EX-99.1 10 fidelity-ex991xform10x12ba2.htm EX-99.1 Document
Exhibit 99.1
[l], 2022
Dear FNF Shareholder:
On March 16, 2022, Fidelity National Financial, Inc. (“FNF”) announced its intention to separate F&G Annuities & Life, Inc. (“F&G”) from FNF. The separation will be effected through a dividend of approximately 15% of the common stock of F&G to FNF shareholders on a pro rata basis. The separation and distribution will result in FNF and F&G operating as two publicly traded companies, with F&G operating FNF’s pre-separation annuities and life insurance segment and FNF continuing to own and operate its remaining businesses, including its title insurance business segment. Following the separation and distribution, FNF will retain control of F&G through an approximate 85% equity ownership stake.
The separation will create two public companies that we believe will have distinct strengths and will be well-positioned for continued market leadership and growth. Each public company will offer investors a distinct and compelling investment opportunity based on different operating and financial models, end-market business cycles and strategic growth opportunities. By retaining ownership of approximately 85% of F&G, we intend to continue to benefit from its growth while also highlighting the substantial equity value that has been and is expected to continue to be created by F&G.
The separation will provide current FNF shareholders with equity ownership in both FNF and F&G. The separation will be effected by means of a pro rata distribution of approximately 15% of the outstanding shares of F&G common stock to holders of FNF common stock. Each FNF shareholder will receive [l] shares of F&G common stock for every [l] share[s] of FNF common stock held as of [5:00 p.m.], Eastern Daylight Time (“EDT”) on [l], 2022, the record date for the distribution. F&G expects the shares of F&G common stock to be distributed to you at 12:01 a.m., EDT, on [l], 2022. No vote of FNF shareholders is required for the separation or the distribution. You do not need to take any action to receive shares of F&G common stock to which you are entitled as an FNF shareholder, and you do not need to pay any consideration, or surrender or exchange your FNF common stock.
The distribution of F&G common stock and cash received in lieu of fractional shares will be treated as a taxable distribution for U.S. federal income tax purposes.
I encourage you to read the attached Information Statement, which is being provided to all FNF shareholders who held common stock on the record date for the distribution. The Information Statement describes the separation in detail and contains important business and financial information about F&G.
We believe the time is right for this separation as these two businesses are well-positioned to deliver value as public companies. We appreciate your continued support of FNF, and look forward to your future support of both companies.
Sincerely,
Michael J. Nolan
Chief Executive Officer
Fidelity National Financial, Inc.


[l], 2022
Dear Future F&G Shareholder:
I am pleased to welcome you as a future shareholder of F&G Annuities & Life, Inc. (“F&G”), the common stock of which we expect will be listed on the New York Stock Exchange under the symbol “FG.” We are a leading provider of insurance solutions serving retail annuity and life customers and institutional clients. In fiscal year 2021, we generated approximately $4.0 billion of revenue as part of Fidelity National Financial, Inc. (“FNF”).
As explained in the attached Information Statement, we believe that F&G, as a standalone publicly traded company, will be a strong organization that is a leader in its industry. We see our partial spin-off from FNF as a vote of confidence from FNF for our business with the added benefit of maintaining our partnership with FNF through its majority ownership. We anticipate that the transition back to being a stand-alone public company will help to reinforce the value of F&G. Investors will have the opportunity to invest directly in F&G, giving them closer exposure to the earnings and cash flow potential of our inforce book, as well as the upside potential from our new business platforms. We plan to create long-term shareholder value by continuing to improve our industry-leading position and maximizing our strategic growth opportunities.
We invite you to learn more about F&G and our strategic initiatives by reading the attached information statement. We thank you in advance for your support as a future shareholder of F&G.
Sincerely,
Chris Blunt
President and Chief Executive Officer
F&G Annuities & Life, Inc.


Information contained herein is subject to completion or amendment. A registration statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.
PRELIMINARY AND SUBJECT TO COMPLETION, DATED OCTOBER 26, 2022
INFORMATION STATEMENT
prospectuscover1a.jpg
F&G Annuities & Life, Inc.
Common Stock, par value $0.001 per share
This Information Statement is being furnished in connection with the distribution by Fidelity National Financial, Inc. (“FNF”) to its shareholders of approximately 15% of the issued and outstanding shares of common stock of F&G Annuities & Life, Inc. (“F&G”), a wholly owned subsidiary of FNF, that holds and operates the annuities and life insurance related businesses of FNF. To implement the distribution, FNF will distribute approximately 15% of the shares of F&G common stock on a pro rata basis to FNF shareholders.
For every [l] share[s] of FNF common stock you hold of record as of [5:00 p.m.], Eastern Daylight Time (“EDT”) on [l], 2022, the record date for the distribution, you will receive [l] shares of F&G common stock. F&G expects the shares of F&G common stock to be distributed to you at 12:01 a.m., EDT, on [l], 2022. F&G refers to the date of the distribution of the F&G common stock as the “distribution date.”
The distribution will be treated as a taxable distribution for U.S. federal income tax purposes, including any cash received in lieu of fractional shares.
No vote of FNF shareholders is required for the separation or the distribution. Therefore, you are not being asked for a proxy, and you are requested not to send FNF a proxy, in connection with the separation or the distribution. You do not need to pay any consideration, exchange or surrender your existing FNF common stock, or take any other action to receive your shares of F&G common stock.
There is no current trading market for F&G common stock, although F&G expects that a limited market, commonly known as a “when-issued” trading market, will develop on or shortly before the record date for the distribution, and F&G expects “regular-way” trading of F&G common stock to begin on the first trading day following the completion of the distribution. F&G’s common stock has been authorized for listing on the New York Stock Exchange (the “NYSE”) under the symbol “FG,” subject to its being in compliance with all applicable listing standards on the date it begins trading on the NYSE. F&G intends to satisfy all the requirements for that listing. Following the separation and distribution, FNF will continue to trade on the NYSE under the symbol “FNF.”
In reviewing this Information Statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 8.
Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.
This Information Statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.
The date of this Information Statement is [l], 2022.
A Notice of Internet Availability with instructions for how to access this Information Statement was first mailed to FNF shareholders on or about [l], 2022.


TABLE OF CONTENTS


QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION
What is F&G and why is FNF separating F&G’s business and distributing F&G stock?
F&G, a wholly owned subsidiary of FNF, was incorporated by FNF for the purpose of holding the businesses of FGL Holdings. FGL Holdings was a publicly traded provider of annuity and life insurance products that was acquired by FNF in 2020. This annuity and life insurance business has seen significant expansion under FNF’s ownership. The separation of F&G from FNF and the distribution of F&G common stock are intended to provide you with equity ownership in two publicly traded companies. FNF and F&G expect that the separation will result in enhanced long-term performance of each business for the reasons discussed in the section titled “The Separation and Distribution—Rationale for the Separation and Distribution.”
Why am I receiving this document?
FNF is delivering this document to you because you are a holder of FNF common stock. If you are a holder of FNF common stock as of [5:00 p.m.] EDT on [l], 2022, the record date of the distribution, you will be entitled to receive [l] shares of F&G common stock for every [l] share[s] of FNF common stock that you held at [5:00 p.m.] EDT on such date. This document will help you understand how the separation and distribution will affect your post-separation ownership in FNF and F&G, respectively.
How will the separation of F&G from FNF work?
F&G is currently a wholly owned subsidiary of FNF. F&G’s businesses have been operated separately within FNF since the June 1, 2020 acquisition. The separation will be effected through a dividend of approximately 15% of the common stock of F&G to the FNF shareholders on a pro rata basis. For additional information on the separation, see “The Separation and Distribution.”
Why is the separation of F&G structured as a distribution?
FNF believes that the separation and distribution is an efficient way to separate its annuities and life insurance related businesses from its title insurance and other businesses in a manner that will achieve the corporate business purposes as set forth herein in the section titled “The Separation and Distribution—Rationale for the Separation and Distribution.”
What is the record date for the distribution?
The record date for the distribution will be [l], 2022.
When will the distribution occur?
It is expected that all of the shares of F&G common stock included in the distribution will be distributed by FNF at [5:00 p.m.], EDT, on [l], 2022 to holders of record of FNF common stock at [5:00 p.m.] EDT on [l], 2022 the record date for the distribution.
What do FNF shareholders need to do to participate in the distribution?
Shareholders of FNF as of the record date for the distribution will not be required to take any action to receive F&G common stock in the distribution. However, we urge you to read this entire Information Statement carefully. No shareholder approval of the separation and distribution is required. You are not being asked for a proxy. You do not need to pay any consideration, exchange or surrender your existing FNF common stock or take any other action to receive your shares of F&G common stock. Please do not send in your FNF stock certificates. The distribution will not affect the number of outstanding shares of FNF common stock or any rights of FNF shareholders, although it may affect the market value of each outstanding share of FNF common stock.
How will shares of F&G common stock be issued?
You will receive shares of F&G common stock through the same channels that you currently use to hold or trade FNF common stock, whether through a brokerage account or other channel. Receipt of shares of F&G
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common stock will be documented for you in the same manner that you typically receive shareholder updates, such as monthly broker statements.
If you own FNF common stock as of [5:00 p.m.] EDT on the record date for the distribution, including shares owned in certificated form, FNF, with the assistance of Continental Stock Transfer & Trust Company (“CST”), the distribution agent, will electronically distribute shares of F&G common stock to you or to your brokerage firm on your behalf in book-entry form. CST will mail you a book-entry account statement that reflects your shares of F&G common stock, or your bank or brokerage firm will credit your account for the common stock.
How many shares of F&G common stock will I receive in the distribution?
FNF will distribute to you [l] shares of F&G common stock for every [l] share[s] of FNF common stock you held as of [5:00 p.m.] EDT on the record date for the distribution. Based on approximately [l] shares of FNF common stock outstanding as of [l], 2022, a total of approximately [l] shares of F&G common stock will be distributed. For additional information on the distribution, see “The Separation and Distribution.”
Will F&G issue fractional shares of its common stock in the distribution?
No. F&G will not issue fractional shares of its common stock in the distribution. Fractional shares that FNF shareholders would otherwise have been entitled to receive will be aggregated and sold in the public market by the distribution agent. The aggregate net cash proceeds of these sales will be distributed pro rata (based on the fractional shares such holder would otherwise have been entitled to receive) to those shareholders who would otherwise have been entitled to receive fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares generally will be taxable, for U.S. federal income tax purposes, to the recipient FNF shareholders. See “Certain U.S. Federal Income Tax Consequences of the Distribution to U.S. Holders” for further information.
What are the conditions to the Separation and Distribution Agreement?
The transactions contemplated by the Separation and Distribution Agreement are subject to the satisfaction or waiver of the following conditions:
•each of FNF and F&G shall have performed in all material respects its respective covenants and agreements contained in the Separation and Distribution Agreement to be performed at or prior to the closing;
•there being no law, injunction, judgment or ruling enacted, promulgated, issued, entered, amended or enforced by any governmental authority in effect enjoining, restraining, preventing or prohibiting consummation of any of the transactions contemplated by the Separation and Distribution Agreement or making the consummation of any such transactions illegal;
•the SEC shall have declared effective the registration statement of which this Information Statement forms a part and no stop order suspending the effectiveness of the registration statement shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC;
•the shares of F&G common stock to be distributed shall have been accepted for listing on the NYSE, subject to official notice of distribution;
•each of FNF and F&G shall have delivered certain deliverables as contemplated by the Separation and Distribution Agreement, including the ancillary agreements relating to the separation and distribution; and
•no other events or developments shall exist or shall have occurred that, in the judgment of the board of directors of FNF, in its sole and absolute discretion, make it inadvisable to effect the separation, the distribution or the transactions contemplated by the Separation and Distribution Agreement or any ancillary agreement.
FNF and F&G cannot assure you that any or all of these conditions will be met and may also waive any of the conditions to the separation and distribution. In addition, FNF can choose at any time prior to distribution not to go
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forward with the separation and distribution for any reason or no reason. For a complete discussion of all of the conditions to the distribution, see “The Separation and Distribution—Conditions to the Separation and Distribution Agreement.”
What is the expected date of completion of the separation and distribution?
As described above, the completion and timing of the separation and distribution depend on a number of conditions. It is expected that the shares of F&G common stock will be distributed by FNF at [5:00 p.m.], EDT, on [l], 2022 to the holders of record of FNF common stock at [5:00 p.m.] EDT on [l], 2022, the record date for the distribution. However, no assurance can be provided as to the timing of the separation or that all conditions to the distribution will be met.
Can FNF decide to cancel the distribution of F&G common stock even if all the conditions have been met?
Yes. Until the distribution has occurred, FNF has the right to terminate the distribution, even if all of the conditions are satisfied. See “The Separation and Distribution—Conditions to the Separation and Distribution Agreement.”
What if I want to sell my FNF common stock or my F&G common stock?
You should consult with your financial advisors, such as your stockbroker, bank or tax advisor.
What is “regular-way” and “ex-distribution” trading of FNF common stock?
Beginning on or shortly before the record date for the distribution and continuing up to and through the distribution date, it is expected that there will be two markets in FNF common stock: a “regular-way” market and an “ex-distribution” market. FNF common stock that trades in the “regular-way” market will trade with an entitlement to shares of F&G common stock distributed pursuant to the distribution. Shares that trade in the “ex-distribution” market will trade without an entitlement to the shares of F&G common stock to be distributed in the distribution. If you decide to sell any FNF common stock before the distribution date, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your FNF common stock with or without your entitlement to F&G common stock to be issued in the distribution.
Where will I be able to trade shares of F&G common stock?
F&G intends to apply to list its common stock on the NYSE under the symbol “FG.” F&G anticipates that trading in shares of its common stock will begin on a “when-issued” basis on or shortly before the record date for the distribution and will continue up to and through the distribution date and that “regular-way” trading in F&G common stock will begin on the first trading day following the completion of the separation. If trading begins on a “when-issued” basis, you may purchase or sell F&G common stock up to and through the distribution date, but your transaction will not settle until after the distribution date. F&G cannot predict the trading prices for its common stock before, on or after the distribution date.
What will happen to the listing of FNF common stock?
FNF common stock will continue to trade on the NYSE after the distribution under the symbol “FNF.”
Will the number of FNF common stock that I own change as a result of the distribution?
No. The number of FNF common stock that you own will not change as a result of the distribution.
Will the distribution affect the market price of my FNF common stock?
As a result of the distribution, FNF expects the trading price of FNF common stock immediately following the distribution to be lower than the “regular-way” trading price of such common stock immediately prior to the distribution because the trading price will no longer reflect FNF’s 100% ownership of F&G. There can be no assurance that the market value of the FNF common stock following the separation will be higher or lower than the market value of FNF common stock before the separation. This means, for example, that the combined trading
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prices of one FNF common share and one share of F&G common stock after the distribution may be equal to, greater than or less than the trading price of one FNF common share before the distribution.
What will be my tax basis in the F&G common stock received in the distribution and my tax basis in my shares of FNF common stock following the distribution?
Following the distribution, you will have an initial tax basis for U.S. federal income tax purposes in the shares of F&G common stock received by you in the distribution equal to the fair market value of those shares on the distribution date. Your tax basis in your FNF common stock will be reduced, but not below zero, only to the extent that the fair market value of F&G common stock received by you on the distribution date (plus any cash received in lieu of fractional shares) exceeds your allocable portion of FNF’s current and accumulated earnings and profits. You should consult your tax advisor about the particular consequences of the distribution to you, including the application of federal, state, local and non-U.S. tax laws. See “Certain U.S. Federal Income Tax Consequences of the Distribution to U.S. Holders” for further information.
What will F&G’s relationship be with FNF following the separation?
Upon completion of the separation and distribution, FNF will own approximately 85% of F&G outstanding common stock. F&G will enter into a Separation and Distribution Agreement with FNF to effect the separation and provide a framework for F&G’s relationship with FNF after the separation and will enter into certain ancillary agreements, such as a Corporate Services Agreement, a Reverse Corporate Services Agreement and a Tax Sharing Agreement (referred to herein as the “ancillary agreements”). These agreements will govern the relationship between F&G and FNF subsequent to the completion of the separation and distribution. In certain cases, FNF may have interests which differ from other shareholders of F&G. For additional information regarding the Separation and Distribution Agreement and other ancillary agreements, see the “Risk Factors—Risks Related to the Separation and Distribution,” “The Separation and Distribution” and “Certain Relationships and Related Person Transactions” sections of this Information Statement.
