 | 47 | % | 507,652 | 51 | % | |||||||||||||||||||||||||||||||||||
| Less than 1.0 |
— | — | % | — | — | % | — | — | % | 6,107 | 64 | % | 13,025 | 70 | % | 25,625 | 65 | % | 44,757 | 66 | % | |||||||||||||||||||||||||||||||||||
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| Total |
$ | 425,875 | 59 | % | $ | 592,468 | 53 | % | $ | 486,339 | 58 | % | $ | 591,076 | 61 | % | $ | 416,132 | 57 | % | $ | 1,042,668 | 47 | % | $ | 3,554,558 | 54 | % | ||||||||||||||||||||||||||||
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LTV and DSC ratios for our agricultural mortgage loans are calculated at the time of loan origination and are evaluated annually for each loan using land value averages. A DSC ratio of less than 1.0 indicates that a property’s operations do not generate sufficient income to cover debt payments. An LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. All of our agricultural mortgage loans that have a debt service coverage ratio of less than 1.0 are performing under the original contractual loan terms at September 30, 2023 and December 31, 2022.
The amortized cost of our agricultural mortgage loan portfolio by LTV and DSC ratios based on the most recent information collected was as follows at September 30, 2023 and December 31, 2022 (by year of origination):
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
|||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| As of September 30, 2023: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Service Coverage |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Greater than or equal to 1.5 |
$ | 27,014 | 59 | % | $ | 86,511 | 46 | % | $ | 61,672 | 57 | % | $ | 100,768 | 45 | % | $ | — | — | % | $ | — | — | % | $ | 275,965 | 49 | % | ||||||||||||||||||||||||||||
| Greater than or equal to 1.2 and less than 1.5 |
17,824 | 59 | % | 103,934 | 54 | % | 65,543 | 53 | % | 60,068 | 45 | % | — | — | % | — | — | % | 247,369 | 52 | % | |||||||||||||||||||||||||||||||||||
| Greater than or equal to 1.0 and less than 1.2 |
3,988 | 43 | % | 3,080 | 55 | % | 8,673 | 39 | % | — | — | % | — | — | % | — | — | % | 15,741 | 43 | % | |||||||||||||||||||||||||||||||||||
| Less than 1.0 |
— | — | % | — | — | % | — | — | % | 7,975 | 40 | % | 2,263 | 33 | % | 34,000 | 42 | % | 44,238 | 41 | % | |||||||||||||||||||||||||||||||||||
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| Total |
$ | 48,826 | 58 | % | $ | 193,525 | 51 | % | $ | 135,888 | 54 | % | $ | 168,811 | 45 | % | $ | 2,263 | 33 | % | $ | 34,000 | 42 | % | $ | 583,313 | 50 | % | ||||||||||||||||||||||||||||
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| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
Amortized Cost |
Average LTV |
|||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2022: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Service Coverage |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Greater than or equal to 1.5 |
$ | 85,367 | 47 | % | $ | 84,186 | 46 | % | $ | 97,143 | 41 | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 266,696 | 45 | % | ||||||||||||||||||||||||||||
| Greater than or equal to 1.2 and less than 1.5 |
107,856 | 54 | % | 67,630 | 52 | % | 61,103 | 32 | % | — | — | % | — | — | % | — | — | % | 236,589 | 48 | % | |||||||||||||||||||||||||||||||||||
| Greater than or equal to 1.0 and less than 1.2 |
3,124 | 56 | % | 8,825 | 38 | % | 3,125 | 25 | % | — | — | % | — | — | % | — | — | % | 15,074 | 39 | % | |||||||||||||||||||||||||||||||||||
| Less than 1.0 |
— | — | % | — | — | % | 7,975 | 35 | % | 5,629 | 41 | % | 34,000 | 31 | % | — | — | % | 47,604 | 33 | % | |||||||||||||||||||||||||||||||||||
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| Total |
$ | 196,347 | 51 | % | $ | 160,641 | 48 | % | $ | 169,346 | 37 | % | $ | 5,629 | 41 | % | $ | 34,000 | 31 | % | $ | — | — | % | $ | 565,963 | 45 | % | ||||||||||||||||||||||||||||
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28
We closely monitor loan performance for our commercial, agricultural and residential mortgage loan portfolios. Aging of financing receivables is summarized in the following table (by year of origination):
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| As of September 30, 2023: |
||||||||||||||||||||||||||||
| Commercial mortgage loans |
||||||||||||||||||||||||||||
| Current |
$ | 34,618 | $ | 500,624 | $ | 599,335 | $ | 475,500 | $ | 558,182 | $ | 1,360,747 | $ | 3,529,006 | ||||||||||||||
| 30 - 59 days past due |
— | — | — | — | — | — | — | |||||||||||||||||||||
| 60 - 89 days past due |
— | — | — | — | — | — | — | |||||||||||||||||||||
| 90 days or more past due |
— | — | — | — | — | — | — | |||||||||||||||||||||
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|||||||||||||||
| Total commercial mortgage loans |
$ | 34,618 | $ | 500,624 | $ | 599,335 | $ | 475,500 | $ | 558,182 | $ | 1,360,747 | $ | 3,529,006 | ||||||||||||||
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| Agricultural mortgage loans |
||||||||||||||||||||||||||||
| Current |
$ | 48,826 | $ | 193,525 | $ | 135,888 | $ | 168,811 | $ | 2,263 | $ | 34,000 | $ | 583,313 | ||||||||||||||
| 30 - 59 days past due |
— | — | — | — | — | — | — | |||||||||||||||||||||
| 60 - 89 days past due |
— | — | — | — | — | — | — | |||||||||||||||||||||
| 90 days or more past due |
— | — | — | — | — | — | — | |||||||||||||||||||||
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| Total agricultural mortgage loans |
$ | 48,826 | $ | 193,525 | $ | 135,888 | $ | 168,811 | $ | 2,263 | $ | 34,000 | $ | 583,313 | ||||||||||||||
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| Residential mortgage loans |
||||||||||||||||||||||||||||
| Current |
$ | 975,966 | $ | 1,639,242 | $ | 411,035 | $ | 167,678 | $ | 27,309 | $ | 893 | $ | 3,222,123 | ||||||||||||||
| 30 - 59 days past due |
30,963 | 36,240 | 15,604 | 6,560 | 99 | — | 89,466 | |||||||||||||||||||||
| 60 - 89 days past due |
3,007 | 21,436 | 4,233 | 888 | — | — | 29,564 | |||||||||||||||||||||
| 90 days or more past due |
8,171 | 39,138 | 27,114 | 5,369 | 3,398 | 3,403 | 86,593 | |||||||||||||||||||||
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| Total residential mortgage loans |
$ | 1,018,107 | $ | 1,736,056 | $ | 457,986 | $ | 180,495 | $ | 30,806 | $ | 4,296 | $ | 3,427,746 | ||||||||||||||
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|||||||||||||||
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| As of December 31, 2022: |
||||||||||||||||||||||||||||
| Commercial mortgage loans |
||||||||||||||||||||||||||||
| Current |
$ | 425,875 | $ | 592,468 | $ | 486,339 | $ | 591,076 | $ | 416,132 | $ | 1,042,668 | $ | 3,554,558 | ||||||||||||||
| 30 - 59 days past due |
— | — | — | — | — | — | — | |||||||||||||||||||||
| 60 - 89 days past due |
— | — | — | — | — | — | — | |||||||||||||||||||||
| 90 days or more past due |
— | — | — | — | — | — | — | |||||||||||||||||||||
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|||||||||||||||
| Total commercial mortgage loans |
$ | 425,875 | $ | 592,468 | $ | 486,339 | $ | 591,076 | $ | 416,132 | $ | 1,042,668 | $ | 3,554,558 | ||||||||||||||
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| Agricultural mortgage loans |
||||||||||||||||||||||||||||
| Current |
$ | 196,347 | $ | 160,641 | $ | 166,211 | $ | 5,629 | $ | 34,000 | $ | — | $ | 562,828 | ||||||||||||||
| 30 - 59 days past due |
— | — | — | — | — | — | — | |||||||||||||||||||||
| 60 - 89 days past due |
— | — | — | — | — | — | — | |||||||||||||||||||||
| 90 days or more past due |
— | — | 3,135 | — | — | — | 3,135 | |||||||||||||||||||||
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| Total agricultural mortgage loans |
$ | 196,347 | $ | 160,641 | $ | 169,346 | $ | 5,629 | $ | 34,000 | $ | — | $ | 565,963 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Residential mortgage loans |
||||||||||||||||||||||||||||
| Current |
$ | 1,915,169 | $ | 595,363 | $ | 211,119 | $ | 27,483 | $ | 1,710 | $ | 417 | $ | 2,751,261 | ||||||||||||||
| 30 - 59 days past due |
39,179 | 8,238 | 13,073 | 1,960 | — | — | 62,450 | |||||||||||||||||||||