Who will manage F&G after the separation?
F&G will benefit from a management team with an extensive background in operating annuities and life insurance related businesses. Led by Chris Blunt, who will be F&G’s President and Chief Executive Officer after the separation, F&G’s management team will possess a diverse set of relevant skills as well as experience in its industry. For more information regarding F&G’s management, see “Management.”
Are there risks associated with owning F&G common stock?
Yes. Ownership of F&G common stock is subject to both general and specific risks relating to F&G’s business, the management of F&G’s investment assets, the industry in which F&G operates (including economic conditions and market conditions), legal, regulatory and tax risks, F&G’s indebtedness and financing, the separation and distribution, F&G’s status as a publicly traded company, and F&G’s ongoing contractual relationships with FNF. Ownership of F&G common stock is also subject to risks relating to the separation and distribution. These risks are described in the “Risk Factors” section of this Information Statement beginning on page 8. You are encouraged to read that section carefully.
Does F&G plan to pay dividends?
We intend to pay quarterly cash dividends on our common stock at an initial aggregate amount of approximately $100 million per year beginning in early 2023, although any declaration of dividends will be at the discretion of F&G’s board of directors and will depend on our financial condition, earnings, liquidity and capital requirements, regulatory constraints, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by Delaware law, general business conditions and any other factors that the F&G board of directors deems relevant in making such a determination. Therefore, there can be no assurance that we will pay any dividends to holders of our common stock, or as to the amount of such dividends. See “Dividend Policy.”
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Will F&G incur any indebtedness prior to or at the time of the distribution?
Yes. F&G has also established a $5.0 billion Global Debt Issuance program. F&G Global Funding is a statutory trust formed solely for the purpose of issuing medium-term notes to institutional investors. The proceeds of note issuances are used by the issuer to acquire funding agreements from Fidelity & Guaranty Life Insurance Company (“FGL Insurance”), a subsidiary of F&G. The notes are secured by these funding agreements, which have matching interest payment and maturity terms. The notes may be denominated in U.S. dollar or foreign currencies and may have fixed or floating interest rates. As of June 30, 2022, F&G had funding agreements issued in connection with its funding agreement-backed medium-term note program with an account value of $2.6 billion.
Who will be the distribution agent, transfer agent, registrar and information agent for the F&G common stock?
The distribution agent, transfer agent and registrar for the F&G common stock will be CST. For questions relating to the mechanics of the distribution or matters relating to the subsequent transfer of F&G common stock, you should contact CST shareholder relations by phone: 800-509-5586, email: cstmail@continentalstock.com or mail:
Continental Stock Transfer & Trust Company
ATTN: Shareholder Relations
1 State Street, 30th Floor
New York, NY 10004-1561
Where can I find more information about FNF and F&G?
Before the distribution, if you have any questions relating to FNF’s business performance, you should contact:
Fidelity National Financial, Inc.
601 Riverside Ave.
Jacksonville, FL 32204
Email: Investors@fnf.com
Attn: Lisa Foxworthy-Parker, SVP of Investor & External Relations
After the distribution, F&G shareholders who have any questions relating to F&G’s business performance should contact F&G at:
F&G Annuities & Life, Inc.
801 Grand Ave, Suite 2600
Des Moines, Iowa 50309
Email: Investor.relations@fglife.com
Attn: Lisa Foxworthy-Parker, SVP of Investor & External Relations
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INFORMATION STATEMENT SUMMARY
This summary highlights selected information from this Information Statement relating to our company. For a more complete understanding of our business, the separation and the distribution, you should carefully read this entire Information Statement, including the “Risk Factors” section and our consolidated historical financial statements and notes to those statements appearing elsewhere in this Information Statement.
Unless otherwise indicated or unless the context otherwise requires, the information included in this Information Statement assumes the completion of the separation of F&G from FNF (the “separation”) and the distribution of F&G’s common stock to FNF’s shareholders (the “distribution”). References in this Information Statement to “ F&G,” “we,” “us,” “our” and “ the company” refer to F&G Annuities & Life, Inc. and its consolidated subsidiaries, unless the context requires otherwise. References in this Information Statement to “FNF” refer to Fidelity National Financial, Inc. and its consolidated subsidiaries, unless the context requires otherwise. References to F&G’s historical business and operations refer to the business and operations of FNF’s F&G business segment that will be operated by F&G in connection with the separation and distribution.
Following the completion of the separation and the distribution, we will be a “controlled company” under the New York Stock Exchange corporate governance standards, and as a result, will rely on exemptions from certain corporate governance requirements. See “Risk Factors.”
Overview
We are a leading provider of insurance solutions serving retail annuity and life customers and institutional clients. Through our insurance subsidiaries, including FGL Insurance and Fidelity & Guaranty Life Insurance Company of New York (“FGL NY Insurance”), we market a broad portfolio of deferred annuities (fixed indexed annuities (“FIAs”) and multi-year guarantee annuities (“MYGAs”) or other fixed rate annuities), immediate annuities, indexed universal life (“IUL”) insurance, funding agreements (through funding agreement-backed notes (“FABN”) issuances and the Federal Home Loan Bank of Atlanta (“FHLB”)) and pension risk transfer (“PRT”) solutions.
We were acquired by FNF on June 1, 2020 (the “FNF Acquisition”). We benefited from immediate financial strength ratings upgrades and affirmations following the FNF Acquisition; S&P Global Ratings, a Standard & Poor’s Financial Services LLC (“S&P”) and Fitch Ratings Inc. (“Fitch”) upgraded us to A-, A.M. Best Company (“A.M. Best”) affirmed at A-, and Moody’s Investors Service, Inc. (“Moody’s”) upgraded us to Baa1. These upgrades and affirmations, which we believe were valued by our distribution partners, positioned us to quickly expand our business in our existing channels and gain access to new markets. In the first full year of ownership by FNF, we more than doubled sales from $4.5 billion in 2020 to $9.6 billion in 2021 and did so profitably. With our success in expanding distribution under FNF’s ownership, we have grown assets under management (“AUM”) from $26.5 billion at the time of acquisition to $40.3 billion as of June 30, 2022. We now operate in and source significant premiums from five distinct channels, versus a single channel prior to the FNF Acquisition. For a discussion of the five distinct channels, see “Business — We Play in Large and Growing Markets” and “Business — Our Retail Distribution Channels” in this Information Statement.
We believe the strength of our balance sheet provides confidence to our policyholders and business partners and positions us for continued growth. Our invested assets comprise what we believe to be a highly rated and well diversified portfolio. As of June 30, 2022, 92% of our fixed maturity securities were rated NAIC 1 or NAIC 2, the two highest credit rating designations under criteria of the National Association of Insurance Commissioners (the “NAIC”). These assets are managed against what we believe to be prudently underwritten liabilities. We have in-force liabilities of $38.7 billion at June 30, 2022, with a liability duration of 6 years, well matched to our assets. For the six months ended June 30, 2022, net earnings attributable to common shareholders was $466 million, we produced adjusted net earnings (“ANE”) of $195 million and an adjusted return on assets (“ROA”) of 102 basis points. We are focused on growing our in-force liabilities and AUM, driven by sales of attractively priced liabilities, including FIAs, MYGAs or other fixed rate annuities, IUL, funding agreements, and PRT solutions.
As of June 30, 2022, we had $2.5 billion of total equity and $4.6 billion of total equity excluding accumulated other comprehensive earnings (“AOCI”). FGL Insurance expects to maintain its U.S. risk-based capital (“RBC”)
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ratio at or above our target of 400%. Going forward, we intend to fund our continued growth through statutory earnings, reinsurance programs, and unused debt capacity.
Rationale for the Separation and Distribution
FNF and the FNF board of directors believes that separation of the annuities and life insurance related businesses from the remainder of FNF is in both companies’ best interest for a number of reasons, including the following:
Unlock the Value of Two Industry Leading Businesses
FNF believes that the separation will result in the creation of shareholder value because, among other things, the trading value of FNF’s and F&G’s common stock in the aggregate would exceed the trading value of the existing FNF common stock, although there can be no assurance that this will occur. The separation is expected to provide greater transparency for investors, resulting in more focus and attention by the investment community on the F&G business.
Distinct Investment Identities
The separation is intended to create two distinct and compelling investment opportunities for investors based on individually unique operating models and associated track records of successful performance. It also provides investors with enhanced insight into each company’s distinct value drivers and simplified financial reporting to more accurately assess and value performance of each individual business.
Strategy and Competitive Strengths
FNF and F&G believe that F&G’s strategy and competitive strengths position F&G well for growth. Through a diversification growth strategy, F&G has demonstrated profitable, compound annual growth rates (“CAGRs”) in sales of 56%, AUM of 18%, and ANE of 44%, for the two-year period ended December 31, 2021 and, more recently, annual increases in sales of 31% and AUM of 27%, and an annual ANE decrease of 22%, for the six month period ended June 30, 2022, as compared to the prior year.
We have expanded our business in our traditional channels, and entered new markets. With this strategy, we believe that we will continue to deliver stable ROA driven by asset growth and increasing margins from scale as well as expansion into higher-margin, less capital-intensive products. We are positioned to accomplish our goals through the following areas of strategic focus:
•Targeting large and growing markets. The opportunity for our core annuity products remains significant, as policyholders seek to add safety and certainty to their retirement plans. Our investments in life insurance products allows us to penetrate the underserved middle market, which addresses the needs of many of our cultural communities. And as corporations continue to de-risk their pension funds, our buyout solutions can guarantee pension-holders the lifetime benefits they need and want. Finally, we continue to attract strong institutional annuity buyers with funding agreements. F&G is a national leader in the markets we play in, and demographic trends provide tailwinds and significant room to continue growing.
•Superior ecosystem. Our business model gives us a sustainable competitive advantage. We have strong and long-standing relationships with a diverse network of distributors, a durable investment edge through our Blackstone, Inc. (“Blackstone”) partnership, a scalable administrative platform, and a track record of attracting and retaining top talent.
•Consistent track record of success. F&G’s deep and experienced management team has successfully diversified products and channels in recent years and demonstrated our ability to deliver consistent top line growth, increase AUM and generate steady spreads and ROA across varying market cycles.
•The separation and distribution will unlock value. Investors will be able to invest directly in F&G to capitalize on the earnings and cash flow potential of its in-force book, as well as the upside potential of its new business platforms. F&G will continue to reap the benefits that come from its majority ownership by
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FNF. We view the separation and distribution as a vote of confidence for our business, and anticipate that the transition to being a public company will help to reinforce the value of F&G.
The Separation
On March 14, 2022, FNF’s Board of Directors approved a dividend to their shareholders, on a pro rata basis, of 15% of the common stock of F&G (the “F&G Distribution”). FNF intends to retain control of F&G through their approximate 85% ownership stake. The proposed F&G Distribution is intended to be structured as a taxable dividend to FNF shareholders and is subject to various conditions including the final approval of FNF’s Board of Directors, the effectiveness of appropriate filings with the SEC, and any applicable regulatory approvals. The record date and distribution settlement date will be determined by FNF’s Board of Directors prior to the distribution. Upon completion of the F&G Distribution, FNF’s shareholders as of the record date are expected to own stock in both publicly traded companies. The proposed F&G Distribution is targeted to be completed early in the fourth quarter of 2022. However, there can be no assurance regarding the timeframe for completing the F&G Distribution or that the conditions of the F&G Distribution will be met. The separation will be effected pursuant to a separation and distribution agreement between FNF and F&G (the “Separation and Distribution Agreement”).
Conditions to the Separation and Distribution Agreement
The transactions contemplated by the Separation and Distribution Agreement are subject to the satisfaction or waiver of the following conditions:
•each of FNF and F&G shall have performed in all material respects its respective covenants and agreements contained in the Separation and Distribution Agreement to be performed at or prior to the closing of the separation and distribution (the “separation and distribution closing”);
•there being no law, injunction, judgment or ruling enacted, promulgated, issued, entered, amended or enforced by any governmental authority in effect enjoining, restraining, preventing or prohibiting consummation of any of the transactions contemplated by the Separation and Distribution Agreement or making the consummation of any such transactions illegal;
•the SEC shall have declared effective the registration statement of which this Information Statement forms a part and no stop order suspending the effectiveness of the registration statement shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC;
•the shares of F&G common stock to be distributed shall have been accepted for listing on the NYSE, subject to official notice of distribution;
•each of FNF and F&G shall have delivered certain deliverables as contemplated by the Separation and Distribution Agreement, including the ancillary agreements relating to the separation and distribution; and
•no other events or developments shall exist or shall have occurred that, in the judgment of the board of directors of FNF, in its sole and absolute discretion, make it inadvisable to effect the separation, the distribution or the transactions contemplated by the Separation and Distribution Agreement or any ancillary agreement.
FNF will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the separation and distribution and, to the extent it determines to so proceed, to determine the record date for the distribution, the distribution date and the distribution ratio. FNF will also have sole discretion to amend or terminate the distribution at any time. FNF does not intend to notify its shareholders of any modifications to the terms of the separation that, in the judgment of its board of directors, are not material. For example, FNF’s board of directors might consider material such matters as significant changes to the distribution ratio or the allocation of the assets and liabilities of FNF in the separation. To the extent that FNF’s board of directors determines that any modifications by FNF materially change the material terms of the distribution, FNF will notify FNF’s shareholders in a manner reasonably calculated to inform them about the modification as may be required by law, by, for
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example, publishing a press release, filing a current report on Form 8-K or circulating a supplement to this Information Statement.
Agreements with FNF
Following the separation and distribution, F&G and FNF will each operate separately, as publicly traded companies. In addition to FNF’s retained ownership of F&G, F&G will enter into the Separation and Distribution Agreement with FNF. In connection with the separation, F&G also intends to enter into various ancillary agreements to effect the separation and provide a framework for its relationship with FNF after the separation and distribution, such as a corporate services agreement (the “Corporate Services Agreement”), a reverse corporate services agreement (the “Reverse Corporate Services Agreement”), a tax sharing agreement (the “Tax Sharing Agreement”) and other agreements entered into in connection therewith (collectively with the Separation and Distribution Agreement, the “Transaction Agreements”). These agreements will provide for the allocation between F&G and FNF of FNF’s assets, employees, liabilities and obligations attributable to periods prior to, at and after F&G’s separation from FNF and will govern certain relationships between F&G and FNF after the separation. Forms of the agreements listed above are filed as exhibits to the registration statement on Form 10 of which this Information Statement forms a part.
Formation of F&G
F&G was incorporated in Delaware on August 7, 2020 for the purpose of holding the businesses of FGL Holdings, a former Cayman exempted company which was acquired by FNF on June 1, 2020 and merged into CF Bermuda Holdings Ltd. (“CF Bermuda”). FGL Holdings was a publicly traded provider of annuity and life insurance products.
Relationship With FNF Following the Separation and Distribution
Upon completion of the separation and distribution, FNF will own approximately 85% of our outstanding common stock. As a result, FNF will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matters submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. FNF will also have sufficient voting power to approve amendments to our organizational documents.
Accordingly, upon completion of the separation and distribution, we will qualify as a “controlled company” within the meaning of the NYSE corporate governance standards and may elect not to comply with certain NYSE corporate governance standards. We intend to avail ourselves of some or all “controlled company” exemptions to these certain NYSE corporate governance standards. Consequently, you will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance rules and requirements. For additional information regarding the exemptions on which we intend to rely, see “Management–Status as a Controlled Company” and “Risk Factors–Risks Related to the Separation and Distribution–We will be a ‘controlled company’ within the meaning of the NYSE rules and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.”
The interests of FNF may not coincide with our interests or the interests of the other holders of our common stock. In addition, conflicts of interest may arise between FNF, as our controlling stockholder, and us. For example, FNF may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us, and FNF may either directly, or through affiliates, also maintain business relationships with companies that may directly compete with us. In general, FNF or its affiliates could pursue business interests or exercise their voting power as stockholders in ways that are detrimental to us but beneficial to themselves or to other companies in which they invest or with whom they have relationships. Also, upon completion of the separation and distribution, F&G’s charter will provide that, subject to any written agreement to the contrary, FNF will not have a duty to refrain from engaging in the same or similar activities or lines of business that F&G engages in, and, except as set forth in F&G’s charter, none of FNF and FNF’s officers and directors will be liable to F&G or its shareholders for any breach of any fiduciary duty due to any such activities of FNF. For additional information regarding FNF’s ability to control the outcome of matters put to a stockholder vote and potential conflicts of interest, see “Risk Factors–Risks Related to
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the Separation and Distribution–FNF will be our principal shareholder following the completion of the separation and distribution and will retain significant rights with respect to our governance and certain corporate actions. In certain cases, FNF may have interests which differ from other stockholders of F&G.” and “Risk Factors–Risks Related to the Separation and Distribution–After the separation and distribution, certain of our directors may have actual or potential conflicts of interest because of their FNF equity ownership or their current or former FNF positions.” and “Description of Capital Stock–Corporate Opportunities.”
Investment Management Relationship with Blackstone
FGL Insurance and certain other subsidiaries of F&G (other than FGL NY Insurance) are party to investment management agreements (“IMAs”) with Blackstone ISG-I Advisors LLC (“BIS”) pursuant to which BIS is appointed as investment manager of substantially all assets in the general and separate accounts of those entities (the “F&G Accounts”). MVB Management, LLC, an entity that is 50% owned by affiliates of William Foley, the Chairman of FNF and a proposed director of F&G (“MVB Management”), receives a participation fee from BIS in connection with assets of F&G and its subsidiaries that are managed by BIS. BIS also receives services from MVB Management. BIS pays MVB Management a fee of approximately 15% of certain fees paid to BIS and its affiliates pursuant to the investment management agreements with BIS. BIS, in accordance with our IMAs, has delegated certain investment services to its affiliates, including Blackstone’s Credit, Real Estate Debt and Asset-Based Finance businesses, in each case, pursuant to separate sub-management agreements executed between BIS and each such affiliate. See also “Certain Relationships and Related Person Transactions—Other Relationships” in this Information Statement.
F&G is not a party to the agreements between BIS and MVB Management and does not pay, and is not responsible for, any fees paid to MVB Management. Our agreements with BIS provide that, in the event BIS and MVB Management amend their participation fee agreement in the future to reduce the fee (based on a decreasing sliding scale of aggregate assets managed by BIS) payable for assets under management in the F&G Accounts over $34 billion by 50%, BIS’s per annum management fee for assets under management in the F&G Accounts over $34 billion will also be reduced. See also “Business—Our Investment Management Governance and Approach” in this Information Statement.
Reason for Furnishing this Information Statement
This Information Statement is being furnished solely to provide information to shareholders of FNF who will receive shares of F&G common stock in the distribution. It is not and is not to be construed as an inducement or encouragement to buy or sell any of F&G’s securities. The information contained in this Information Statement is believed by F&G to be accurate as of the date set forth on its cover. Changes may occur after that date and neither F&G nor FNF will update the information except in the normal course of their respective disclosure obligations and practices.
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Summary Risk Factors
There are risks associated with our business, economic and market conditions, regulatory and tax, indebtedness and financing, the separation of F&G from FNF and an investment in our common stock, including:
Risks Related to Our Business
•A financial strength ratings downgrade, potential downgrade, or any other negative action by a rating agency could increase our cost of capital, making it challenging to grow our business, and could hinder our ability to participate in certain market segments, thereby adversely affecting our results of operations and our financial condition.
•We may face losses if our actual experience differs significantly from our reserving assumptions.
•Our valuation of investments and the determinations of the amounts of allowances and impairments taken on our investments may include methodologies, estimates and assumptions which are subject to differing interpretations and, if changed, could materially adversely affect our results of operations and financial condition.
•The pattern of amortizing our value of business acquired (“VOBA”), deferred acquisition costs (“DAC”) and deferred sales inducements (“DSI”) balances relies on assumptions and estimates made by management. Changes in these assumptions and estimates could impact our results of operations and financial condition.
•Change in our evaluation of the recoverability of our deferred tax assets could adversely affect our results of operations and financial condition.
•We are subject to the credit risk of our counterparties, including companies with whom we have reinsurance agreements or from whom we have purchased options.
•Interruption or other operational failures in telecommunication, information technology and other operational systems, or a failure to maintain the security, integrity, confidentiality or privacy of sensitive data residing on such systems, including as a result of human error, could result in a loss or disclosure of confidential information, damage to our reputation, monetary losses, additional costs and impairment of our ability to conduct business effectively.
•We have a long-term contractual relationship with BIS that limits our ability to terminate this relationship or retain another investment manager without BIS’s consent.
•Increased regulation or scrutiny of alternative investment advisers, arrangements with such investment advisers and investment activities may affect BIS’s or, if engaged, any other asset manager’s ability to manage our investment portfolio or impact the reputation of our business.
Risks Related to Economic Conditions and Market Conditions
•Conditions in the economy generally could adversely affect our business, results of operations and financial condition.
•Our investments are subject to credit risks of the underlying issuer, borrower, or physical collateral which can change over time with the credit cycle.
•Interest rate fluctuations could adversely affect our business, financial condition, liquidity and results of operations.
•Our business could be materially and adversely affected by the occurrence of a catastrophe, including natural or man-made disasters.
Legal, Regulatory and Tax Risks
•Our business is subject to government regulation in each of the jurisdictions in which we conduct business and regulators have broad administrative and discretionary authority over our business and business practices.
•Current and emerging developments relating to market conduct standards for the financial services industry emerging from the U. S. Department of Labor’s (“DOL”) implementation of the “fiduciary rule” may over time materially affect our business.
•The SECURE Act of 2019 may impact our business and the markets in which we compete.
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Risks Related to the Separation and Distribution
•We may not achieve some or all of the expected benefits of the separation and distribution, and the separation and distribution may materially adversely affect our business, financial condition or operating results.
•The combined post-separation value of our common stock and FNF common stock may not equal or exceed the pre-separation value of FNF common stock.
•Although we have past history of operating as a public company, our historical financial information and summary historical financial information are not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.
•Until the separation and distribution occurs, FNF has sole discretion to change the terms of the separation and distribution in ways that may be unfavorable to us.
•FNF will be our principal shareholder following the completion of the separation and distribution and will retain significant rights with respect to our governance and certain corporate actions. In certain cases, FNF may have interests which differ from our other stockholders.
•Provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of us, which could decrease the trading price of our common stock.
•We will be a “controlled company” within the meaning of the NYSE rules and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.
•Insurance holding company laws generally provide that no person, corporation or other entity may acquire control of an insurance company, which is presumed to exist if a person owns, directly or indirectly, 10% or more of the voting securities of an insurance company, without the prior approval of such insurance company's domiciliary state insurance regulator. Persons considering an investment in our common stock should take into consideration their ownership of FNF voting securities and consult their own legal advisors regarding such laws in light of their particular circumstances.
•Our amended and restated bylaws will contain an exclusive forum provision that could limit our stockholders’ ability to choose a judicial forum that they find favorable for certain disputes with us or our directors, officers, stockholders, employees or agents, and may discourage lawsuits with respect to such claims.
•We and certain of our subsidiaries will continue to file consolidated federal income tax returns with FNF after the separation and distribution.
Risks Related to Our Common Stock
•We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation and distribution, and following the separation and distribution, our stock price may fluctuate significantly.
•Substantial sales of our common stock may occur in connection with or following the distribution, which could cause our stock price to be volatile and to decline.
•We cannot guarantee the timing, amount or payment of dividends on our common stock in the future.
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RISK FACTORS
You should carefully consider the following risks and other information in this Information Statement in evaluating F&G and our common stock. The occurrence of any of the following risks could materially and adversely affect our business, financial condition, prospects, results of operations and cash flows. In such case, the trading price of F&G’s common stock could decline and you could lose all or part of your investment.
The risk factors generally have been separated into the following 6 groups: risks related to our business; risks related to economic and market conditions; risks related to legal, regulatory and tax; risks relating to our indebtedness and financing; risks related to the separation and distribution; and risks related to stock. However, these risks are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially affect our business, financial condition, results of operations and prospects.
Risks Related to Our Business
Our ability to grow depends in large part upon the continued availability of capital.
Our long-term strategic capital requirements will depend on many factors, including our accumulated statutory earnings and the relationship between our statutory capital and surplus and various elements of required capital. To support long-term capital requirements, we may need to increase or maintain statutory capital and surplus of our insurance subsidiaries through financings, which could include debt, equity, financing arrangements or other surplus relief transactions. On June 24, 2022, FNF capitalized $400 million of intercompany indebtedness into common stock of F&G. FNF is not obligated to, may choose not to, or may not be able to provide financing or make capital contributions to us now or in the future. Consequently, financings, if available at all, may be available only on terms that are not favorable to us. Under a note purchase agreement with Kubera Insurance (SAC) Ltd. (“Kubera”), in which we are a noteholder, and capital keep-well agreements with our reinsurance subsidiary F&G Cayman Re Ltd. (“F&G Cayman Re”), there is an obligation to provide financing to the extent of a funding shortfall on a reserve note facility. Adverse market conditions have affected and continue to affect the availability and cost of capital from external sources. If we cannot maintain adequate capital for our insurance subsidiaries, or if we are obligated to provide capital contributions in the event of funding shortfalls, we may be required to limit growth in sales of new policies, and such action could materially adversely affect our business, operations and financial condition.
A financial strength ratings downgrade, potential downgrade, or any other negative action by a rating agency could increase our cost of capital, making it challenging to grow our business, and could hinder our ability to participate in certain market segments, thereby adversely affecting our results of operations and our financial condition.
Various nationally recognized rating agencies review the financial performance and condition of insurers, including our insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations. These ratings are important to maintaining public confidence in our products, our ability to market our products and our competitive position. Downgrades, unfavorable changes in rating methodology or other negative action by a rating agency could have a material adverse effect on us in many ways, including the following:
•adversely affecting relationships with distributors, independent marketing organizations (“IMOs”) and sales agents, which could result in reduction of sales;
•increasing the number or amount of policy lapses or surrenders and withdrawals of funds;
•requiring a reduction in prices for our subsidiaries’ insurance products and services in order to remain competitive;
•excluding us from participating in the PRT business or FABN issuances;
•adversely affecting our ability to obtain reinsurance at a reasonable price, on reasonable terms or at all;
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•requiring us to collateralize reserves, balances or obligations under certain reinsurance agreements. In the event of a withdrawal or downgrade of our S&P issuer credit rating to BB or lower, we are required to fund a note issued by a reinsurance counterparty up to $300 million. As of December 31, 2021, the amount funded under the note agreement was insignificant; and
•requiring us to collateralize balances or obligations under derivatives agreements. As of December 31, 2021, we had no derivatives contracts that required us to post collateral.
We may face losses if our actual experience differs significantly from our reserving assumptions.
Our profitability depends significantly upon the extent to which our actual experience is consistent with the assumptions used in setting rates for our products and establishing liabilities for future life insurance, annuity and PRT policy benefits and claims. However, due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of the liabilities for unpaid policy benefits and claims, we cannot precisely determine the amounts we will ultimately pay to settle these liabilities. As a result, we may experience volatility in our reserves and, therefore, our profitability from period to period. To the extent that actual experience is less favorable than our underlying assumptions, we could be required to increase our reserves which may reduce our profitability and impact our financial strength.
We have been issuing guaranteed minimum withdrawal benefit (“GMWB”) products since 2008. In our reserve calculations, we make assumptions for policyholder behavior as it relates to GMWB utilization. If emerging experience deviates from our assumptions on GMWB utilization, it could have a significant effect on our reserve levels and related results of operations. Based on experience of GMWB utilization, which continues to emerge, we updated our GMWB utilization assumption during 2019, with a favorable impact on reserves. We will continue to monitor the GMWB utilization assumption and update our best estimate as applicable.
Our valuation of investments and the determinations of the amounts of allowances and impairments taken on our investments may include methodologies, estimates and assumptions which are subject to differing interpretations and, if changed, could materially adversely affect our results of operations and financial condition.
Fixed maturities, equity securities and derivatives represent the majority of total cash and invested assets reported at fair value on our balance sheet. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Fair value estimates are made based on available market information and judgments about the financial instrument at a specific point in time. Expectations that our investments will continue to perform in accordance with their contractual terms are based on evidence gathered through our normal credit surveillance process and on assumptions a market participant would use in determining the current fair value.
The determination of current expected credit loss varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Our management considers a wide range of factors about the instrument issuer (e.g., operations of the issuer and future earnings potential) and uses their best judgment in evaluating the cause of the decline in the estimated fair value of the instrument and in assessing the prospects for recovery. In addition, we conduct various quantitative credit screens on the investment portfolio to create a credit watchlist. The credit watchlist investments are then further analyzed by our portfolio manager for likelihood of loss of contractual principal and interest. Our portfolio managers also maintain a credit spotlight for investments that do not meet the quantitative screens. These investments have been identified as requiring a higher level of review and monitoring due to idiosyncratic risk. Such evaluations and assessments require significant judgment and are revised as conditions change and new information becomes available. Additional impairments may need to be taken in the future, and the ultimate loss may exceed management’s current estimate of impairment amounts.
The value and performance of certain of our assets are dependent upon the performance of collateral underlying these investments. It is possible the collateral will not meet performance expectations leading to adverse changes in the cash flows on our holdings of these types of securities.
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See Note E — Investments to the historical audited consolidated financial statements including the notes thereto, (the “Consolidated Financial Statements”) and Note C — Investments to the unaudited Condensed Consolidated Financial Statements included elsewhere in this Information Statement for additional information about our investment portfolio.
The pattern of amortizing our VOBA, DAC and DSI balances relies on assumptions and estimates made by management. Changes in these assumptions and estimates could impact our results of operations and financial condition.
Amortization of our VOBA, DAC and DSI balances depends on the actual and expected profits generated by the respective lines of business that incurred the expenses. Expected profits are dependent on assumptions regarding a number of factors including investment returns, benefit payments, expenses, mortality, and policy lapse. Due to the uncertainty associated with establishing these assumptions, we cannot, with precision, determine the exact pattern of profit emergence. As a result, amortization of these balances will vary from period to period. Any difference in actual experience versus expected results could require us to, among other things, accelerate the amortization of VOBA, DAC and DSI which would reduce profitability for such lines of business in the current period.
Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” for additional details on the amortization of VOBA, DAC and DSI balances.
Change in our evaluation of the recoverability of our deferred tax assets could materially adversely affect our results of operations and financial condition.
Deferred tax assets and liabilities are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates expected to be in effect during the years in which the basis differences reverse. Deferred tax assets, in essence, represent future savings of taxes that would otherwise be paid in cash. We are required to evaluate the recoverability of our deferred tax assets each quarter and establish a valuation allowance, if necessary, to reduce our deferred tax assets to an amount that is more-likely-than-not to be realizable. In determining the need for a valuation allowance, we consider many factors, including future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years and implementation of any feasible and prudent tax planning strategies management would employ to realize the tax benefit.
Based on our current assessment of future taxable income, including available tax planning opportunities, we anticipate it is more-likely-than-not that we will generate sufficient taxable income to realize all of our deferred tax assets as to which we do not have a valuation allowance. If future events differ from our current assumptions, the valuation allowance may need to be increased, which could have a material adverse effect on our results of operations and financial condition.
We have recorded goodwill as a result of past acquisitions, and adverse events affecting the value of our reporting unit could cause the balance to become impaired, requiring write-downs that would reduce our operating income.
Current accounting rules require that goodwill be assessed for impairment annually or more frequently if changes in events or circumstances indicate that the fair value of our reporting unit may be less than its carrying value. Factors that may be considered a change in circumstance indicating the carrying value of goodwill may not be recoverable include, but are not limited to, significant underperformance relative to historical or projected future operating results, divestitures, and negative industry or economic trends. Evaluating this asset’s recoverability requires us to make estimates and assumptions to estimate the fair value of our reporting unit. For the year ended December 31, 2021, the period from June 1, 2020 to December 31, 2020, the predecessor period from January 1, 2020 to May 31, 2020, and for the predecessor year ended December 31, 2019, no goodwill impairment charge was recorded. However, if there is an adverse event affecting the value of our reporting unit in the future, the carrying amount of our goodwill may no longer be recoverable, and we may be required to record an impairment charge, which would have a negative impact on our results of operations and financial condition. We will continue to monitor our operating results and the impact of the economy to determine if there is an impairment of goodwill in future periods.
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If we are unable to attract and retain national marketing organizations and independent agents, sales of our products may be reduced.
We must attract and retain our network of IMOs and independent agents to sell our products. Insurance companies compete vigorously for productive agents. We compete with other life insurance companies for marketers and agents primarily on the basis of our financial position, support services, compensation and product features. Such marketers and agents may promote products offered by other life insurance companies that offer a larger variety of products than we do. If we are unable to attract and retain a sufficient number of marketers and agents to sell our products, our ability to compete and our revenues would suffer.