| 60 - 89 days past due |
6,668 | 7,165 | 3,034 | 57 | — | — | 16,924 | |||||||||||||||||||||
| 90 days or more past due |
9,702 | 14,068 | 6,515 | 1,762 | 2,796 | — | 34,843 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total residential mortgage loans |
$ | 1,970,718 | $ | 624,834 | $ | 233,741 | $ | 31,262 | $ | 4,506 | $ | 417 | $ | 2,865,478 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
29
Commercial, agricultural and residential mortgage loans are considered nonperforming when they become 90 days or more past due. When loans become nonperforming, we place them on non-accrual status and discontinue recognizing interest income. If payments are received on a nonperforming loan, interest income is recognized to the extent it would have been recognized if normal principal and interest would have been received timely. If payments are received to bring a nonperforming loan back to less than 90 days past due, we will resume accruing interest income on that loan. There were 164 loans in non-accrual status at September 30, 2023 and 59 loans in non-accrual status at December 31, 2022. During the three and nine months ended September 30, 2023 we recognized $156 thousand and $2,156 thousand in interest income on loans which were in non-accrual status at the respective period end. During the three and nine months ended September 30, 2022, we recognized $0 thousand and $546 thousand interest income on loans which were in non-accrual status at the respective period end.
Loan Modifications
Our commercial, agricultural and residential mortgage loans may be subject to loan modifications. Loan modifications may be granted to borrowers experiencing financial difficulty and could include principal forgiveness, interest rate reduction, an other-than-significant delay or a term extension. We consider the following factors in determining whether or not a borrower is experiencing financial difficulty:
| • | borrower is in default, |
| • | borrower has declared bankruptcy, |
| • | there is growing concern about the borrower’s ability to continue as a going concern, |
| • | borrower has insufficient cash flows to service debt, |
| • | borrower’s inability to obtain funds from other sources, and |
| • | there is a breach of financial covenants by the borrower. |
A loan modification typically does not result in a change in valuation allowance as it is already incorporated into our allowance methodology. However, if we grant a borrower experiencing financial difficulty principal forgiveness, the amount of principal forgiven would be written off, which would reduce the amortized cost of the loan and result in an adjustment to the valuation allowance.
There were no significant mortgage loan modifications for the three and nine months ended September 30, 2023.
Prior to adoption of authoritative guidance on January 1, 2023, we evaluated whether a TDR had occurred on our commercial, agricultural or residential mortgage loans. We did not have any significant loan modifications that resulted in a TDR for the three and nine months ended September 30, 2022.
5. Variable Interest Entities
We have relationships with various types of entities which may be VIEs. Certain VIEs are consolidated in our financial results.
Consolidated Variable Interest Entities
We are invested in multiple investment company real estate limited partnerships which own various limited liability companies that invest in residential real estate properties and one real estate limited liability company that invests in a commercial real estate property. These entities are VIE’s as the legal entities equity investors have insufficient equity at risk and lack of power to direct the activities that most significantly impact the economic performance. We determined we are the primary beneficiary as a result of our power to control the entities through our significant ownership. Due to the nature of the investment company real estate investments, the investments balance will fluctuate based on changes in the fair value of the properties as well as when purchases and sales of properties are made. The investment balance in the commercial real estate property is held at depreciated cost, and is expected to decrease over time.
We are invested in two investment company limited liability companies that invest in operating entities which hold multifamily real estate properties. The entities are VIEs and we have determined we are the primary beneficiary as a result of our power to control the entities through our significant ownership. The investment balances, which represent equity interests in the investment company limited liability companies, fluctuate based on changes in the fair value of the properties and the performance of the operating entities.
We are invested in two limited partnership feeder funds which each invest in a separate limited partnership fund. One fund holds infrastructure credit assets and the other holds tech-centric middle-market loans. In both cases, the feeder fund limited partnerships are VIEs, and we determined we are the primary beneficiary as a result of our significant ownership of the limited partnerships and our obligation to absorb losses or receive benefits from the VIEs. We have consolidated the assets and liabilities of the limited partnerships, which primarily consist of equity interests in limited partnerships.
We are invested in one investment company limited liability company that invests in core infrastructure assets typically held through an interest in limited liability companies. The entity is a VIE and we have determined we are the primary beneficiary as a result of our power to control the entity through significant ownership and our obligation to absorb losses or receive benefits from the VIE. The VIE meets the definition of an investment company, which requires the investment balance to be held at fair value.
30
The carrying amounts of our consolidated VIE assets, which can only be used to settle obligations of the consolidated VIEs, and liabilities of consolidated VIEs for which creditors do not have recourse were as follows:
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| Total Assets |
Total Liabilities |
Total Assets |
Total Liabilities |
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Real estate investments |
$ | 1,362,292 | $ | 90,828 | $ | 1,095,267 | $ | 78,244 | ||||||||
| Real estate limited liability companies |
50,095 | 142 | 66,258 | 287 | ||||||||||||
| Limited partnership funds |
1,023,769 | 224 | 620,741 | 113 | ||||||||||||
| Infrastructure limited liability companies |
100,620 | 540 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 2,536,776 | $ | 91,734 | $ | 1,782,266 | $ | 78,644 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Unconsolidated Variable Interest Entities
We provided debt funding to various special purpose vehicles, which are used to acquire and hold various types of loans or receivables. These legal entities are deemed VIEs because there is insufficient equity at risk. We have determined we are not the primary beneficiary as we do not control the activities that most significantly impact the economic performance of the VIEs. Our investments in these VIEs are reported in Fixed maturity securities, available for sale in the Consolidated Balance Sheets.
The carrying value and maximum loss exposure for our unconsolidated VIEs were as follows:
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| Asset Carrying Value |
Maximum Exposure to Loss |
Asset Carrying Value |
Maximum Exposure to Loss |
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Fixed maturity securities, available for sale |
$ | 1,503,458 | $ | 1,503,458 | $ | 1,178,110 | $ | 1,178,110 | ||||||||
6. Derivative Instruments
We use derivative instruments to manage risks. We have derivatives that are designated as hedging instruments and others that are not designated as hedging instruments. Any change in the fair value of the derivatives is recognized immediately in the Consolidated Statements of Operations.