We operate in a highly competitive industry, which could limit our ability to gain or maintain our position in the industry and could materially adversely affect our business, financial condition and results of operations.
We operate in a highly competitive industry. We encounter significant competition in all of our product lines from other insurance companies, many of which have greater financial resources and higher financial strength ratings than us and which may have a greater market share, offer a broader range of products, services or features, assume a greater level of risk, have lower operating or financing costs, or have different profitability expectations than we do. Competition could result in, among other things, lower sales or higher lapses of existing products.
Our annuity products compete with FIAs, fixed rate annuities and variable annuities sold by other insurance companies and also with mutual fund products, traditional bank investments and other retirement funding alternatives offered by asset managers, banks and broker-dealers. The ability of banks and broker dealers to increase their securities-related business or to affiliate with insurance companies may materially and adversely affect sales of all of our products by substantially increasing the number and financial strength of potential competitors. Our insurance products compete with those of other insurance companies, financial intermediaries and other institutions based on a number of factors, including premium rates, policy terms and conditions, service provided to distribution channels and policyholders, ratings by rating agencies, reputation and commission structures.
Our ability to compete is dependent upon, among other things, our ability to develop competitive and profitable products, our ability to maintain low unit costs, our maintenance of adequate financial strength ratings from rating agencies and our ability to attract and retain distribution channels to market our products, the competition for which is vigorous.
Concentration in certain states for the distribution of our products may subject us to losses attributable to economic downturns or catastrophes in those states.
For the year ended December 31, 2021, our top five states for the distribution of our products were California, Florida, Texas, New Jersey, and Ohio, which together accounted for 38% of our premiums. Any adverse economic developments or catastrophes in these states could have an adverse impact on our business.
Concentration in one or more of our products (for example, FIAs) may subject us to greater volatility of sales if such products experienced a significant decrease in sales.
We may experience greater volatility in our sales performance from period to period to the extent we have a high concentration of sales in one or more of our products and those products suffer a material decline (for whatever reason) in a particular period. For example, for the years ended December 31, 2021 and December 31, 2020, FIAs generated approximately 45% and 77% of our total sales respectively. We may not be able to increase the sales of other products at the same pace, or at all, to the extent there is a decrease in sales of our products that made up the majority of our sales in historical periods. As a result, decreased sales in high concentration products could adversely affect our financial condition, liquidity and results of operations.
We are subject to the credit risk of our counterparties, including companies with whom we have reinsurance agreements or from whom we have purchased options.
We cede material amounts of insurance and transfers related assets and certain liabilities to other insurance companies through reinsurance. Accordingly, we bear credit risk with respect to our reinsurers. The failure,
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insolvency, inability or unwillingness of any reinsurer to pay under the terms of reinsurance agreements with us could materially adversely affect our business, financial condition, liquidity and results of operations. We regularly monitor the credit rating and performance of our reinsurance parties. Wilton Reassurance Company (“Wilton Re”), ASPIDA Life Re Ltd. (“Aspida Re”), and Somerset Reinsurance Ltd. (“Somerset”) represent our largest reinsurance counterparty exposure. As of December 31, 2021, the net amount recoverable from Wilton Re, Aspida Re, and Somerset were $1,269 million, $873 million and $780 million, respectively. We also face funds withheld reinsurance counterparty risk. Under funds withheld reinsurance arrangements, we retain possession and legal title to assets backing the ceded liabilities.
We are also exposed to credit loss in the event of non-performance by our counterparties on options. We seek to reduce the risk associated with such agreements by purchasing such options from large, well-established financial institutions, and by holding collateral. There can be no assurance we will not suffer losses in the event of counterparty non-performance. Several of our derivative counterparty International Swap and Derivative Association (“ISDA”) agreements contain additional termination event triggers based on a downgrade of FGL Insurance. These triggers would give these counterparties the option to terminate our options, which could lead to losses if occurring at an inopportune time.
Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional details on credit risk and counterparty risk.
Our business could be interrupted or compromised if we experience difficulties arising from outsourcing relationships.
If we do not maintain an effective outsourcing strategy or third-party providers do not perform as contracted, we may experience operational difficulties, increased costs and a loss of business that could have a material adverse effect on our results of operations. If there is a delay in our third-party providers’ introduction of our new products or if our third-party providers are unable to service our customers appropriately, we may experience a loss of business that could have a material adverse effect on our business, financial condition and results of operations.
In addition, our reliance on third-party service providers that we do not control does not relieve us of our responsibilities and contractual, legal and other requirements. Any failure or negligence by such third-party service providers in carrying out their contractual duties may result in us becoming subjected to liability to parties who are harmed and ensuing litigation. Any litigation relating to such matters could be costly, expensive and time-consuming, and the outcome of any such litigation may be uncertain. Moreover, any adverse publicity arising from such litigation, even if the litigation is not successful, could adversely affect our reputation and sales of our products.
The loss of key personnel could negatively affect our financial results and impair our ability to implement our business strategy.
Our success depends in large part on our ability to attract and retain qualified employees. Intense competition exists for key employees with demonstrated ability, and we may be unable to hire or retain such employees. Our key employees include senior management, sales and distribution professionals, actuarial and finance professionals and information technology professionals. We do not believe the departure of any particular individual would cause a material adverse effect on our operations; however, the unexpected loss of several key employees could have a material adverse effect on our operations due to the loss of their skills, knowledge of our business, and their years of industry experience as well as the potential difficulty of promptly finding qualified replacement employees.
Our risk management policies and procedures may not capture unidentified or unanticipated risk, which could negatively affect our business or result in losses.
We believe we have developed risk management policies and procedures designed to manage material risks within established risk appetites and risk tolerances. Nonetheless, our policies and procedures may not effectively mitigate the internal and external risks identified or predict future exposures, which could be different or significantly greater than expected and which could result in unexpected monetary losses or cause damage to our reputation or additional costs, or which could impair our ability to conduct business effectively. Many of our methods of managing risk and exposures are based upon observed historical data, current market behavior, and
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certain assumptions made by management. This information may not always be accurate, complete, up-to-date, or properly evaluated. As a result, additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may materially adversely affect our business, financial condition and results of operations.
Interruption or other operational failures in telecommunication, information technology and other operational systems, or a failure to maintain the security, integrity, confidentiality or privacy of sensitive data residing on such systems, including as a result of human error, could result in a loss or disclosure of confidential information, damage to our reputation, monetary losses, additional costs and impairment of our ability to conduct business effectively.
We are highly dependent on automated and information technology systems to record and process our internal transactions and transactions involving our customers, as well as to calculate reserves, value invested assets and complete certain other components of our statutory financial statements. The integrity of our computer systems and the protection of the information, including policy holder information, that resides on such systems are important to our successful operation. If we fail to maintain an adequate security infrastructure, adapt to emerging security threats or follow our internal business processes with respect to security, the information or assets we hold could be compromised. Further, even if we, or third parties to which we outsource certain information technology services, maintain a reasonable, industry-standard information security infrastructure to mitigate these risks, the inherent risk that unauthorized access to information or assets remains. This risk is increased by transmittal of information over the internet and the increased threat and sophistication of cyber criminals. While, to date, we believe that we have not experienced a material breach of our computer systems, the occurrence or scope of such events is not always apparent.
In addition, some laws and certain of our contracts require notification of various parties, including regulators, consumers or customers, in the event that confidential or personal information has or may have been taken or accessed by unauthorized parties. Such notifications can potentially result in, among other things, adverse publicity, diversion of management and other resources, the attention of regulatory authorities, the imposition of fines, and disruptions in business operations, the effects of which may be material. Any inability to prevent security or privacy breaches, or the perception that such breaches may occur, could inhibit our ability to retain or attract new clients and/or result in financial losses, litigation, increased costs, negative publicity, or other adverse consequences to our business.
Further, our financial institution clients have obligations to safeguard their information technology systems and the confidentiality of customer information. In certain of our businesses, we are bound contractually and/or by regulation to comply with the same requirements. If we fail to comply with these regulations and requirements, we could be exposed to suits for breach of contract, governmental proceedings or the imposition of fines. In addition, future adoption of more restrictive privacy laws, rules or industry security requirements by federal or state regulatory bodies or by a specific industry in which we do business could have an adverse impact on us through increased costs or restrictions on business processes.
We rely on our investment management or advisory agreements with BIS and other investment managers and sub-managers for the management of portions of certain of our life insurance companies’ investment portfolios.
Our insurance company subsidiaries are parties to IMAs with BIS and other investment managers and sub-managers. These entities depend in large part on their ability to attract and retain key people, including senior executives, finance professionals and information technology professionals. Intense competition exists for key employees with demonstrated ability, and our investment managers may be unable to hire or retain such employees. The unexpected loss by any of our investment managers, including BIS, of key employees could have a material adverse effect on their ability to manage our investment portfolio and have an adverse impact on our investment portfolio and results of operations.
We have a long-term contractual relationship with BIS that limits our ability to terminate this relationship or retain another investment manager without BIS’s consent.
Under an omnibus termination side letter among us, FNF and BIS, we have agreed with BIS not to allow other investment managers to be appointed or retained to provide investment management or advisory services to our
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annuity and life insurance subsidiaries without BIS’s consent. Although BIS has consented to the engagement of other investment managers in the past, BIS has no obligation to do so in the future.
Each of our subsidiaries that is party to an IMA with BIS may terminate such agreement upon 30 days’ notice. BIS may also terminate any IMA upon 30 days’ notice. However, we and FNF have agreed in the omnibus termination side letter to cause our insurance company subsidiaries to engage BIS as an investment manager. The initial term of this side letter expires on June 1, 2027 and contains an automatic renewal provision which provides for successive one year terms thereafter. Prior to June 1, 2027, we and FNF may only terminate the side letter for cause. Cause is generally limited to circumstances where BIS is legally unable to manage our assets, if BIS fails to offer us “most favored nations” rights with respect to certain products it may issue to third parties, or where BIS has acted with gross negligence, willful misconduct or reckless disregard of its obligations. In addition, at the expiration of the initial term of the side letter in 2027, or at the end of any renewal term, we may, with prior notice, terminate the side letter for (i) unsatisfactory long-term performance by BIS that is materially detrimental to one of our subsidiaries or (ii) unfair and excessive fees charged by BIS compared to those that would be charged by a comparable asset manager (taking into account the experience, education and qualification of BIS’s personnel, the scale and scope of the services being provided by BIS, and the composition of the managed investment portfolio and comparable investment guidelines). If we provide any such notice, the termination would not become effective for two years, during which time BIS may seek to cure the events giving arise to our termination right. If one of our subsidiaries were to terminate an IMA or take other actions that we have agreed will not be taken under the omnibus termination side letter, we and FNF may be in breach of our respective obligations to BIS under such side letter.
The historical performance of BIS, or any other asset manager we engage, should not be considered as indicative of the future results of our investment portfolio, our future results or any returns expected on our common stock.
Our investment portfolio’s returns have benefited historically from investment opportunities and general market conditions that may not continue or currently exist, or may not be repeated, and there can be no assurance that BIS will be able to avail itself of profitable investment opportunities in the future. In addition, because BIS is compensated based solely on our assets which it manages, rather than by investment return targets, BIS is not directly incentivized to maximize investment return targets. Accordingly, there can be no guarantee that BIS will be able to achieve, or seek to achieve, any particular returns for our investment portfolio in the future.
Increased regulation or scrutiny of alternative investment advisers, arrangements with such investment advisers and investment activities may affect BIS’s or, if engaged, any other asset manager’s ability to manage our investment portfolio or impact the reputation of our business.
The regulatory environment for investment managers is evolving, and changes in the regulation of investment managers may adversely affect the ability of BIS to effect transactions that utilize leverage or pursue their strategies in managing our investment portfolio. In addition, the securities and futures markets are subject to comprehensive statutes, regulations and margin requirements. The SEC, other regulators and self-regulatory organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies. Due to our reliance on these relationships in particular to manage a significant portion of our investment portfolio, any regulatory action or enforcement against BIS could have an adverse effect on our financial condition.
In addition, the NAIC continues to consider the nature of the relationships between insurance companies and their investment advisors and investment managers, and more broadly the impact of private equity within the insurance industry. We are continuing to monitor the development of any proposals that could have a material impact on the contractual relationships between us and BIS.
Risks Related to Economic Conditions and Market Conditions
Conditions in the economy generally could adversely affect our business, results of operations and financial condition.
Our results of operations are materially affected by conditions in the U.S. economy. Adverse economic conditions may result in a decline in revenues and/or erosion of our profit margins. In addition, in the event of
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extreme prolonged market events and economic downturns, we could incur significant losses. Even in the absence of a market downturn we are exposed to substantial risk of loss due to market volatility.
Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, investor and consumer confidence, foreign currency exchange rates and inflation levels all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, negative investor sentiment and lower consumer spending, the demand for our insurance products could be adversely affected. Under such conditions, we may also experience an elevated incidence of policy lapses, policy loans, withdrawals and surrenders. In addition, our investments could be adversely affected as a result of deteriorating financial and business conditions affecting the issuers of the securities in our investment portfolio.
As of June 30, 2022, current economic conditions, including high inflation rates, have not adversely affected our business, results of operations and financial condition. See also “—Risks Relating to Economic Conditions and Market Conditions — Interest rate fluctuations could adversely affect our business, financial condition, liquidity and results of operations.” in this Information Statement.
Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Trends and Conditions” for additional details on risk factors relating to economic conditions and market conditions. See also “—The COVID-19 pandemic could have a material adverse effect on our liquidity, financial condition and results of operations.”
Our investments are subject to geopolitical risk. The on-going conflict in Russia and Ukraine could heighten and expand to peripheral countries in the region.
We have no exposure to investments in Russia or Ukraine but we do have relatively small investments in the neighboring countries of Finland, Kazakhstan and Sweden, all non-NATO countries. If the conflict were to expand into neighboring countries or lead to a wider recession in Europe, our investments in those countries could suffer losses, which could have a negative impact on our financial results.
Our investments are subject to market risks that could be heightened during periods of extreme volatility or disruption in financial and credit markets.
Our invested assets and derivative financial instruments are subject to risks of credit defaults and changes in market values. Periods of extreme volatility or disruption in the financial and credit markets could increase these risks. Changes in interest rates and credit spreads could cause market price and cash flow variability in the fixed income instruments in our investment portfolio. Significant volatility and lack of liquidity in the credit markets could cause the market value of the fixed-income securities we own to decline. Further, if our investment manager, BIS, fails to react appropriately to difficult market or economic conditions, our investment portfolio could incur material losses.
Our investments are subject to credit risks of the underlying issuer, borrower, or physical collateral which can change over time with the credit cycle.
A worsening business climate, recession, or changing trends could cause issuers of the fixed-income securities that we own to default on either principal or interest payments. Additionally, market price valuations may not accurately reflect the underlying expected cash flows of securities within our investment portfolio.
The value of our mortgage-backed securities and our commercial and residential mortgage loan investments depends in part on the financial condition of the borrowers and tenants for the properties underlying those investments, as well as general and specific economic trends affecting the overall default rate. We are also subject to the risk that cash flows resulting from the payments on pools of mortgages that serve as collateral underlying the mortgage-backed securities we own may differ from our expectations in timing or size. Any event reducing the estimated fair value of these securities, other than on a temporary basis, could have an adverse effect on our business, results of operations, liquidity and financial condition.
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We also maintain holdings in floating rate, and less rate-sensitive investments, including senior tranches of collateralized loan obligations (“CLOs”) and directly originated senior secured loans. If realized collateral loss and recoveries differ materially from our assumptions, returns on these assets could be lower than our expectation.
We invest in asset-backed securities (“ABS”) (traditional and specialty finance) and asset-backed and consumer whole loans. Consumer balance sheets are healthy and underwriting standards have become more conservative following the Global Funding Crisis. However, high inflation rates are a headwind for consumers, and efforts by the Federal Reserve to stem inflation could induce a recession which would have an adverse impact on consumers and potentially increase delinquencies to a higher level than what is assumed in our underwriting.
In addition, the upcoming discontinuation of London Inter-Bank Offered Rate (“LIBOR”) could adversely affect the value of our investment portfolio, derivatives transactions and issued funding agreements bearing interest at LIBOR. There can be no assurance that the alternative rates and fallbacks utilized by the various markets will be effective at preventing or mitigating disruption as a result of the discontinuation of LIBOR. Should such disruption occur, it may adversely affect, among other things, the trading market for LIBOR-based securities, including those held in our investment portfolio, the market for derivative instruments, including those that we use to achieve our hedging objectives, and our ability to issue funding agreements bearing a floating rate of interest.