The notional and fair values of our derivative instruments, including derivative instruments embedded in fixed index annuity contracts, presented in the Consolidated Balance Sheets are as follows:
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| Notional | Fair Value | Notional | Fair Value | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Derivatives designated as hedging instruments |
||||||||||||||||
| Assets |
||||||||||||||||
| Derivative instruments |
||||||||||||||||
| Interest rate swaps |
$ | — | $ | — | $ | 408,369 | $ | 32,769 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Derivatives not designated as hedging instruments |
||||||||||||||||
| Assets |
||||||||||||||||
| Derivative instruments |
||||||||||||||||
| Call options |
$ | 40,993,916 | $ | 733,784 | $ | 38,927,534 | $ | 397,789 | ||||||||
| Warrants |
— | — | 2,020 | 1,169 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 40,993,916 | $ | 733,784 | $ | 38,929,554 | $ | 398,958 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Policy benefit reserves—annuity products |
||||||||||||||||
| Fixed index annuities—embedded derivatives, net |
$ | 4,604,191 | $ | 4,820,845 | ||||||||||||
| Funds withheld for reinsurance liabilities |
||||||||||||||||
| Reinsurance related embedded derivative |
(525,960 | ) | (441,864 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| $ | 4,078,231 | $ | 4,378,981 | |||||||||||||
|
|
|
|
|
|||||||||||||
31
Derivatives Designated as Hedging Instruments
We used interest rate swaps designated and accounted for as fair value hedges to protect a portfolio of fixed-rate fixed maturity securities against changes in fair value due to changes in interest rates. Our interest rate swap contracts allowed us to pay a fixed rate and receive a floating rate utilizing the Secured Overnight Financing Rate at specified intervals based on a notional amount. Interest rate swaps were carried at fair value and presented as Derivative instruments on the Consolidated Balance Sheets.
For derivative instruments that were designated and qualified as a fair value hedge, the gain or loss on the portion of the derivative instrument included in the assessment of hedge effectiveness and the offsetting gain or loss on the hedged item attributable to the hedged risk were recognized in the same line item in the Consolidated Statements of Operations. The change in unrealized gain or loss attributable to interest rate changes on the fixed maturity securities that were designated as part of the hedge were reclassified out of Accumulated other comprehensive income (loss) into Change in fair value of derivatives in the Consolidated Statements of Operations. The remaining change in unrealized gain or loss on the hedged item not associated with the risk being hedged was recognized as a component of Other comprehensive income.
The following represents the amortized cost and cumulative fair value hedging adjustments included in the hedged assets:
| Line Item in the Consolidated Balance Sheets in Which Hedged Item is Included |
Amortized Cost of Hedged Item |
Cumulative Amount of Fair Value Basis Adjustment Gain (Loss) |
||||||||||||||
| September 30, 2023 |
December 31, 2022 |
September 30, 2023 |
December 31, 2022 |
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Fixed maturities, available for sale: |
||||||||||||||||
| Current hedging relationships |
$ | — | $ | 389,060 | $ | — | $ | (39,128 | ) | |||||||
| Discontinued hedging relationships |
1,280,224 | 1,594,736 | (69,756 | ) | (94,681 | ) | ||||||||||
The following represents a summary of the gains (losses) related to the derivatives and hedged items that qualify for fair value hedge accounting:
| Derivative | Hedged Item | Net | Amount Excluded: Recognized in Income Immediately |
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| For the three months ended September 30, 2023 |
||||||||||||||||
| Interest rate swaps |
$ | — | $ | — | $ | — | $ | — | ||||||||
| For the three months ended September 30, 2022 |
||||||||||||||||
| Interest rate swaps |
$ | 188,667 | $ | (214,414 | ) | $ | (25,747 | ) | $ | 11,301 | ||||||
| For the nine months ended September 30, 2023 |
||||||||||||||||
| Interest rate swaps |
$ | 5,856 | $ | 3,240 | $ | 9,096 | $ | — | ||||||||
| For the nine months ended September 30, 2022 |
||||||||||||||||
| Interest rate swaps |
$ | 215,438 | $ | (247,507 | ) | $ | (32,069 | ) | $ | 13,957 | ||||||
Derivatives Not Designated as Hedging Instruments
We have fixed index annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index. When fixed index annuity deposits are received, a portion of the deposit is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to fixed index annuity policyholders. Substantially all such call options are one year options purchased to match the funding requirements of the underlying policies. The call options are marked to fair value with the change in fair value included as a component of revenues. The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term and the changes in fair value for open positions. On the respective anniversary dates of the index policies, the index used to compute the index credit is reset and we purchase new call options to fund the next index credit. We manage the cost of these purchases through the terms of our fixed index annuities, which permit us to change caps, participation rates, and/or asset fees, subject to guaranteed minimums on each policy’s anniversary date. By adjusting caps, participation rates, or asset fees, we can generally manage option costs except in cases where the contractual features would prevent further modifications.
32
The changes in fair value of derivatives not designated as hedging instruments included in the Consolidated Statements of Operations are as follows:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
|
|
||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Change in fair value of derivatives: |
||||||||||||||||
| Call options |
$ | (383,026 | ) | $ | (162,308 | ) | $ | (104,699 | ) | $ | (1,142,521 | ) | ||||
| Warrants |
— | 83 | 1,206 | 262 | ||||||||||||
| Interest rate swaps |
— | 11,301 | — | 13,957 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | (383,026 | ) | $ | (150,924 | ) | $ | (103,493 | ) | $ | (1,128,302 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| Change in fair value of embedded derivatives: |
||||||||||||||||
| Fixed index annuities—embedded derivatives |
$ | (323,080 | ) | $ | (299,144 | ) | $ | 250,494 | $ | (2,176,911 | ) | |||||
| Reinsurance related embedded derivative |
(128,726 | ) | (116,230 | ) | (84,096 | ) | (518,096 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | (451,806 | ) | $ | (415,374 | ) | $ | 166,398 | $ | (2,695,007 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
Derivative Exposure
We attempt to mitigate potential risk of loss due to the nonperformance of the counterparties through a regular monitoring process which evaluates the program’s effectiveness. We do not purchase derivative instruments that would require payment or collateral to another institution and our derivative instruments do not contain counterparty credit-risk-related contingent features. We are exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, we purchase our derivative instruments from multiple counterparties and evaluate the creditworthiness of all counterparties prior to purchase of the contracts. All non-exchange traded derivative instruments have been purchased from nationally recognized financial institutions with a Standard and Poor’s credit rating of A- or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. Both our call options and interest rate swaps fall under the same credit support agreements with each counterparty that allow us to request the counterparty to provide collateral to us when the fair value of our exposure to the counterparty exceeds specified amounts.
The notional amount and fair value of our call options and interest rate swaps by counterparty and each counterparty’s current credit rating are as follows:
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
| Counterparty |
Credit Rating (S&P) |
Credit Rating (Moody’s) |
Notional Amount |
Fair Value | Notional Amount |
Fair Value | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Bank of America |
A+ | Aa1 | $ | 4,458,432 | $ | 37,833 | $ | 3,574,125 | $ | 26,080 | ||||||||||||||
| Barclays |
A+ | A1 | 2,360,864 | 65,937 | 3,686,896 | 39,657 | ||||||||||||||||||
| Canadian Imperial Bank of Commerce |
A+ | Aa2 | 1,266,781 | 37,238 | 2,707,734 | 34,218 | ||||||||||||||||||
| Citibank, N.A. |
A+ | Aa3 | 3,582,088 | 36,800 | 3,748,162 | 29,873 | ||||||||||||||||||
| Credit Suisse |
A+ | A3 | 1,961,115 | 17,525 | 2,086,470 | 20,691 | ||||||||||||||||||
| Goldman Sachs |
A+ | A1 | 105,238 | 327 | — | — | ||||||||||||||||||
| J.P. Morgan |
A+ | Aa2 | 4,593,302 | 37,157 | 6,501,103 | 69,006 | ||||||||||||||||||
| Mizuho |
A | A1 | 7,685,054 | 172,280 | — | — | ||||||||||||||||||
| Morgan Stanley |
A+ | Aa3 | 1,708,060 | 14,328 | 2,957,389 | 38,470 | ||||||||||||||||||
| Royal Bank of Canada |
AA- | A1 | 4,380,240 | 118,325 | 4,378,132 | 58,026 | ||||||||||||||||||
| Societe Generale |
A | A1 | 2,870,061 | 39,335 | 2,099,081 | 17,157 | ||||||||||||||||||
| Truist |
A | A2 | 2,003,795 | 52,208 | 1,960,787 | 32,885 | ||||||||||||||||||
| UBS AG |
A+ | Aa3 | 443,410 | 5,199 | — | — | ||||||||||||||||||
| Wells Fargo |
A+ | Aa2 | 3,545,311 | 98,655 | 5,436,824 | 61,840 | ||||||||||||||||||
| Exchange traded |
30,165 | 637 | 199,200 | 2,655 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| $ | 40,993,916 | $ | 733,784 | $ | 39,335,903 | $ | 430,558 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
As of September 30, 2023 and December 31, 2022, we held $0.7 billion and $0.4 billion, respectively, of cash and cash equivalents and other investments from counterparties for derivative collateral, which is included in Other liabilities on our Consolidated Balance Sheets. This derivative collateral limits the maximum amount of economic loss due to credit risk that we would incur if the counterparties failed completely to perform according to the terms of the contracts to $5.4 million and $3.3 million at September 30, 2023 and December 31, 2022, respectively.
33
The future index credits on our fixed index annuities are treated as a “series of embedded derivatives” over the expected life of the applicable contract. We do not purchase call options to fund the index liabilities which may arise after the next policy anniversary date. We must value both the call options and the related forward embedded options in the policies at fair value.
We cede certain fixed index annuity product liabilities to third party reinsurers on a modified coinsurance basis which results in an embedded derivative. The obligation to pay the total return on the assets supporting liabilities associated with this reinsurance agreement represents a total return swap. The fair value of the total return swap is based on the unrealized gains and losses of the underlying assets held in the modified coinsurance portfolio. The reinsurance related embedded derivative is reported in Funds withheld for reinsurance liabilities on the Consolidated Balance Sheets and the change in the fair value of the embedded derivative is reported in Change in fair value of embedded derivatives on the Consolidated Statements of Operations.
7. Deferred Policy Acquisition Costs and Deferred Sales Inducements
Deferred Policy Acquisition Costs
The following tables present the balances and changes in deferred policy acquisition costs:
| Nine Months Ended September 30, 2023 | ||||||||||||||||
| Fixed Index Annuities |
Fixed Rate Annuities |
Single Premium Immediate Annuities |
Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Balance, beginning of period |
$ | 2,649,322 | $ | 120,105 | $ | 4,216 | $ | 2,773,643 | ||||||||
| Capitalizations |
350,302 | 16,586 | 45 | 366,933 | ||||||||||||
| Amortization expense |
(184,710 | ) | (22,069 | ) | (493 | ) | (207,272 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance, end of period |
$ | 2,814,914 | $ | 114,622 | $ | 3,768 | $ | 2,933,304 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Year Ended December 31, 2022 | ||||||||||||||||
| Fixed Index Annuities |
Fixed Rate Annuities |
Single Premium Immediate Annuities |
Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Balance, beginning of period |
$ | 2,906,684 | $ | 151,322 | $ | 4,198 | $ | 3,062,204 | ||||||||
| Write-off related to in-force ceded reinsurance |
(196,417 | ) | (7,209 | ) | — | (203,626 | ) | |||||||||
| Capitalizations |
193,989 | 4,424 | 663 | 199,076 | ||||||||||||
| Amortization expense |
(254,934 | ) | (28,432 | ) | (645 | ) | (284,011 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance, end of period |
$ | 2,649,322 | $ | 120,105 | $ | 4,216 | $ | 2,773,643 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Deferred Sales Inducements
The following tables present the balances and changes in deferred sales inducements:
| Nine Months Ended September 30, 2023 | ||||||||||||
| Fixed Index Annuities | Fixed Rate Annuities | Total | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Balance, beginning of period |
$ | 2,017,960 | $ | 27,723 | $ | 2,045,683 | ||||||
| Capitalizations |
353,220 | 67 | 353,287 | |||||||||
| Amortization expense |
(139,568 | ) | (2,338 | ) | (141,906 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Balance, end of period |
$ | 2,231,612 | $ | 25,452 | $ | 2,257,064 | ||||||
|
|
|
|
|
|
|
|||||||
| Year Ended December 31, 2022 | ||||||||||||
| Fixed Index Annuities | Fixed Rate Annuities | Total | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Balance, beginning of period |
$ | 2,088,591 | $ | 31,370 | $ | 2,119,961 | ||||||
| Capitalizations |
107,684 | 8 | 107,692 | |||||||||
| Amortization expense |
(178,315 | ) | (3,655 | ) | (181,970 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Balance, end of period |
$ | 2,017,960 | $ | 27,723 | $ | 2,045,683 | ||||||
|
|
|
|
|
|
|
|||||||
34
8. Policyholder Liabilities
Liability for Future Policy Benefits
The liability for future policy benefits consists only of the liability associated with single premium immediate annuities (SPIA) with life contingencies. As this business has no future expected premiums, the rollforward presented below is the present value of expected future benefits. The balances of and changes in the liability for future policy benefits for the nine months ended September 30, 2023 and year ended December 31, 2022 is as follows:
| Present Value of Expected Future Policy Benefits |
||||||||
| Nine Months Ended September 30, 2023 |
Year Ended December 31, 2022 |
|||||||
| (Dollars in thousands) | ||||||||
| Balance, beginning of period |
$ | 318,677 | $ | 402,305 | ||||
| Beginning balance at original discount rate |
342,453 | 352,708 | ||||||
| Effect of changes in cash flow assumptions |
(4,607 | ) | 1,277 | |||||
| Effect of actual variances from expected experience |
(1,692 | ) | (1,941 | ) | ||||
|
|
|
|
|
|||||
| Adjusted beginning of year balance |
336,154 | 352,044 | ||||||
| Issuances |
6,391 | 16,072 | ||||||
| Interest accrual |
10,357 | 14,664 | ||||||
| Derecognition (lapses and benefit payments) |
(29,252 | ) | (40,327 | ) | ||||
|
|
|
|
|
|||||
| Ending balance at original discount rate |