Interest rate fluctuations could adversely affect our business, financial condition, liquidity and results of operations.
Interest rate risk is a significant market risk for us, as our business involves issuing interest rate sensitive obligations backed primarily by investments in fixed income assets. As of June 30, 2022, we also maintained approximately 16% of the assets in our investment portfolio in floating rate instruments, which are subject to an element of market risk from changes in interest rates.
For the past several years interest rates have remained at or near historically low levels. The prolonged period of low rates exposes us to the risk of not achieving returns sufficient to meet our earnings targets and/or our contractual obligations. Furthermore, low or declining interest rates may reduce the rate of policyholder surrenders and withdrawals on our life insurance and annuity products, thus increasing the duration of the liabilities, creating asset and liability duration mismatches and increasing the risk of having to reinvest assets at yields below the amounts required to support our obligations. Lower interest rates may also result in decreased sales of certain insurance products, negatively impacting our profitability from new business.
During periods of increasing interest rates, we may offer higher crediting rates on interest-sensitive products, such as universal life insurance and fixed annuities, and we may increase crediting rates on in-force products to keep these products competitive. We may be required to accept lower spread income (the difference between the returns we earn on our investments and the amounts we credit to contract holders), thus reducing our profitability, as returns on our portfolio of invested assets may not increase as quickly as current interest rates. Rapidly rising interest rates may also expose us to the risk of financial disintermediation, which is an increase in policy surrenders, withdrawals and requests for policy loans as customers seek to achieve higher returns elsewhere, requiring us to liquidate assets in an unrealized loss position. If we experience unexpected withdrawal activity, we could exhaust our liquid assets and be forced to liquidate other less liquid assets such as limited partnership investments. We may have difficulty selling these investments in a timely manner and/or be forced to sell them for less than we otherwise would have been able to realize, which could have a material adverse effect on our business, financial condition or operating results. We have developed and maintain asset liability management (“ALM”) programs and procedures that are, we believe, designed to mitigate interest rate risk by matching asset cash flows to expected liability cash flows. In addition, we assess surrender charges on withdrawals in excess of allowable penalty-free amounts that occur during the surrender charge period. There can be no assurance that actual withdrawals, contract benefits, and maturities will match our estimates. Despite our efforts to reduce the impact of rising interest rates, we may be required to sell assets to raise the cash necessary to respond to an increase in surrenders, withdrawals and loans, thereby realizing capital losses on the assets sold.
We may experience spread income compression, and a loss of anticipated earnings, if credited interest rates are increased on renewing contracts in an effort to decrease or manage withdrawal activity. Our expectation for future
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spread income is an important component in amortization of VOBA, DAC and DSI under GAAP. Significant reductions in spread income may cause us to accelerate VOBA, DAC and DSI amortization. In addition, certain statutory capital and reserve requirements are based on formulas or models that consider interest rates and a prolonged period of low interest rates may increase the statutory capital we are required to hold as well as the amount of assets we must maintain to support statutory reserves.
As of June 30, 2022, current economic conditions, including higher interest rates, have not adversely affected our business, results of operations and financial condition. Higher interest rates have decreased the fair value of our investment security portfolio as of June 30, 2022, primarily our fixed maturity securities, resulting in our AOCI being a loss of $2.1 billion compared to income of $0.7 billion as of December 31, 2021. See “Quantitative and Qualitative Disclosure about Market Risk” in this Information Statement for a more detailed discussion of interest rate risk.
Equity market volatility could negatively impact our business.
The estimated cost of providing GMWB riders associated with our annuity products incorporates various assumptions about the overall performance of equity markets over certain time periods. Periods of significant and sustained downturns in equity markets or increased equity volatility could result in an increase in the valuation of the future policy benefit or policyholder account balance liabilities associated with such products, resulting in a reduction in our revenues and net income.
We are exposed to liquidity risk as a result of our other risks.
We are exposed to liquidity risk, which is the risk that we are unable to meet near-term obligations as they come due.
Liquidity risk is a manifestation of events that are driven by other risk types, including market, insurance, investment or operational risks. A liquidity shortfall may arise in the event of insufficient funding sources or an immediate and significant need for cash or collateral. In addition, it is possible that expected liquidity sources, such as our minimum cash buffers, funding agreements through the FHLB or other credit facilities, may be unavailable or inadequate to satisfy the liquidity demands described below.
We have the following sources of liquidity exposure and associated drivers that trigger material liquidity demand. Those sources are:
•Derivative collateral market exposure: abrupt changes to interest rate, equity, and/or currency markets may increase collateral requirements to counterparties and create liquidity risk for us.
•Asset liability mismatch: there are liquidity risks associated with liabilities coming due prior to the matching asset cash flows.
•Insurance cash flows: we face potential liquidity risks from unexpected cash demands due to severe mortality calamity, customer withdrawals, policy loans or lapse events. If such events were to occur, we may face unexpectedly high levels of claim payments to policyholders.
•FHLB collateral: we issue funding agreements to the FHLB for which eligible securities collateral is posted. If the value of the eligible securities declines significantly, and there is no available eligible security collateral in the portfolio, we may need to supplement the collateral account with cash.
Our business could be materially and adversely affected by the occurrence of a catastrophe, including natural or man-made disasters.
Any catastrophic event, such as pandemic diseases, terrorist attacks, floods, severe storms or hurricanes or computer cyber-terrorism, could have a material and adverse effect on our business in several respects:
•any such event could have a material adverse effect on our liquidity, financial condition and the operating results of our insurance business due to its impact on the economy and financial markets;
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•our workforce being unable to be physically located at one of our facilities could result in lengthy interruptions in our ability to perform or deliver our services;
•we could experience long-term interruptions in the services provided by our significant vendors due to the effects of catastrophic events, including but not limited to government mandates to self-quarantine, work remotely and prolonged travel restrictions;
•some of our operational systems are not fully redundant, and our disaster recovery and business continuity planning cannot account for all eventualities. Additionally, unanticipated problems with our disaster recovery systems could further impede our ability to conduct business, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data;
•how we manage our financial exposure for losses with third-party reinsurance and catastrophic events could adversely affect the cost and availability of that reinsurance; and
•the value of our investment portfolio may decrease if the securities in which we invest are negatively impacted by climate change (both transition risk and physical risk), pandemic diseases, severe weather conditions and other catastrophic events.
Natural and man-made catastrophes, pandemics (including COVID-19) and malicious and terrorist acts present risks that could materially adversely affect our results of operations or the mortality or morbidity experience of our business. Claims arising from such events could have a material adverse effect on our business, operations and financial condition, either directly or as a result of their effect on our reinsurers or other counterparties. Such events could also have an adverse effect on the rate and amount of lapses and surrenders of existing policies, as well as sales of new policies.
While we believe we have taken steps to identify and mitigate these types of risks, such risks cannot be reliably predicted, nor fully protected against even if anticipated. In addition, such events could result in overall macroeconomic volatility or specifically a decrease or halt in economic activity in large geographic areas, adversely affecting the marketing or administration of our business within such geographic areas or the general economic climate, which in turn could have an adverse effect on our business, results of operations and financial condition. The possible macroeconomic effects of such events could also adversely affect our asset portfolio.
The COVID-19 pandemic could have a material adverse effect on our liquidity, financial condition and results of operations.
The health, economic and business conditions precipitated by the worldwide COVID-19 pandemic that emerged in 2020 had an adverse effect on our operating results in 2020 as the market value volatility impacted our total adjusted capital (“TAC”). In 2021 and 2020, we saw an increase in our mortality experience in both our single premium immediate annuity (“SPIA”) and IUL business which largely offset each other. In addition, savings and investment behavior of our policyholders may have been changed as a result of financial stress due to the pandemic.
A significant number of our employees continue to work from home and we believe this will continue into 2022 and future years. The remote work environment puts greater demands on our technological systems, puts us at greater risk of cybersecurity incidents and adds complexity to our programs that are designed to protect private data.
In addition, the changing nature of the work environment post-COVID with more remote employment opportunities has reduced the friction in changing jobs which has increased the mobility of our workforce and provided more opportunities for our employees to transition into jobs at other companies. The so-called “Great Resignation,” instigated by COVID-related changes to how employees work, has introduced increased risk to our ability to retain key personnel.
The severe restriction in economic activity caused by the COVID-19 pandemic and initial increased level of unemployment in the United States have contributed to increased volatility and uncertainty regarding expectations for the economy and markets going forward. Although states have eased restrictions and the capital and labor markets have generally recovered, we are now experiencing a period of higher than normal inflation. It is unclear
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when the economy will return to operating under normal or near-normal conditions. For example, in response to the economic impact of the COVID-19 pandemic, the Federal Reserve cut interest rates to near zero in March 2020. The Federal Reserve has increased interest rates in 2022 and signaled that interest rates will increase over the remainder of 2022 and potentially in 2023.
See “Quantitative and Qualitative Disclosure about Market Risk” in this Information Statement for a more detailed discussion of interest rate risk. See also “— Interest rate fluctuations could adversely affect our business, financial condition, liquidity and results of operations.”
Legal, Regulatory and Tax Risks
Our business is highly regulated and subject to numerous legal restrictions and regulations.
Our insurance businesses are subject to extensive regulation by state insurance authorities in each state in which they operate. Most states also regulate insurance holding companies like us with respect to acquisitions, changes of control and the terms of transactions with our affiliates. In addition, we may incur significant costs in the course of complying with regulatory requirements.
State insurance regulators, the NAIC and federal regulators continually reexamine existing laws and regulations and may impose changes in the future. New interpretations of existing laws and the passage of new legislation may harm our ability to sell new policies, increase our claim exposure on policies we issued previously and adversely affect our profitability and financial strength. We are also subject to the risk that compliance with any particular regulator’s interpretation of a legal or accounting issue may not result in compliance with another regulator’s interpretation of the same issue, particularly when compliance is judged in hindsight. Regulators and other authorities have the power to bring administrative or judicial proceedings against us, which could result in, among other things, suspension or revocation of our licenses, cease and desist orders, fines, civil penalties, criminal penalties or other disciplinary action, which could materially harm our results of operations and financial condition.
We cannot predict what form any future changes in these or other areas of regulation affecting the insurance industry might take or what effect, if any, such proposals might have on us if enacted into law. In addition, because our activities are relatively concentrated in a small number of lines of business, any change in law or regulation affecting one of those lines of business could have a disproportionate impact on us as compared to other more diversified insurance companies.
Please refer to “Regulation of F&G” included in this Information Statement for additional details on the impact of regulations on our business.
Our business is subject to government regulation in each of the jurisdictions in which we conduct business and regulators have broad administrative and discretionary authority over our business and business practices.
Our business is subject to government regulation in each of the states in which we conduct business, along with the District of Columbia and Puerto Rico, and is concerned primarily with the protection of policyholders and other customers. Such regulation is vested in state agencies having broad administrative and discretionary authority, which may include, among other things, premium rates and increases thereto, underwriting practices, reserve requirements, marketing practices, advertising, privacy, policy forms, reinsurance reserve requirements, acquisitions, mergers and capital adequacy. At any given time, we and our insurance subsidiaries may be the subject of a number of ongoing financial or market conduct, audits or inquiries. From time to time, regulators raise issues during such examinations or audits that could have a material impact on our business.
Under insurance guaranty fund laws in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. We cannot predict the amount or timing of any such future assessments and therefore the liability we have established for these potential assessments may not be adequate. In addition, regulators may change their interpretation or application of existing laws and regulations, including, for example, broadening the scope of carriers that must contribute towards long-term care insolvencies.
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Our regulation in the United States is influenced by the NAIC, which continues to consider reforms including relating to cybersecurity regulations, best interest standards, RBC and life insurance reserves.
Although our business is subject to regulation in each state in which we conduct business, along with the District of Columbia and Puerto Rico, in many instances the state regulatory models emanate from the NAIC. Some of the NAIC pronouncements, particularly as they affect accounting issues, take effect automatically in the various states without affirmative action by the states. Statutes, regulations and interpretations may be applied with retroactive impact, particularly in areas such as accounting and reserve requirements. The NAIC continues to work to reform state regulation in various areas, including comprehensive reforms relating to cybersecurity regulations, best interest standards, RBC and life insurance reserves.
We and our insurance subsidiaries are subject to minimum capitalization requirements based on RBC formulas for life insurance companies that establish capital requirements relating to insurance, business, asset, interest rate and certain other risks. Changes to statutory reserve or RBC requirements may increase the amount of reserves or capital we and our insurance subsidiaries are required to hold and may impact our ability to pay dividends. In addition, changes in statutory reserve or RBC requirements may adversely impact our financial strength ratings. Changes currently under consideration include adding an operational risk component, factors for asset credit risk, and group wide capital calculations. See “—Risks Related to our Business—A financial strength ratings downgrade, potential downgrade, or any other negative action by a rating agency could increase our cost of capital, making it challenging to grow the business, and could hinder our ability to participate in certain market segments, thereby adversely affect our financial condition and results of operations” for a discussion of risks relating to our financial strength ratings.
Current and emerging developments relating to market conduct standards for the financial industry emerging from the DOL’s implementation of the “fiduciary rule” may over time materially affect our business.
In December 2020, the DOL issued its final version of an investment advice rule replacing the previous “Fiduciary Rule” that had been challenged by industry participants and vacated in March 2018 by the United States Fifth Circuit Court of Appeals. The new investment advice rule reinstates the five-part test for determining whether a person is considered a fiduciary for purposes of the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”), and sets forth a new exemption, referred to as prohibited transaction class exemption (“PTE”) 2020-02. The rule’s preamble also contains the DOL’s reinterpretation of elements of the five-part test that appears to encompass more insurance agents selling IRA products and withdraws the DOL’s longstanding position that rollover recommendations out of employer plans are not subject to ERISA. The new rule took effect on February 16, 2021. The DOL left in place PTE 84-24, which is a longstanding class exemption providing prohibited transaction relief for insurance agents selling annuity products, provided that certain disclosures are made to the plan fiduciary, which is the policyholder in the case of an individual retirement account (“IRA”), and certain other conditions are met. Among other things, these disclosures include the agent’s relationship to the insurer and commissions received in connection with the annuity sale. We, along with FGL Insurance and FGL NY Insurance, designed and launched a compliance program in January 2022 requiring all agents selling IRA products to submit an acknowledgment with each IRA application indicating the agent has satisfied PTE 84-24 requirements on a precautionary basis in case the agent acted or is found to have acted as a fiduciary. Meanwhile, the DOL has publicly announced its intention to consider future rulemaking that may revoke or modify PTE 84-24.
Management believes these current and emerging developments relating to market conduct standards for the financial services industry may, over time, materially affect the way in which our agents do business, the role of IMOs, sale of IRA products including IRA-to-IRA and employer plan rollovers, how we supervise our distribution force, compensation practices and liability exposure and costs. In addition to implementing the compliance procedures described above, management is monitoring further developments closely and will be working with IMOs and distributors to adapt to these evolving regulatory requirements and risks.
Please refer to “Regulation of F&G” for additional details on the DOL’s “Fiduciary Rule.”
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Our regulation in Bermuda and the Cayman Islands may limit or curtail our activities, and changes to existing regulations may affect our ability to continue to offer our existing products and services, or new products and services.
Our business is subject to regulation in Bermuda and the Cayman Islands, including the Bermuda Monetary Authority (“BMA”) and the Cayman Islands Monetary Authority (“CIMA”). These regulations may limit or curtail our activities, including activities that might be profitable, and changes to existing regulations may affect our ability to continue to offer our existing products and services, or new products and services we may wish to offer in the future.
Our reinsurance subsidiary, F&G Life Re Ltd. (“F&G Life Re”), is registered in Bermuda under the Bermuda Insurance Act of 1978 (the “Insurance Act”) and is subject to the rules and regulations promulgated thereunder. The BMA has sought regulatory equivalency, which enables Bermuda’s commercial insurers to transact business with the European Union (“EU”) on a “level playing field.” In connection with its initial efforts to achieve equivalency under the EU’s Directive (2009/138/EC) (“Solvency II”), the BMA implemented and imposed additional requirements on the companies it regulates. The European Commission in 2016 granted Bermuda’s commercial insurers full equivalency in all areas of Solvency II for an indefinite period of time.