323,650 | 342,453 | ||||||
| Effect of changes in discount rate assumptions |
(31,316 | ) | (23,776 | ) | ||||
|
|
|
|
|
|||||
| Balance, end of period |
$ | 292,334 | $ | 318,677 | ||||
|
|
|
|
|
|||||
The reconciliation of the net liability for future policy benefits to the liability for future policy benefits included in policy benefit reserves in the consolidated balance sheets is as follows:
| September 30, 2023 | December 31, 2022 | |||||||
| (Dollars in thousands) | ||||||||
| Liability for future policy benefits |
$ | 292,334 | $ | 318,677 | ||||
| Deferred profit liability |
22,975 | 19,223 | ||||||
|
|
|
|
|
|||||
| 315,309 | 337,900 | |||||||
| Less: Reinsurance recoverable |
(1,997 | ) | (1,259 | ) | ||||
|
|
|
|
|
|||||
| Net liability for future policy benefits, after reinsurance recoverable |
$ | 313,312 | $ | 336,641 | ||||
|
|
|
|
|
|||||
The weighted-average liability duration of the liability for future policy benefits is as follows:
| September 30, 2023 | December 31, 2022 | |||||||
| SPIA With Life Contingency: |
||||||||
| Weighted-average liability duration of the liability for future policy benefits (years) |
6.82 | 6.78 | ||||||
The following table presents the amount of undiscounted expected future benefit payments and expected gross premiums:
| September 30, 2023 | December 31, 2022 | |||||||
| (Dollars in thousands) | ||||||||
| SPIA With Life Contingency: |
||||||||
| Expected future benefit payments |
$ | 446,831 | $ | 467,627 | ||||
| Expected future gross premiums |
— | — | ||||||
35
The amount of revenue and interest associated with the liability for future policy benefits recognized in the statement of operations for the nine months ended September 30, 2023 and year ended December 31, 2022 is as follows:
| Nine Months Ended September 30, 2023 |
Year Ended December 31, 2022 |
|||||||||||||||
| Gross Premiums or Assessments |
Interest Expense |
Gross Premiums or Assessments |
Interest Expense |
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| SPIA With Life Contingency |
$ | 6,994 | $ | 10,297 | $ | 16,994 | $ | 14,613 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 6,994 | $ | 10,297 | $ | 16,994 | $ | 14,613 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The weighted-average interest rate is as follows:
| September 30, 2023 | December 31, 2022 | |||||||
| Interest accretion rate |
4.25 | % | 4.25 | % | ||||
| Current discount rate |
5.92 | % | 5.37 | % | ||||
Market Risk Benefits
The balances of and changes in the liability for market risk benefits (MRB) for the nine months ended September 30, 2023 and year ended December 31, 2022 is as follows:
| Nine Months Ended September 30, 2023 |
Year Ended December 31, 2022 |
|||||||||||||||
| Fixed Rate Annuities |
Fixed Index Annuities |
Fixed Rate Annuities |
Fixed Index Annuities |
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| MRB Liability |
||||||||||||||||
| Balance, beginning of period |
$ | 37,863 | $ | 2,187,758 | $ | 78,411 | $ | 2,557,378 | ||||||||
| Balance, beginning of period, before effect of changes in the instrument-specific credit risk |
44,355 | 2,453,169 | 77,731 | 2,310,437 | ||||||||||||
| Issuances |
32 | 218,643 | 376 | 59,452 | ||||||||||||
| Interest accrual |
2,294 | 118,391 | 1,349 | 72,551 | ||||||||||||
| Attributed fees collected |
920 | 93,757 | 1,270 | 125,168 | ||||||||||||
| Benefits payments |
— | — | — | — | ||||||||||||
| Effect of changes in interest rates |
(8,338 | ) | (401,074 | ) | (19,421 | ) | (952,265 | ) | ||||||||
| Effect of changes in equity markets |
— | (9,167 | ) | — | 186,618 | |||||||||||
| Effect of changes in equity index volatility |
— | (36,721 | ) | — | 241,563 | |||||||||||
| Actual policyholder behavior different from expected behavior |
— | — | — | — | ||||||||||||
| Effect of changes in future expected policyholder behavior |
(250 | ) | (948 | ) | 602 | 46,567 | ||||||||||
| Effect of changes in other future expected assumptions |
16,720 | (219,094 | ) | (17,552 | ) | 363,078 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance, end of period, before effect of changes in the instrument-specific credit |
55,733 | 2,216,956 | 44,355 | 2,453,169 | ||||||||||||
| Effect of changes in the instrument-specific credit risk |
(5,134 | ) | (61,163 | ) | (6,492 | ) | (265,411 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance, end of period |
50,599 | 2,155,793 | 37,863 | 2,187,758 | ||||||||||||
| Reinsured MRB, end of period |
15,776 | 562,516 | 10,656 | 593,959 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance, end of period, net of reinsurance |
$ | 34,823 | $ | 1,593,277 | $ | 27,207 | $ | 1,593,799 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net amount at risk (a) |
$ | 265,429 | $ | 11,673,620 | $ | 258,826 | $ | 10,987,198 | ||||||||
| Weighted average attained age of contract holders (years) |
70 | 71 | 69 | 71 | ||||||||||||
| (a) | Net amount at risk is defined as the current guarantee amount in excess of the current account balance. |
The following is a reconciliation of market risk benefits by amounts in an asset position and in a liability position to market risk benefit amounts included in other assets and market risk benefit reserves, respectively, in the Consolidated Balance Sheets:
| September 30, 2023 | ||||||||||||
| Asset | Liability | Net Liability | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Fixed Index Annuities |
$ | 343,923 | $ | 2,499,716 | $ | 2,155,793 | ||||||
| Fixed Rate Annuities |
2,592 | 53,191 | 50,599 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 346,515 | $ | 2,552,907 | $ | 2,206,392 | ||||||
|
|
|
|
|
|
|
|||||||
36
| December 31, 2022 | ||||||||||||
| Asset | Liability | Net Liability | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Fixed Index Annuities |
$ | 226,294 | $ | 2,414,052 | $ | 2,187,758 | ||||||
| Fixed Rate Annuities |
3,577 | 41,440 | 37,863 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 229,871 | $ | 2,455,492 | $ | 2,225,621 | ||||||
|
|
|
|
|
|
|
|||||||
Reinsured Market Risk Benefits
The following table presents the balances and changes in reinsured market risk benefits associated with fixed index annuities for the nine months ended September 30, 2023 and year ended December 31, 2022:
| Nine Months Ended September 30, 2023 |
Year Ended December 31, 2022 |
|||||||||||||||
| Fixed Rate Annuities |
Fixed Index Annuities |
Fixed Rate Annuities |
Fixed Index Annuities |
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Ceded MRB |
||||||||||||||||
| Balance, beginning of period |
$ | 10,656 | $ | 593,959 | $ | — | $ | 156,931 | ||||||||
| Write-off related to in-force ceded reinsurance |
— | — | 10,091 | 334,835 | ||||||||||||
| Issuances |
— | 146,498 | — | 36,036 | ||||||||||||
| Interest accrual |
536 | 24,861 | 104 | 7,598 | ||||||||||||
| Attributed fees collected |
41 | 22,440 | 28 | 23,745 | ||||||||||||
| Benefits payments |
— | — | — | — | ||||||||||||
| Effect of changes in interest rates |
(1,129 | ) | (74,994 | ) | 135 | (171,948 | ) | |||||||||
| Effect of changes in equity markets |
— | (2,167 | ) | 118 | 43,799 | |||||||||||
| Effect of changes in equity index volatility |
— | (8,485 | ) | — | 34,278 | |||||||||||
| Actual policyholder behavior different from expected behavior |
— | — | — | — | ||||||||||||
| Effect of changes in future expected policyholder behavior |
58 | 5,098 | 180 | 12,598 | ||||||||||||
| Effect of changes in other future expected assumptions |
5,614 | (144,694 | ) | — | 116,087 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance, end of period |
$ | 15,776 | $ | 562,516 | $ | 10,656 | $ | 593,959 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net amount at risk (a) |
$ | 74,611 | $ | 2,828,270 | $ | 72,350 | $ | 2,402,964 | ||||||||
| Weighted average attained age of contract holders (years) |
70 | 70 | 70 | 71 | ||||||||||||
| (a) | Net amount at risk is defined as the current guarantee amount in excess of the current account balance. |
The following is a reconciliation of reinsurance market risk benefits by amounts in an asset position and in liability position to market risk benefit amounts included in coinsurance deposits and other liabilities, respectively, in the consolidated balance sheets:
| September 30, 2023 | ||||||||||||
| Asset | Liability | Net Asset | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Fixed Index Annuities |
$ | 695,387 | $ | 132,871 | $ | 562,516 | ||||||
| Fixed Rate Annuities |
16,026 | 250 | 15,776 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 711,413 | $ | 133,121 | $ | 578,292 | ||||||
|
|
|
|
|
|
|
|||||||
| December 31, 2022 | ||||||||||||
| Asset | Liability | Net Asset | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Fixed Index Annuities |
$ | 629,611 | $ | 35,652 | $ | 593,959 | ||||||
| Fixed Rate Annuities |
11,070 | 414 | 10,656 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 640,681 | $ | 36,066 | $ | 604,615 | ||||||
|
|
|
|
|
|
|
|||||||
37
Significant Inputs for Fair Value Measurement—Market Risk Benefits
The following tables provides a summary of the significant inputs and assumptions used in the fair value measurements of market risk benefits:
| September 30, 2023 | ||||||||||||||
| Fair Value | Valuation Technique |
Significant Inputs and Assumptions |
Range | Weighted Average |
||||||||||
| (in thousands) | ||||||||||||||
| Market risk benefits |
$ | 2,206,392 | Discounted cash flow | Utilization (a) | 0.04% -47.37% | 5.62 | % | |||||||
| Ceded market risk benefits |
578,292 | Option budget (b) | 1.85% - 2.75% | 2.29 | % | |||||||||
| Risk-free interest rate (c) | 3.63% - 5.44% | 4.05 | % | |||||||||||
| Nonperformance risk (d) | 0.66% - 3.00% | 2.21 | % | |||||||||||
| Mortality (e) | 0.01% - 46.00% | 3.73 | % | |||||||||||
| Lapse (f) | 0.25% - 40.00% | 3.69 | % | |||||||||||
| December 31, 2022 | ||||||||||||||
| Fair Value | Valuation Technique |
Significant Inputs and Assumptions |
Range | Weighted Average |
||||||||||
| (in thousands) | ||||||||||||||
| Market risk benefits |
$ | 2,225,621 | Discounted cash flow | Utilization (a) | 0.04% - 78.75% | 4.24 | % | |||||||
| Ceded market risk benefits |
604,615 | Option budget (b) | 1.65% - 2.50% | 2.31 | % | |||||||||
| Risk-free interest rate (c) | 2.51% - 4.90% | 3.31 | % | |||||||||||
| Nonperformance risk (d) | 0.06% - 3.27% | 2.59 | % | |||||||||||
| Mortality (e) | 0.01% - 44.00% | 3.44 | % | |||||||||||
| Lapse (f) | 0.25% - 40.00% | 3.65 | % | |||||||||||
| (a) | The utilization assumption represents the percentage of policyholders who will elect to receive lifetime income benefit payments in a given year. The range and weighted average of this assumption can vary from year to year depending on the characteristics of policies in a given cohort within the range. A decrease (increase) in the utilization assumption used in the fair value of market risk benefits could lead to favorable (unfavorable) changes in the market risk benefits. |
| (b) | The option budget assumption represents the expected cost of annual call options we will purchases in the future. An increase (decrease) in the option budget assumption used in the fair value of market risk benefits could lead to favorable (unfavorable) changes in the market risk benefits. |
| (c) | The risk-free interest rate assumption impacts the discount rate used in the discounted future cash flow valuation. An increase (decrease) in the risk-free interest rate assumption used in the fair value of market risk benefits could lead to favorable (unfavorable) changes in the market risk benefits. |
| (d) | The nonperformance risk assumption impacts the discount rate used in the discounted future cash flow valuation and includes our own credit risk based on the current market credit spreads for debt-like instruments we have issued and are available in the market. Additionally, the nonperformance risk assumption includes the counterparty credit risk used in the fair value measurement of ceded market risk benefits which is determined using the current market credit spreads based on the counterparty credit rating. An increase (decrease) in the nonperformance risk assumption for own credit risk used in the fair value of market risk benefits could lead to favorable (unfavorable) changes in the market risk benefits. An decrease (increase) in the nonperformance risk assumption for counterparty credit risk used in the fair value of ceded market risk benefits could lead to favorable (unfavorable) changes in the ceded market risk benefits. |
| (e) | The mortality rate assumptions are set based on a combination of company and industry experience, adjusted for improvement factors. Mortality rates vary by age and by demographic characteristics such as gender. An increase (decrease) in the mortality rate assumptions used in the fair value of market risk benefits could lead to favorable (unfavorable) changes in the market risk benefits. |
| (f) | The lapse rate assumptions represent the expected rate of full surrenders which are set based on product type or feature and whether a policy is subject to surrender charges. An increase (decrease) in lapse rate assumptions used in the fair value of market risk benefits could lead to favorable (unfavorable) changes in the market risk benefits. |
38
During the nine months ended September 30, 2023, the Company made the following notable changes to significant inputs and assumptions resulting in changes in the fair value measurement of market risk benefits:
| • | Utilization assumptions were increased resulting in an increase to the market risk benefits liability and a decrease to net income. |
| • | Option budget assumptions were changed to increase the near term assumption and decrease the long-term assumption. There was no change to the grading of these assumptions. The net impact of these changes resulted in an increase in the market risk benefits and a decrease to net income. |
| • | Mortality assumptions were increased resulting in a decrease to the market risk benefits liability and an increase to net income. |
| • | Lapse assumptions were increased resulting in a decrease to the market risk benefits liability and an increase to net income. |
During the year ended December 31, 2022, the Company made the following notable changes to significant inputs and assumptions resulting in changes in the fair value measurement of market risk benefits:
| • | Utilization assumptions were increased resulting in an increase to the market risk benefits liability and a decrease to net income. |
| • | Option budget assumptions were increased resulting in a decrease to the market risk benefits liability and an increase to net income. |
| • | Mortality assumptions were decreased resulting in an increase to the market risk benefits liability and a decrease to net income. |
| • | Lapse assumptions were increased resulting in a decrease to the market risk benefits liability and an increase to net income. |