Our reinsurance subsidiary, F&G Cayman Re Ltd. (“F&G Cayman Re”), is a licensed Class D insurer in the Cayman Islands and a wholly owned direct subsidiary of ours, is licensed by the CIMA and is subject to supervision by CIMA. CIMA may, at any time, direct F&G Cayman Re, in relation to a policy, a line of business or the entire business, to cease or refrain from committing an act or pursing a course of conduct and to perform such acts as in the opinion of CIMA are necessary to remedy or ameliorate the situation.
Please refer to “Regulation of F&G” for additional details on the regulations in Bermuda and the Cayman Islands.
The SECURE Act of 2019 may impact our business and the markets in which we compete.
The Setting Every Community Up for Retirement Enhancement Act of 2019, Pub.L. 116-94 (the “SECURE Act”) was signed into law by Congress on December 20, 2019, as part of the Further Consolidated Appropriations Act. The SECURE Act contains provisions that may impact our insurance subsidiaries, including elimination of the “stretch IRA” (with the effect that funds from inherited IRAs must now be fully withdrawn by beneficiaries within 10 years of the account owner’s death and, as a result, IRAs may be less desirable to our customers, and our administrative system for handling distributions from IRAs invested in our annuity products may need to be updated to reflect the shortened distribution period for IRA beneficiaries); elimination of age limit for making traditional IRA contributions; raising of the age for required minimum distributions from IRAs from 70½ to 72 (which particularly impacts our administrative system for handling distributions from IRAs that are invested in our annuity products); expansion of 401K plan eligibility for part-time workers; creation of new employer protections for offering annuities, including a fiduciary safe harbor for employer retirement plan sponsors that wish to add in-plan annuity products (which particularly impacts how we and our competitors may now sell annuity products to employers or provide certifications necessary to meet the SECURE Act fiduciary safe harbor requirements); and lowering of barriers for offering multiple employer plans. The SECURE Act changes may also affect, to some extent, the length of time that IRA assets remain in our annuity products. While we cannot predict whether, or to what extent, the SECURE Act will ultimately impact us, the SECURE Act may have implications for our business operations and the markets in which we compete.
The amount of statutory capital that our insurance subsidiaries have and the amount of statutory capital that they must hold to maintain their financial strength ratings and meet other requirements can vary significantly from time to time due to a number of factors outside of our control.
The financial strength ratings of our insurance subsidiaries are significantly influenced by their statutory surplus amounts and capital adequacy ratios. In any particular year, statutory surplus amounts and U.S. RBC ratios may
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increase or decrease depending on a variety of factors, most of which are outside of the control of each of our insurance subsidiaries, including, but not limited to, the following:
•the amount of statutory income or losses generated by such insurance subsidiary (which itself is sensitive to equity market and credit market conditions);
•the amount of additional capital such insurance subsidiary must hold to support business growth and changes to the RBC calculation methodologies;
•changes in statutory accounting or reserve requirements applicable to such insurance subsidiary;
•such insurance subsidiary’s ability to access capital markets to provide reserve relief;
•changes in equity market levels, interest rates, and market volatility;
•the value of certain fixed-income and equity securities in such insurance subsidiary’s investment portfolio;
•changes in the credit ratings of investments held in such insurance subsidiary’s portfolio; and
•the value of certain derivative instruments.
Rating agencies may also implement changes to their internal models, which differ from the RBC capital model and could result in such insurance subsidiary increasing or decreasing the amount of statutory capital it must hold in order to maintain its current financial strength ratings. In addition, rating agencies may downgrade the investments held in such insurance subsidiary’s portfolio, which could result in a reduction of its capital and surplus and its RBC ratio. To the extent that such insurance subsidiary’s U.S. RBC ratios are deemed to be insufficient, such insurance subsidiary may take actions either to increase its capitalization or to reduce the capitalization requirements. If such insurance subsidiary is unable to take such actions, the rating agencies may view this as a reason for a ratings downgrade.
The failure of any of our insurance subsidiaries to meet their applicable RBC requirements or minimum capital and surplus requirements could subject them to further examination or corrective action imposed by insurance regulators, including limitations on their ability to write additional business, supervision by regulators or seizure or liquidation. Any corrective action imposed could have a material adverse effect on such insurance subsidiary’s business, results of operations and financial condition. A decline in U.S. RBC ratios could be a factor in causing rating agencies to downgrade such insurance subsidiary’s financial strength ratings, which could have a material adverse effect on its business, results of operations and financial condition.
Changes in federal or state tax laws may affect sales of our products and profitability.
The annuity and life insurance products that we market generally provide the policyholder with certain federal income or state tax advantages. For example, federal income taxation on any increases in non-qualified annuity contract values (i.e., the “inside build-up”) is deferred until it is received by the policyholder. Non-qualified annuities are annuities that are not sold to a qualified retirement plan or are in the form of a qualified contract such as an IRA. With other savings investments, such as certificates of deposit and taxable bonds, the increase in value is generally taxed each year as it is realized. Additionally, life insurance death benefits and the inside build-up under life insurance contracts are generally exempt from income tax or are tax deferred.
From time to time, various tax law changes have been proposed that could have an adverse effect on our business, including the elimination of all or a portion of the income tax advantages described above for annuities and life insurance policies. For example, changes in tax law could reduce or eliminate the tax-deferred accumulation of earnings on the deposits paid by the holders of annuities and life insurance products, which could make such products less attractive to potential purchasers. Additionally, insurance products, including the tax favorable features of these products, generally must be approved by the insurance regulators in each state in which they are sold. This review could delay the introduction of new products or impact the features that provide for tax advantages and make such products less attractive to potential purchasers. A shift away from life insurance and annuity products could reduce FGL Insurance’s and FGL NY Insurance’s income from the sale of such products, as well as the assets upon
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which FGL Insurance and FGL NY Insurance earn investment income. If legislation were enacted to eliminate the tax deferral for annuities or life insurance policies, such a change would have a material adverse effect on our ability to sell non-qualified annuities or life insurance policies.
Changes in tax law may increase our future tax liabilities and related compliance costs.
From time to time, the United States, as well as foreign, state and local governments, consider changes to their tax laws that may affect our future results of operations and financial condition. Also, the Organization for Economic Co-operation and Development has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. Changes to tax laws could increase their complexity and the burden and costs of compliance. Additionally, such changes could also result in significant modifications to the existing transfer pricing rules and could potentially have an impact on our taxable profits as such legislation is adopted by participating countries.
We and our subsidiaries and affiliates are subject to reviews and audits by the Internal Revenue Service (“IRS”) and other taxing authorities from time to time, and the IRS or other taxing authority may challenge tax positions taken by us and our subsidiaries and affiliates. Responding to or defending against challenges from taxing authorities could be expensive and time consuming, and could divert management’s time and focus away from operating our business. We cannot predict whether and when taxing authorities will conduct an audit, challenge our tax positions or the cost involved in responding to any such audit or challenge. If our subsidiaries and affiliates are unsuccessful in defending against such challenges, they may be required to pay taxes for prior periods, interest, fines or penalties, and may be obligated to pay increased taxes in the future, all of which could have an adverse effect on our business, financial condition, results of operations or growth prospects.
We may be the target of future litigation, law enforcement investigations or increased scrutiny which may negatively affect our operations or financial strength or reduce profitability.
We, like other financial services companies, are involved in litigation and arbitration in the ordinary course of business. For further discussion on litigation and regulatory investigation risk, see Note H — Commitments and Contingencies to the Consolidated Financial Statements and Note F — Commitments and Contingencies to the unaudited Condensed Consolidated Financial Statements included in this Information Statement.
From time to time we receive inquiries and requests for information from state insurance departments, attorneys general and other regulatory agencies about various matters relating to our business. Sometimes these take the form of civil investigative demands or subpoenas. We cooperate with all such inquiries and we have responded to or are currently responding to inquiries from multiple governmental agencies. Also, regulators and courts have been dealing with issues arising from foreclosures and related processes and documentation. Various governmental entities are studying the insurance product, market, pricing, and business practices, and potential regulatory and legislative changes, which may materially affect our business and operations. From time to time, we are assessed fines for violations of regulations or other matters or enter into settlements with such authorities, which may require us to pay fines or claims or take other actions.
More generally, we operate in an industry in which various practices are subject to scrutiny and potential litigation, including class actions. In addition, we sell our products through IMOs, whose activities may be difficult to monitor. Civil jury verdicts have been returned against insurers and other financial services companies involving sales, underwriting practices, product design, product disclosure, administration, denial or delay of benefits, charging excessive or impermissible fees, recommending unsuitable products to customers, breaching fiduciary or other duties to customers, refund or claims practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or other persons with whom the insurer does business, payment of sales or other contingent commissions and other matters. Such lawsuits can result in substantial judgments and damage to our reputation that is disproportionate to the actual damages, including material amounts of punitive non-economic compensatory damages. In some states, juries, judges and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages, which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited appellate review. In
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addition, in some class action and other lawsuits, financial services companies have made material settlement payments.
We may not be able to protect our intellectual property and may be subject to infringement claims.
We rely on a combination of contractual rights and copyright, trademark and trade secret laws to establish and protect our intellectual property. Although we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect our copyrights, trademarks, trade secrets and know-how or to determine their scope, validity or enforceability, which represents a diversion of resources that may be significant in amount and may not prove successful. The loss of intellectual property protection or the inability to secure or enforce the protection of our intellectual property assets could adversely impact our business and our ability to compete effectively.
We may be subject to costly litigation in the event that another party alleges our operations or activities infringe upon that party’s intellectual property rights. Third parties may have, or may eventually be issued, patents or other protections that could be infringed by our products, methods, processes or services or could otherwise limit our ability to offer certain product features. We may also be subject to claims by third parties for breach of copyright, trademark, trade secret or license usage rights. Any such claims and any resulting litigation could result in significant expense and liability for damages or we could be enjoined from providing certain products or services to our customers or utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses, or alternatively, we could be required to enter into costly licensing arrangements with third parties, all of which could have a material adverse effect on our business, results of operations and financial condition.
Risks Relating to Our Indebtedness and Financing
We are a holding company and depend on distributions from our subsidiaries for cash.
We are a holding company whose operating subsidiaries write insurance products that generate a net spread between their assets and liabilities (net of operating costs). Our ability to pay interest on our outstanding debt and our other obligations and to pay dividends is dependent on the ability of our subsidiaries to pay dividends or make other distributions or payments to us. If our operating subsidiaries are not able to pay dividends to us, we may not be able to meet our obligations or pay dividends on our common stock.
Our insurance subsidiaries are also subject to state laws with respect to the payment of dividends. The Iowa insurance law and the New York insurance law regulate the amount of dividends that may be paid in any year by FGL Insurance and FGL NY Insurance, respectively. Compliance with these state regulations will limit the amounts that FGL Insurance and FGL NY Insurance may dividend to us. Any dividends in excess of a threshold amount are subject to advance state notice or approval.
The maximum dividend permitted by law is not necessarily indicative of an insurer’s actual ability to pay dividends, which may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer’s ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, depending on business and regulatory conditions, we may in the future need to retain cash in our subsidiaries or even contribute cash to one or more of them in order to maintain their ratings or their statutory capital position. Such a requirement could be the result of investment losses, reserve charges, adverse operating conditions in the current economic environment or changes in interpretation of statutory accounting requirements by regulators.
Risks Related to the Separation and Distribution
We may not achieve some or all of the expected benefits of the separation and distribution, and the separation and distribution may materially adversely affect our business, financial condition or operating results.
Following the separation and distribution, F&G and FNF will be two separately governed companies. We may not be able to achieve some or all of the benefits that we expect to achieve as a separate company from FNF in the time we expect, if at all. For instance, we may not be able to achieve our expectations for growth or to raise the
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necessary equity or debt capital to finance such growth. We may not achieve the expected benefits for a variety of reasons, including, among others that: (a) the separation and distribution will require a significant amount of management’s time and effort, which may divert management’s attention from operating and growing our business; (b) following the separation and distribution, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of FNF; (c) following the separation and distribution, our business will be less diversified than FNF’s business prior to the separation and distribution; and (d) the other actions required to separate FNF’s and our respective businesses could disrupt our operations. If we fail to achieve some or all of the benefits expected to result from the separation and distribution, or if such benefits are delayed or are not realized at all, it could have a material adverse effect on our business, financial condition or operating results.
The combined post-separation value of our common stock and FNF common stock may not equal or exceed the pre-separation value of FNF common stock.
Following the distribution, there can be no assurance that the aggregate market value of the FNF common stock and our common stock following the separation and distribution will be higher or lower than the market value of FNF common stock if the separation and distribution had not occurred.
Although we have past history of operating as a public company, our historical financial information and summary historical financial information are not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.
The historical information about us in this Information Statement refers to our business, which we have operated as a wholly owned subsidiary of FNF since the FNF Acquisition. Our historical financial information and summary historical financial information included in this Information Statement is derived from the Consolidated Financial Statements and the accounting records of F&G and FNF. Accordingly, the historical financial information included in this Information Statement does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly traded company during the periods presented, or those that we will achieve in the future, including:
•After the completion of the separation and distribution, the cost of capital for our business may be higher than FNF’s cost of capital prior to the separation and distribution.
•Our historical financial information does not reflect the debt or the associated interest expense that we expect to incur as part of the separation and distribution.
Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a company separate from FNF. For additional information about the past financial performance of our business and the basis of presentation of the Consolidated Financial Statements and summary historical financial information of our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes included elsewhere in this Information Statement.
The distribution of our common stock will be treated as a distribution that is generally taxable as a dividend for U.S. federal income tax purposes.
The distribution of our common stock will be treated as a taxable distribution for U.S. federal income tax purposes. An amount equal to the fair market value of our common stock received by you on the distribution date (plus any cash received in lieu of fractional shares) will generally be treated as a taxable dividend to the extent of your allocable portion of FNF’s current or accumulated earnings and profits as determined for U.S. federal income tax purposes. The fair market value of our common stock reported by FNF to you on IRS Form 1099-DIV may differ from the trading price of our common stock on the distribution date. In addition, FNF or other applicable withholding agents may be required or permitted to withhold at the applicable rate on all or a portion of the distribution payable to non-U.S. stockholders, and any such withholding would be satisfied by FNF or such agent withholding and selling a portion of the our common stock otherwise distributable to non-U.S. stockholders or by withholding from other property held in the non-U.S. stockholder’s account with the withholding agent.
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Taxing authorities could ascribe a higher valuation to our shares on the distribution date than the value ascribed by FNF, particularly if our stock trades at prices significantly above the value ascribed to our shares by FNF in the period following the distribution. Such a higher valuation may cause you to recognize additional dividend or capital gain income and may cause a larger reduction in the tax basis of your FNF shares.
You should read the discussion titled “Certain U.S. Federal Income Tax Consequences of the Distribution to U.S. Holders” for more information and consult your own tax advisor as to the particular tax consequences to you of the separation and distribution.
Until the separation and distribution occurs, FNF has sole discretion to change the terms of the separation and distribution in ways that may be unfavorable to us.
Until the separation and distribution occurs, we will be a wholly owned subsidiary of FNF. Accordingly, FNF will effectively have the sole and absolute discretion to determine and change the terms of the separation and distribution, including the date of the separation and distribution. These changes could be unfavorable to us.
In addition, FNF may decide at any time not to proceed with the separation and distribution if at any time the board of directors of FNF determines, in its sole and absolute discretion, that the distribution of our common stock or the terms thereof are not in the best interests of FNF and its stockholders or that legal, market or regulatory conditions or other circumstances are such that the separation and distribution are no longer advisable at that time. If FNF’s board of directors determines to cancel the separation and distribution, stockholders of FNF will not receive any distribution of our common stock and FNF will be under no obligation whatsoever to its shareholders to distribute such shares.
FNF will be our principal shareholder following the completion of the separation and distribution and will retain significant rights with respect to our governance and certain corporate actions. In certain cases, FNF may have interests which differ from our other stockholders.
Upon completion of the separation and distribution, FNF will own approximately 85% of our outstanding common stock. As a result, FNF will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. FNF will also have sufficient voting power to approve amendments to our organizational documents.
FNF is under no obligation to sell its remaining interest in us and retains the sole discretion to determine the timing of any future sales of shares of our common stock.
FNF may decide at any time not to proceed with the separation and distribution.