Policyholder Account Balances
The following table presents the balances and changes in policyholders’ account balances:
| Nine Months Ended September 30, 2023 |
Year Ended December 31, 2022 |
|||||||||||||||
| Fixed Rate Annuities |
Fixed Index Annuities |
Fixed Rate Annuities |
Fixed Index Annuities |
|||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Balance, beginning of period |
$ | 6,589,577 | $ | 53,826,234 | $ | 6,860,060 | $ | 55,003,305 | ||||||||
| Issuances |
569,851 | 5,276,791 | 159,570 | 3,001,738 | ||||||||||||
| Premiums received |
11,871 | 112,087 | 4,811 | 170,493 | ||||||||||||
| Policy charges |
(3,506 | ) | (188,503 | ) | (6,587 | ) | (272,604 | ) | ||||||||
| Surrenders and withdrawals |
(713,181 | ) | (4,120,220 | ) | (574,590 | ) | (3,945,504 | ) | ||||||||
| Benefit payments |
(9,782 | ) | (610,452 | ) | (11,328 | ) | (727,847 | ) | ||||||||
| Interest credited |
123,713 | 708,194 | 151,762 | 599,259 | ||||||||||||
| Other |
(18,730 | ) | (2,790 | ) | 5,879 | (2,606 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance, end of period |
$ | 6,549,813 | $ | 55,001,341 | $ | 6,589,577 | $ | 53,826,234 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Weighted-average crediting rate |
2.53 | % | 1.75 | % | 2.28 | % | 1.11 | % | ||||||||
| Net amount at risk (a) |
$ | 265,429 | $ | 11,673,620 | $ | 258,826 | $ | 10,987,198 | ||||||||
| Cash surrender value |
$ | 6,169,436 | $ | 50,607,640 | $ | 6,208,597 | $ | 49,551,657 | ||||||||
| (a) | Net amount at risk is defined as the current guarantee amount in excess of the current account balance. |
The following table presents the reconciliation of policyholders’ account balances to policy benefit reserves in the consolidated balance sheets:
| September 30, 2023 | December 31, 2022 | |||||||
| (Dollars in thousands) | ||||||||
| Fixed index annuities policyholder account balances |
$ | 55,001,341 | $ | 53,826,234 | ||||
| Fixed rate annuities policyholder account balances |
6,549,813 | 6,589,577 | ||||||
| Embedded derivative adjustment (b) |
(1,684,963 | ) | (1,996,640 | ) | ||||
| Liability for future policy benefits |
292,334 | 318,677 | ||||||
| Deferred profit liability |
22,975 | 19,223 | ||||||
| Other |
44,594 | 24,765 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 60,226,094 | $ | 58,781,836 | ||||
|
|
|
|
|
|||||
| (b) | The embedded derivative adjustment reconciles the account balance to the gross GAAP liability and represents the combination of the host contract and the fair value of the embedded derivatives. |
39
The following table presents the balance of account values by range of guaranteed minimum crediting rates and the related range of the difference, in basis points, between rates being credited to policyholders and the respective guaranteed minimums:
| September 30, 2023 |
||||||||||||||||||||||
| Range of guaranteed minimum crediting rate |
At guaranteed minimum |
1 to 50 | 51 to 150 | Greater than 150 basis points above |
Total | |||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||
| Fixed Index Annuities |
0.00% - 0.50% | $ | — | $ | 833,693 | $ | 466,501 | $ | 840,895 | $ | 2,141,089 | |||||||||||
| 0.50% - 1.00% | 2,379,142 | 1,060,459 | 2,105,601 | 127,464 | 5,672,666 | |||||||||||||||||
| 1.00% - 1.50% | 45,031 | 9,083 | — | — | 54,114 | |||||||||||||||||
| 1.50% - 2.00% | 50 | — | — | — | 50 | |||||||||||||||||
| 2.00% - 2.50% | 126,181 | 78,511 | 8 | — | 204,700 | |||||||||||||||||
| 2.50% - 3.00% | 817,671 | — | — | — | 817,671 | |||||||||||||||||
| Greater than 3.00% | — | — | — | — | — | |||||||||||||||||
| Allocated to index strategies | 46,111,051 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 3,368,075 | $ | 1,981,746 | $ | 2,572,110 | $ | 968,359 | $ | 55,001,341 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Fixed Rate Annuities |
0.00% - 0.50% | $ | 52 | $ | — | $ | — | $ | — | $ | 52 | |||||||||||
| 0.50% - 1.00% | 53,147 | 178,358 | 3,833,822 | 985,499 | 5,050,826 | |||||||||||||||||
| 1.00% - 1.50% | 442,739 | 235 | — | — | 442,974 | |||||||||||||||||
| 1.50% - 2.00% | 359,167 | 32,400 | 226,713 | 215 | 618,495 | |||||||||||||||||
| 2.00% - 2.50% | 17,870 | 23 | — | — | 17,893 | |||||||||||||||||
| 2.50% - 3.00% | 365,385 | 6,956 | — | — | 372,341 | |||||||||||||||||
| Greater than 3.00% | 47,232 | — | — | — | 47,232 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 1,285,592 | $ | 217,972 | $ | 4,060,535 | $ | 985,714 | $ | 6,549,813 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 31, 2022 |
||||||||||||||||||||||
| Range of guaranteed minimum crediting rate |
At guaranteed minimum |
1 to 50 | 51 to 150 | Greater than 150 basis points above |
Total | |||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||
| Fixed Index Annuities |
0.00% - 0.50% | $ | — | $ | 462,356 | $ | 407,426 | $ | 314,929 | $ | 1,184,711 | |||||||||||
| 0.50% - 1.00% | 2,421,795 | 1,098,332 | 2,258,992 | 77,901 | 5,857,020 | |||||||||||||||||
| 1.00% - 1.50% | 51,586 | 9,391 | — | — | 60,977 | |||||||||||||||||
| 1.50% - 2.00% | 57 | — | — | — | 57 | |||||||||||||||||
| 2.00% - 2.50% | 133,059 | 100,205 | 8 | — | 233,272 | |||||||||||||||||
| 2.50% - 3.00% | 939,684 | — | — | — | 939,684 | |||||||||||||||||
| Greater than 3.00% | — | — | — | — | — | |||||||||||||||||
| Allocated to index strategies | 45,550,513 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 3,546,181 | $ | 1,670,284 | $ | 2,666,426 | $ | 392,830 | $ | 53,826,234 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Fixed Rate Annuities |
0.00% - 0.50% | $ | 61 | $ | — | $ | — | $ | — | $ | 61 | |||||||||||
| 0.50% - 1.00% | 55,458 | 203,523 | 4,000,203 | 701,836 | 4,961,020 | |||||||||||||||||
| 1.00% - 1.50% | 454,728 | 231 | — | — | 454,959 | |||||||||||||||||
| 1.50% - 2.00% | 281,694 | 96,767 | 277,053 | 189 | 655,703 | |||||||||||||||||
| 2.00% - 2.50% | 21,887 | 22 | — | — | 21,909 | |||||||||||||||||
| 2.50% - 3.00% | 434,042 | 7,417 | — | — | 441,459 | |||||||||||||||||
| Greater than 3.00% | 54,466 | — | — | — | 54,466 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 1,302,336 | $ | 307,960 | $ | 4,277,256 | $ | 702,025 | $ | 6,589,577 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
40
9. Notes and Loan Payable
Notes and loan payable includes the following:
| September 30, 2023 | December 31, 2022 | |||||||
| (Dollars in thousands) | ||||||||
| Senior notes due 2027 |
| |||||||
| Principal |
$ | 500,000 | $ | 500,000 | ||||
| Unamortized debt issue costs |
(2,507 | ) | (2,960 | ) | ||||
| Unamortized discount |
(151 | ) | (178 | ) | ||||
| Term loan due 2027 |
| |||||||
| Principal |
300,000 | 300,000 | ||||||
| Principal paydown |
(9,375 | ) | (3,750 | ) | ||||
| Unamortized debt issue costs |
(869 | ) | (1,039 | ) | ||||
|
|
|
|
|
|||||
| $ | 787,098 | $ | 792,073 | |||||
|
|
|
|
|
|||||
On June 16, 2017, we issued $500 million aggregate principal amount of senior unsecured notes due 2027 which bear interest at 5.0% per year and will mature on June 15, 2027 (the “2027 Notes”). The 2027 Notes were issued at a $0.3 million discount, which is being amortized over the term of the 2027 Notes using the effective interest method. Contractual interest is payable semi-annually in arrears each June 15th and December 15th. The initial transaction fees and costs totaling $5.8 million were capitalized as deferred financing costs and are being amortized over the term of the 2027 Notes using the effective interest method.
On February 15, 2022, we entered into a five-year, $300 million unsecured delayed draw term loan credit agreement. On July 6, 2022, we borrowed $300 million under this agreement. We will pay a floating rate of interest on the term loan utilizing SOFR adjusted for a credit spread. The term loan matures on February 15, 2027 and is amortizing at 2.5% annually for the first three years and 5.0% for the last two years.
10. Commitments and Contingencies
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state and federal regulatory bodies, such as state insurance departments, the Securities and Exchange Commission (“SEC”) and the Department of Labor, regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws and the Employee Retirement Income Security Act of 1974, as amended.
In accordance with applicable accounting guidelines, we establish an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. As a litigation or regulatory matter is developing we, in conjunction with outside counsel, evaluate on an ongoing basis whether the matter presents a loss contingency that meets conditions indicating the need for accrual and/or disclosure, and if not, the matter will continue to be monitored for further developments. If and when the loss contingency related to litigation or regulatory matters is deemed to be both probable and estimable, we will establish an accrued liability with respect to that matter and will continue to monitor the matter for further developments that may affect the amount of the accrued liability.
There can be no assurance that any pending or future litigation will not have a material adverse effect on our business, financial condition, or results of operations.
In addition to our commitments to fund mortgage loans, we have unfunded commitments at September 30, 2023 to limited partnerships of $725.5 million, and fixed maturity securities of $1.1 billion.
Through our FHLB membership, we have issued funding agreements to the FHLB in exchange for cash advances. As of September 30, 2023, we had no FHLB funding agreements outstanding. We are required to provide collateral in excess of the funding agreement amounts outstanding. The fixed maturity security investments pledged for collateral had a fair value of $1.7 billion at September 30, 2023.
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11. Earnings Per Common Share and Stockholders’ Equity
Earnings Per Common Share
The following table sets forth the computation of earnings per common share and earnings per common share—assuming dilution:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||
| Numerator: |
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| Net income available to common stockholders—numerator for earnings per common share |
$ | 465,238 | $ | 433,971 | $ | 642,769 | $ | 1,854,891 | ||||||||
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| Denominator: |
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| Weighted average common shares outstanding |
78,033,828 | 87,707,426 | 79,719,497 | 92,338,919 | ||||||||||||
| Effect of dilutive securities: |
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| Stock options and deferred compensation agreements |
702,387 | 452,321 | 599,809 | 517,490 | ||||||||||||
| Restricted stock and restricted stock units |
1,215,929 | 421,391 | 871,466 | 413,106 | ||||||||||||
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| Denominator for earnings per common share—assuming dilution |
79,952,144 | 88,581,138 | 81,190,772 | 93,269,515 | ||||||||||||
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| Earnings per common share |
$ | 5.96 | $ | 4.95 | $ | 8.06 | $ | 20.09 | ||||||||
| Earnings per common share—assuming dilution |
$ | 5.82 | $ | 4.90 | $ | 7.92 | $ | 19.89 | ||||||||
There were no options to purchase shares of our common stock outstanding excluded from the computation of diluted earnings per common share during the three and nine months ended September 30, 2023 and 2022, as the exercise price of all options outstanding was less than the average market price of our common shares for those periods.
Stockholders’ Equity
On June 10, 2020, we issued 12,000 shares of 6.625% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series B (“Series B”) with a $1.00 par value per share and a liquidation preference of $25,000 per share, for aggregate net proceeds of $290.3 million.
On November 21, 2019 we issued 16,000 shares of 5.95% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series A (“Series A”) with a $1.00 par value per share and a liquidation preference of $25,000 per share, for aggregate net proceeds of $388.9 million.
Dividends on the Series A and Series B preferred stock are payable on a non-cumulative basis only when, as and if declared, quarterly in arrears on the first day of March, June, September and December of each year, commencing on March 1, 2020 for Series A and on December 1, 2020 for Series B. For both the three and nine months ended September 30, 2023 and 2022, we paid dividends totaling $5.9 million and $17.8 million for Series A preferred stock and $5.0 million and $14.9 million for Series B preferred stock, respectively. The Series A and Series B preferred stock rank senior to our common stock with respect to dividends, to the extent declared, and in liquidation, to the extent of the liquidation preference. The Series A and Series B preferred stock are not subject to any mandatory redemption, sinking fund, retirement fund, purchase fund or similar provisions.
Brookfield Asset Management Equity Investment
On October 18, 2020, we announced an agreement with Brookfield Asset Management, Inc. and its affiliated entities (collectively, “Brookfield”) under which Brookfield would acquire up to a 19.9% ownership interest of common stock in the Company. The equity investment by Brookfield took place in two stages: an initial purchase of a 9.9% equity interest at $37.00 per share which closed on November 30, 2020 with Brookfield purchasing 9,106,042 shares, and a second purchase of an additional 6,775,000 shares which were issued to Brookfield at $37.33 per share in January of 2022, resulting in total ownership of approximately 16%. Brookfield also received the right to nominate one candidate for the Company’s Board of Directors following the initial equity investment.
Share Repurchase Program
As part of a share repurchase program, the Company’s Board of Directors approved the repurchase of Company common stock of $500 million on November 19, 2021, and an additional $400 million on November 11, 2022. The share repurchase program has offset dilution from the issuance of shares to Brookfield, and its purpose remains to institute a regular cash return program for shareholders.
On March 17, 2023 we entered into an accelerated share repurchase (ASR) agreement with JPMorgan Chase Bank, National Association to repurchase an aggregate of $200 million of our common stock. Under the ASR agreement, we received an initial share delivery of approximately 4.8 million shares representing approximately 80% of the number of shares initially underlying the ASR. The average price paid for the initial share delivery under the ASR was $33.12 per common share. The ASR agreement was determined to be an equity contract. The ASR was terminated on July 13, 2023, and a payment of $14 million was made to settle for the final volume-weighted average price associated with the initial share delivery.
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From the 2020 inception of the share repurchase program through September 30, 2023, we have repurchased approximately 31.2 million shares of our common stock at an average price of $35.21 per common share, including 2.4 million shares repurchased in the open market during the nine months ended September 30, 2023. As of September 30, 2023, we had $276 million remaining under our share repurchase program.
Treasury Stock
As of September 30, 2023, we held 30,971,013 shares of treasury stock with a carrying value of $1.1 billion. As of December 31, 2022, we held 24,590,353 shares of treasury stock with a carrying value of $823.1 million.