Our amended and restated certificate of incorporation and our amended and restated bylaws will also include a number of provisions that may discourage, delay or prevent a change in our management or control. These provisions not only could have a negative impact on the trading price of our common stock, but could also allow FNF to delay or prevent a corporate transaction of which the public stockholders approve.
In addition, conflicts of interest may arise between FNF, as our controlling stockholder, and us. Affiliates of FNF engage in transactions with us. Further, FNF may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us, and FNF may either directly, or through affiliates, also maintain business relationships with companies that may directly compete with us. In general, FNF or its affiliates could pursue business interests or exercise their voting power as stockholders in ways that are detrimental to us but beneficial to themselves or to other companies in which they invest or with whom they have relationships. Conflicts of interest could also arise with respect to business opportunities that could be advantageous to FNF, and they may pursue acquisition opportunities in the future that may be complementary to our business. As a result, those acquisition opportunities may not be available to us.
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As a result of these relationships, the interests of FNF may not coincide with our interests or the interests of the other holders of our common stock. So long as FNF continues to control a significant amount of the outstanding shares of our common stock, FNF will continue to be able to strongly influence or effectively control our decisions, including with respect to potential mergers or acquisitions, asset sales and other significant corporate transactions.
After the separation and distribution, certain of our directors may have actual or potential conflicts of interest because of their FNF equity ownership or their current or former FNF positions.
A number of persons who currently are, or who we expect to become, our directors have been, and will continue to be, officers, directors or employees of FNF (or officers, directors or employees of affiliates of FNF) and, thus, have professional relationships with FNF’s officers, directors or employees. In addition, certain of our directors and executive officers own FNF common stock or other equity compensation awards. These relationships may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for FNF and us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between FNF and us regarding the terms of the agreements governing our relationship with FNF.
Provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of us, which could decrease the trading price of our common stock.
Our amended and restated certificate of incorporation and bylaws will contain, and Delaware law contains, provisions that may be considered to have an anti-takeover effect and may delay or prevent a tender offer or other corporate transaction that a stockholder might consider to be in its best interest, including those transactions that might result in payment of a premium over the market price for our stock.
These provisions include:
•rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;
•permitting our Board to issue preferred stock without stockholder approval;
•granting to the Board, and not the stockholders, the sole power to set the number of directors;
•the initial division of our Board into three classes of directors, with each class serving a staggered term;
•a provision that directors serving on a classified Board may be removed by stockholders only for cause;
•authorizing vacancies on our Board to be filled only by a vote of the majority of the directors then in office and specifically denying our stockholders the right to fill vacancies in the Board; and
•limiting stockholder action by written consent.
These provisions apply even if an offer may be considered beneficial by some stockholders.
Certain other provisions of our amended and restated certificate of incorporation and bylaws may be considered to have an anti-takeover effect and may delay or prevent a tender offer or other corporate transaction that a stockholder might consider to be in its best interest, including those transactions that might result in payment of a premium over the market price for our shares. We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and the provisions could delay or prevent an acquisition that our Board determines is not in the best interests of us and our stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.
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We will be a “controlled company” within the meaning of the NYSE rules and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.
After the completion of the separation and distribution, FNF will continue to control a majority of the voting power of our outstanding common stock. Accordingly, we will qualify as a “controlled company” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain NYSE corporate governance standards, including:
•the requirement that a majority of the board consist of independent directors;
•the requirement to have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
•the requirement to have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, or otherwise have director nominees selected by vote of a majority of the independent directors; and
•the requirement for an annual performance evaluation of the nominating and governance and compensation committees.
Following the separation and distribution, we intend to avail ourselves of some or all of these exemptions. Consequently, you will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance rules and requirements. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price. When we cease to qualify as a “controlled company” we will be subject to certain phase-in rules to come into compliance with applicable listing standards.
FNF or F&G may fail to perform under various transaction agreements that will be executed as part of the separation and distribution, or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.
In connection with the separation and distribution, we and FNF will enter into the separation and distribution agreement and the other Transaction Agreements. The Transaction Agreements will determine the allocation of assets, rights and liabilities between the companies following the separation and distribution and will include indemnifications related to liabilities and obligations. The Corporate Services Agreement will provide for the performance of certain services by FNF for the benefit of us for a limited period of time after the separation and distribution. The reverse services agreement will provide for the performance of certain services by us for the benefit of FNF for a limited period of time after the separation and distribution. We will rely on FNF to satisfy its obligations under the Transaction Agreements. If FNF is unable to satisfy its obligations under the Transaction Agreements, including its indemnification obligations, we could incur operational difficulties or losses. Upon expiration of the Corporate Services Agreement, the services that are covered thereunder will have to be provided internally or by third parties. If we do not have agreements with other providers for these services once certain Transaction Agreements expire or terminate, we may not be able to operate our business effectively, which may have a material adverse effect on our business, financial condition or operating results.
In connection with the separation and distribution, FNF will indemnify us for certain liabilities and we will indemnify FNF for certain liabilities. If we are required to pay under these indemnities to FNF, our financial results could be negatively impacted. FNF’s indemnification of us may not be sufficient to hold us harmless from the full amount of all liabilities that will be allocated to us, and FNF may not be able to satisfy its indemnification obligations in the future.
Pursuant to the Transaction Agreements, FNF will agree to indemnify us for certain liabilities, and we will agree to indemnify FNF for certain liabilities, in certain cases for uncapped amounts, as discussed further in “Certain Relationships and Related Person Transactions.” Indemnities that we may be required to provide FNF may not be subject to any cap, may be significant and could negatively impact our business, particularly with respect to
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indemnities provided in the Tax Sharing Agreement. Third parties could also seek to hold us responsible for any of the liabilities that FNF has agreed to retain under the Transaction Agreements. Any amounts that we are required to pay pursuant to these indemnification obligations and other liabilities could require us to divert cash that would otherwise have been used operating our business. Further, the indemnities from FNF may not be sufficient to protect us against the full amount of such liabilities, and FNF may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from FNF any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could have a material adverse effect on our business, financial condition or operating results.
We may have received better terms from unaffiliated third parties than the terms we receive in our agreements with FNF.
The agreements we will enter into with FNF in connection with the separation and distribution, including the Transaction Agreements, were prepared in the context of our separation from FNF while we were still a wholly owned subsidiary of FNF. Accordingly, during the period in which the terms of those agreements were prepared, we did not have an independent board of directors or a management team that was independent of FNF. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s length negotiations between unaffiliated third parties. We may have received better terms from third parties because, among other things, third parties may have competed with each other to win our business. For more information, see “Certain Relationships and Related Person Transactions.”
Insurance holding company laws generally provide that no person, corporation or other entity may acquire control of an insurance company, which is presumed to exist if a person owns, directly or indirectly, 10% or more of the voting securities of an insurance company, without the prior approval of such insurance company’s domiciliary state insurance regulator. Persons considering an investment in our common stock should take into consideration their ownership of FNF voting securities and consult their own legal advisors regarding such laws in light of their particular circumstances.
We are subject to regulation under the insurance holding company laws of various jurisdictions. See “Regulation of F&G.” Insurance holding company laws generally provide that no person, corporation or other entity may acquire control of an insurance company, or a controlling interest in any direct or indirect parent company of an insurance company, without the prior approval of such insurance company’s domiciliary state insurance regulator. Under the laws of each of the domiciliary states of our U.S. insurance subsidiaries, Iowa and New York, any person acquiring, directly or indirectly, 10% or more of the voting securities of an insurance company is presumed to have acquired “control” of the company, which may consider voting securities held at both the parent company and subsidiary collectively for these purposes. This statutory presumption of control may be rebutted by a showing that control does not exist in fact. State insurance regulators, however, may find that “control” exists in circumstances in which a person owns or controls less than 10% of the voting securities. We are and will remain following the separation and distribution a subsidiary of FNF, the common stock (its voting securities) of which trades on the NYSE. Consequently, persons considering an investment in our common stock (our voting securities) should also take into consideration their ownership of FNF voting securities and consult their own legal advisors regarding such insurance holding company laws relating to the purchase and ownership of our common stock in light of their particular circumstances.
Our amended and restated bylaws will contain an exclusive forum provision that could limit our stockholders’ ability to choose a judicial forum that they find favorable for certain disputes with us or our directors, officers, stockholders, employees or agents, and may discourage lawsuits with respect to such claims.
Our amended and restated bylaws will provide that unless the Board otherwise determines, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of us, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, stockholder, employee or agent of ours to either of us or our stockholders, (iii) any action asserting a claim against us or any director, officer, stockholder, employee or agent of ours arising out of or relating to any provision of the DGCL or our amended and restated certificate of incorporation or bylaws, or (iv) any action asserting a claim against us or any director, officer, stockholder, employee or agent of ours governed by the internal affairs doctrine,
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in all cases subject to the court having subject matter jurisdiction and personal jurisdiction over an indispensable party named as a defendant. The amended and restated bylaws will further provide that the federal district courts of the United States of America shall, to the fullest extent permitted by law, be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder, therefore there is uncertainty as to whether a court will enforce the exclusive forum provision with respect to claims arising under the Securities Act. Notwithstanding the foregoing, the exclusive forum provision does not apply to any actions arising under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. These exclusive forum provisions may limit our stockholders’ ability, or make it more costly, to bring a claim in a judicial forum that they find favorable for such disputes and may discourage these types of lawsuits. Alternatively, if a court were to find the exclusive forum provisions inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.
We and certain of our subsidiaries will continue to file consolidated federal income tax returns with FNF after the separation and distribution.
Following the separation and distribution, we and our eligible subsidiaries will continue to be “affiliated” with FNF for U.S. federal income tax purposes and will join in filing with FNF a consolidated federal income tax return. Pursuant to the Tax Sharing Agreement, we will periodically be obligated to make payments to FNF equal to the tax obligations of us and our subsidiaries for federal income taxes and certain state and local income taxes that are computed on a combined, consolidated or unitary method. In addition, we will be obligated to make payments to FNF for the use of certain tax attributes of FNF and its subsidiaries that are used to offset taxes by us and our subsidiaries. Certain tax attributes of us and our subsidiaries will also be available for use by FNF, for which FNF will generally be obligated to make payments to us in compensation. To the extent such tax attributes are used by FNF and its subsidiaries, they will not be available to offset taxes of us and our subsidiaries.
Risks Related to Our Common Stock
We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation and distribution, and following the separation and distribution, our stock price may fluctuate significantly.
A public market for our common stock does not currently exist. We anticipate that on or prior to the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis and will continue through the distribution date. However, we cannot guarantee that an active trading market will develop or be sustained for our common stock after the separation and distribution. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. In addition, we cannot predict the prices at which shares of our common stock may trade after the separation and distribution.
Similarly, we cannot predict the effect of the separation and distribution on the trading price of our common stock. After the distribution, FNF’s common stock will continue to be listed and traded on the NYSE under the symbol “FNF.” Subject to the consummation of the separation and distribution, we expect our common stock to be listed and traded on the NYSE under the symbol “FG.” The combined trading prices of the shares of our common stock and FNF common stock after the separation and distribution, as adjusted for any changes in the combined capitalization of these companies, may not equal or exceed the trading prices of FNF’s common stock prior to the separation and distribution.
Many factors could cause the market price of our common stock to rise and fall, including the following:
•our business profile and market capitalization may not fit the investment objectives of FNF’s current stockholders, causing a shift in our investor base, and our common stock may not be included in some indices in which FNF’s common stock is included, causing certain holders to sell their common stock;
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•our announcements or our competitors’ announcements regarding new products or services, significant contracts, acquisitions or strategic investments;
•fluctuations in our quarterly or annual financial results or the quarterly or annual financial results of companies perceived to be similar to us;
•the failure of securities analysts to cover our common stock after the separation and distribution;
•actual or anticipated fluctuations in our operating results;
•changes in earnings estimates or recommendations by securities analysts or our ability to meet those estimates;
•the operating and stock price performance of other comparable companies;
•investors’ general perception of us and our industry;
•changes to the regulatory and legal environment under which we operate;
•changes in general economic and market conditions;
•changes in industry conditions;
•changes in regulatory and other dynamics; and
•the other factors described in this “Risk Factors” section and elsewhere in this Information Statement.
In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if successfully defended, could be costly to defend and a distraction to management.
If we are unable to implement and maintain the effectiveness of our internal control over financial reporting, our investors may lose confidence in the accuracy and completeness of our financial reports, which could adversely affect our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, starting with the second annual report that we file with the SEC after the consummation of the separation and distribution, our management will be required to report on the effectiveness of our internal control over financial reporting. We may encounter problems or delays in completing the implementation of any changes necessary to our internal control over financial reporting to conclude such controls are effective. If we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investor confidence and our stock price could decline.
Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of NYSE rules, and result in a breach of the covenants under our financing arrangements. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect the price of our common stock.
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Substantial sales of our common stock may occur in connection with or following the distribution, which could cause our stock price to be volatile and to decline.
Any sales of substantial amounts of our common stock in the public market, or the perception that these sales may occur, in connection with the distribution or otherwise, could cause the market price of our common stock to decline. These sales also could impede our ability to raise future capital. Upon completion of the distribution, we expect that we will have an aggregate of approximately 125 million shares of our common stock issued and outstanding on [l], 2022. These shares will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”), unless the shares are owned by one of our “affiliates,” as that term is defined in Rule 405 under the Securities Act. We cannot predict the size of future sales of shares of our common stock in the open market following the distribution or the effect, if any, that such future sales, or the perception that such sales may occur, would have on the market price of our common stock. We are also unable to predict whether a sufficient number of buyers would be in the market at that time.
We cannot guarantee the timing, amount or payment of dividends on our common stock in the future.
We expect to pay regular quarterly dividends in the future. However, there can be no assurance we will be able to pay such dividends. The payment and amount of any future dividend will be subject to the sole discretion of our post-distribution board of directors and will depend upon many factors, including our financial condition and prospects, our capital requirements and access to capital markets, covenants associated with certain of our debt obligations, legal requirements and other factors that our Board may deem relevant, and there can be no assurance that we will continue to pay a dividend in the future. See “Dividend Policy.”
Your percentage of ownership in F&G may be diluted in the future.
In the future, your percentage ownership in us may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we may be granting to our directors, officers and employees. Such awards may have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock. From time to time, we will issue additional options or other stock-based awards to our employees under our employee benefits plans.
In addition, our amended and restated certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions, as our board generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock. See “Description of Capital Stock.”
No vote of the FNF shareholders is required in connection with the separation and distribution. As a result, if you do not want to receive our common stock in the distribution, your sole recourse will be to divest yourself of your FNF common stock prior to or on the distribution date.
No vote of FNF shareholders is required or being sought in connection with the distribution. Accordingly, if you do not want to receive our common stock in the distribution, your only recourse will be to divest yourself of your FNF common stock prior to or on the distribution date. You may also choose to divest shares of our common stock you receive in the distribution following the distribution.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This information statement and other materials that F&G has filed or will file with the SEC contains information that includes or is based upon forward-looking statements that are intended to enhance the reader’s ability to assess our future financial and business performance.
Some of the forward-looking statements can be identified by the use of terms such as “believes”, “expects”, “may”, “will”, “should”, “could”, “seeks”, “intends”, “plans”, “estimates”, “anticipates” or other comparable terms. However, not all forward-looking statements contain these identifying words. These forward-looking statements include all matters that are not related to present facts or current conditions or that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our consolidated results of operations, financial condition, liquidity, prospects and growth strategies and the industries in which we operate and including, without limitation, statements relating to our future performance.
Forward-looking statements are subject to known and unknown risks and uncertainties, many of which are beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that our actual consolidated results of operations, financial condition and liquidity, and industry development may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our consolidated results of operations, financial condition and liquidity, and industry development are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results to differ materially from those contained in or implied by the forward-looking statements, including the risks and uncertainties discussed in “Risk Factors”. Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include:
•general economic conditions and other factors, including prevailing interest and unemployment rate levels and stock and credit market performance;
•natural disasters, public health crises, international tensions and conflicts, geopolitical events, terrorist acts, labor strikes, political crises, accidents and other events;
•concentration in certain states for distribution of our products;
•the impact of interest rate fluctuations;
•equity market volatility;
•credit market volatility or disruption;
•the impact of credit risk of our counterparties;
•volatility or decline in the market price of our common stock could impair our ability to raise necessary capital;
•changes in our assumptions and estimates regarding the amortization of our deferred acquisition costs, deferred sales inducements and value of business acquired balances;
•changes in our methodologies, estimates and assumptions regarding our valuation of investments and the determinations of the amounts of allowances and impairments;
•changes in our valuation allowance against our deferred tax assets, and restrictions on our ability to fully utilize such assets;
•the accuracy of management’s reserving assumptions;
•regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) underwriting of insurance products and regulation of the sale, underwriting and pricing of
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products, and minimum capitalization and statutory reserve requirements for insurance companies, or the ability of our insurance subsidiaries to make cash distributions to us (including dividends or payments on surplus notes those insurance subsidiaries issue to us);
•the ability to maintain or obtain approval of the Iowa Insurance Division (“IID”), New York State Department of Financial Services (“NYDFS”) and other regulatory authorities as required for our operations and those of our insurance subsidiaries;
•the impact of fiduciary standards on us and on our products, distribution and business model;
•changes in the federal income tax laws and regulations which may affect the relative income tax advantages of our products;
•changes in tax laws which affect us and/or our shareholders;
•the impact on our business of new accounting rules or changes to existing accounting rules;
•our potential need and our insurance subsidiaries’ potential need for additional capital to maintain our and their financial strength and credit ratings and meet other requirements and obligations;
•our ability to successfully acquire new companies or businesses and integrate such acquisitions into our existing framework;
•the impact of potential litigation, including class action litigation;
•our ability to protect our intellectual property;
•our ability to maintain effective internal controls over financial reporting;
•the impact of restrictions in our debt instruments on its ability to operate its business, finance its capital needs or pursue or expand its business strategies;
•our ability and our insurance subsidiaries’ ability to maintain or improve financial strength ratings;
•the performance of third parties including third-party administrators, investment managers, independent distributors, underwriters, actuarial consultants and other outsourcing relationships;
•the loss of key personnel;
•interruption or other operational failures in telecommunication, information technology and other operational systems, or a failure to maintain the security, integrity, confidentiality or privacy of sensitive data residing on such systems;
•our exposure to unidentified or unanticipated risk not adequately addressed by our risk management policies and procedures;
•the impact on our business of natural and man-made catastrophes, pandemics, and malicious and terrorist acts;
•our ability to compete in a highly competitive industry;
•our ability to attract and retain national marketing organizations and independent agents;
•our subsidiaries’ ability to pay dividends to us; and
•the other factors discussed in “Risk Factors” beginning on page 8 of this Information Statement.
Consequently, any forward-looking statements should be regarded solely as F&G’s current plans, estimates and beliefs and are based on management’s beliefs and assumptions about the businesses in which F&G competes,
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global and domestic economic conditions and other factors. F&G does not intend, and will not undertake any obligation, to update any forward-looking statements to reflect future events or circumstances or changed assumptions after the date of such statements.
You should review carefully the section captioned “Risk Factors” in this Information Statement to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.
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THE SEPARATION AND DISTRIBUTION
Overview
On March 14, 2022, FNF’s Board of Directors approved the F&G Distribution. FNF intends to retain control of F&G through their approximate 85% ownership stake. The proposed F&G Distribution is intended to be structured as a taxable dividend to FNF shareholders and is subject to various conditions including the final approval of FNF’s Board of Directors, the effectiveness of appropriate filings with the SEC, and any applicable regulatory approvals. The record date and distribution settlement date will be determined by FNF’s Board of Directors prior to the distribution. Upon completion of the F&G Distribution, FNF’s shareholders as of the record date are expected to own stock in both publicly traded companies. The proposed F&G Distribution is targeted to be completed early in the fourth quarter of 2022. However, there can be no assurance regarding the timeframe for completing the F&G Distribution or that the conditions of the F&G Distribution will be met. The separation will be effected pursuant to a separation and distribution agreement between FNF and F&G (the “Separation and Distribution Agreement”).
At 12:01 a.m., EDT, on [l], 2022, the distribution date, each FNF shareholder will receive [l] shares of F&G common stock for every [l] share[s] of FNF common stock held at [5:00 p.m.] EDT on the record date for the distribution, as described below. You will not be required to make any payment, surrender or exchange your FNF common stock or take any other action to receive your shares of F&G’s common stock in the distribution. The distribution of F&G’s common stock as described in this Information Statement is subject to the satisfaction or waiver of certain conditions. For a more detailed description of these conditions, see “Conditions to the Separation and Distribution Agreement.”
Rationale for the Separation and Distribution
The FNF board of directors believes that separation of the annuities and life insurance related businesses from the remainder of FNF is in both companies’ best interest for a number of reasons, including the following:
Unlock the Value of Two Industry Leading Businesses
FNF believes that the separation will result in the creation of shareholder value because, among other things, the trading value of FNF’s and F&G’s common stock in the aggregate would exceed the trading value of the existing FNF common stock, although there can be no assurance that this will occur. The separation is expected to provide greater transparency for investors, resulting in more focus and attention by the investment community on the F&G business.
Distinct Investment Identities
The separation is intended to create two distinct and compelling investment opportunities for investors based on individually unique operating models and associated track records of successful performance. It also provides investors with enhanced insight into each company’s distinct value drivers and simplified financial reporting to more accurately assess and value performance of each individual business.
Formation of F&G
F&G was incorporated in Delaware on August 7, 2020, for the purpose of holding the businesses of FGL Holdings. FGL Holdings was a publicly traded provider of annuity and life insurance products.
When and How You Will Receive the Distribution
With the assistance of CST, FNF expects to distribute F&G common stock at 12:01 a.m., EDT, on [l], 2022, the distribution date, to all holders of outstanding FNF common stock as of [5:00 p.m.] EDT on [l], 2022, the record date for the distribution. CST will serve as the distribution agent in connection with the distribution, and the transfer agent and registrar for F&G common stock.
If you own FNF common stock as of [5:00 p.m.] EDT on the record date for the distribution, the shares of F&G common stock that you are entitled to receive in the distribution will be issued electronically, as of the distribution
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date, to you in direct registration form or to your bank or brokerage firm on your behalf. If you are a registered holder, CST will then mail you a direct registration account statement that reflects your shares of F&G common stock. If you hold your shares through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares. Direct registration form refers to a method of recording share ownership when no physical share certificates are issued to shareholders, as is the case in this distribution. If you sell FNF common stock in the “regular-way” market up to and including the distribution date, you will be selling your right to receive shares of F&G common stock in the distribution.
Commencing on or shortly after the distribution date, if you hold physical share certificates that represent your FNF common stock and you are the registered holder of the shares represented by those certificates, the distribution agent will mail to you an account statement that indicates the number of shares of F&G’s common stock that have been registered in book-entry form in your name.
Most FNF shareholders hold their common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the shares in “street name,” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your FNF common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the F&G common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares held in “street name,” please contact your bank or brokerage firm.
Transferability of Shares You Receive
Shares of F&G common stock distributed to holders in connection with the distribution will be transferable without registration under the Securities Act, except for shares received by persons who may be deemed to be F&G affiliates. Persons who may be deemed to be F&G affiliates after the distribution generally include individuals or entities that control, are controlled by or are under common control with F&G, which may include certain F&G executive officers, directors or principal shareholders, including FNF. Securities held by F&G affiliates will be subject to resale restrictions under the Securities Act. F&G affiliates will be permitted to sell shares of F&G common stock only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act.
Number of Shares of F&G Common Stock You Will Receive
For every [l] share[s] of FNF common stock that you own at [5:00 p.m.] EDT on [l], 2022, the record date for the distribution, you will receive [l] share[s] of F&G common stock on the distribution date. F&G will not issue fractional shares of its common stock in the distribution. Fractional shares that you and other FNF shareholders would otherwise have been entitled to receive will be aggregated and sold in the public market by the distribution agent. The aggregate net cash proceeds of these sales will be distributed pro rata (based on the fractional shares such holder would otherwise have been entitled to receive) to those shareholders who would otherwise have been entitled to receive fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares generally will be taxable, for U.S. federal income tax purposes, to the recipient FNF shareholders.
Treatment of Equity-Based Compensation
Outstanding FNF equity awards held by F&G employees will remain outstanding following the effective time of the separation and will otherwise be subject to the same terms and conditions that applied immediately prior to the separation. Each outstanding FNF restricted share and restricted share unit as of the record date of the distribution will be adjusted in a manner intended to preserve the value of the original FNF equity award as measured immediately before and immediately after the separation. Such adjusted FNF equity awards will otherwise be subject to the same terms and conditions that applied to the original FNF equity awards immediately prior to the separation. F&G expects that certain F&G employees will be eligible to receive grants of equity awards based on shares of F&G common stock following the separation and distribution and in the ordinary course of business in connection with future compensation cycles.
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Results of the Distribution
After its separation from FNF, F&G will be a publicly traded company listed on the NYSE. The actual number of shares to be distributed will be determined at [5:00 p.m.] EDT on [l], 2022, the record date for the distribution, and will reflect any exercise of FNF options between the date FNF’s board of directors declares the distribution and the record date for the distribution. The distribution will not affect the number of outstanding shares of FNF common stock or any rights of FNF shareholders.
F&G will enter into a Separation and Distribution Agreement and other related agreements with FNF before the distribution to effect the separation and provide a framework for F&G’s relationship with FNF after the separation. These agreements will govern the relationship between FNF and F&G after the separation, including with respect to certain services provided by FNF and F&G, respectively. For a more detailed description of these agreements, see “Certain Relationships and Related Person Transactions.”
Market for F&G’s Common Stock
There is currently no public trading market for F&G’s common stock. F&G is seeking to list its common stock on the NYSE under the symbol “FG,” subject to its being in compliance with all applicable listing standards on the date it begins trading on the NYSE. F&G intends to satisfy all the requirements for that listing. F&G has not and will not set the initial price of its common stock. The initial price will be established by the public markets.
F&G cannot predict the price at which its common stock will trade after the distribution. In fact, the combined trading prices, after the separation, of the shares of F&G common stock that each FNF shareholder will receive in the distribution and the FNF common stock held at the record date for the distribution may not equal the “regular-way” trading price of an FNF share immediately prior to the separation. The price at which F&G common stock trades may fluctuate significantly, particularly until an orderly public market develops. Trading prices for F&G common stock will be determined in the public markets and may be influenced by many factors. Many factors could cause the market price of our common stock to rise and fall, including the following:
•we may not achieve some or all of the expected benefits of the separation and distribution, and the separation and distribution may materially adversely affect our business, financial condition or operating results;
•the combined post-separation value of F&G and FNF common stock may not equal or exceed the pre-separation value of FNF common stock;
•although we have past history of operating as a public company, and our historical financial information is not necessarily representative of the results that we would have achieved as a publicly traded company and may not be a reliable indicator of our future results;
•FNF will be our principal shareholder following the completion of the separation and distribution and will retain significant rights with respect to our governance and certain corporate actions and in certain cases, FNF may have interests which differ from other shareholders of F&G;
•after the separation and distribution, certain of our directors may have actual or potential conflicts of interest because of their FNF equity ownership or their current or former FNF positions;
•provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of us, which could decrease the trading price of our common stock;
•we will be a “controlled company” within the meaning of the NYSE rules and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements and you will not have the same protections afforded to shareholders of companies that are subject to such requirements;
•if we are unable to implement and maintain the effectiveness of our internal control over financial reporting, our investors may lose confidence in the accuracy and completeness of our financial reports, which could adversely affect our stock price;
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•we cannot be certain that an active trading market for our common stock will develop or be sustained after the separation and distribution, and following the separation and distribution, our stock price may fluctuate significantly;
•substantial sales of our common stock may occur in connection with the distribution or thereafter, which could cause our stock price to be volatile and to decline;
•we cannot guarantee the timing, amount or payment of dividends on our common stock in the future;
•your percentage of ownership in F&G may be diluted in the future; and
•the other factors described in this “Risk Factors” section and elsewhere in this information statement. In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if successfully defended, could be costly to defend and a distraction to management. See “Risk Factors — Risks Related to F&G’s Common Stock.”
Incurrence of Debt
F&G [anticipates] having approximately $550 million of indebtedness upon completion of the separation. On June 24, 2022, FNF exchanged F&G’s existing $400 million intercompany note for F&G common stock. For more information on F&G’s debt financing, see “Description of Other Indebtedness.”
Trading Between the Record Date and Distribution Date
Beginning on or shortly before the record date for the distribution and continuing up to and including through the distribution date, FNF expects that there will be two markets in FNF common stock: a “regular-way” market and an “ex-distribution” market. FNF common stock that trades on the “regular-way” market will trade with an entitlement to F&G common stock distributed pursuant to the separation. FNF common stock that trades on the “ex-distribution” market will trade without an entitlement to F&G common stock distributed pursuant to the distribution. Therefore, if you sell FNF common stock in the “regular-way” market up to and including through the distribution date, you will be selling your right to receive F&G common stock in the distribution. If you own FNF common stock at [5:00 p.m.] EDT on the record date and sell those shares on the “ex-distribution” market up to and including through the distribution date, you will receive the shares of F&G common stock that you are entitled to receive pursuant to your ownership as of the record date of the FNF common stock.
Furthermore, beginning on or shortly before the record date for the distribution and continuing up to and including the distribution date, F&G expects that there will be a “when-issued” market in its common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for F&G common stock that will be distributed to holders of FNF common stock on the distribution date. If you owned FNF common stock at [5:00 p.m.] EDT on the record date for the distribution, you would be entitled to F&G common stock distributed pursuant to the distribution. You may trade this entitlement to shares of F&G common stock, without the FNF common stock you own, on the “when-issued” market. On the first trading day following the distribution date, “when-issued” trading with respect to F&G common stock will end, and “regular-way” trading will begin.
Conditions to the Separation and Distribution Agreement
The transactions contemplated by the Separation and Distribution Agreement are subject to the satisfaction or waiver of the following conditions:
•each of FNF and F&G shall have performed in all material respects its respective covenants and agreements contained in the Separation and Distribution Agreement to be performed at or prior to the separation and distribution closing;
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•there being no law, injunction, judgment or ruling enacted, promulgated, issued, entered, amended or enforced by any governmental authority in effect enjoining, restraining, preventing or prohibiting consummation of any of the transactions contemplated by the Separation and Distribution Agreement or making the consummation of any such transactions illegal;
•the SEC shall have declared effective the registration statement of which this information statement forms a part and no stop order suspending the effectiveness of the registration statement shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC;
•the shares of F&G common stock to be distributed shall have been accepted for listing on the NYSE, subject to official notice of distribution;
•each of FNF and F&G shall have delivered certain deliverables as contemplated by the Separation and Distribution Agreement, including the other Transaction Agreements; and
•no other events or developments shall exist or shall have occurred that, in the judgment of the board of directors of FNF, in its sole and absolute discretion, make it inadvisable to effect the separation, the distribution or the transactions contemplated by the Separation and Distribution Agreement or any other Transaction Agreement.
FNF will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the separation and distribution and, to the extent it determines to so proceed, to determine the record date for the distribution, the distribution date and the distribution ratio. FNF will also have sole discretion to amend or terminate the distribution at any time. FNF does not intend to notify its shareholders of any modifications to the terms of the separation that, in the judgment of its board of directors, are not material. For example, FNF’s board of directors might consider material such matters as significant changes to the distribution ratio or the allocation of the assets and liabilities of FNF in the separation. To the extent that FNF’s board of directors determines that any modifications by FNF materially change the material terms of the distribution, FNF will notify FNF’s shareholders in a manner reasonably calculated to inform them about the modification as may be required by law, by, for example, publishing a press release, filing a current report on Form 8-K or circulating a supplement to this Information Statement.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION TO U.S. HOLDERS
The following discussion is a summary of the anticipated material U.S. federal income tax consequences of the distribution of F&G common stock to U.S. Holders (as defined below) of FNF shares that hold those FNF shares as capital assets (generally, property held for investment purposes). This discussion is based on the Code, applicable Treasury Regulations thereunder, judicial and administrative interpretations and court decisions as in effect as of the date of this Information Statement, all of which may change, possibly with retroactive effect, or be subject to differing interpretations, and any such change or differing interpretation could affect the accuracy of the statements and conclusions set forth in this discussion.
For purposes of this discussion, a “U.S. Holder” is a beneficial owner of FNF shares that is, for U.S. federal income tax purposes, (i) an individual that is either a citizen or resident of the United States, (ii) a corporation (or other entity that is treated as a corporation) that is created or organized in or under the laws of the United States, or any State thereof, or the District of Columbia, (iii) an estate whose income is subject to U.S. federal income tax regardless of its source, or (iv) a trust if a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or if the trust validly elects to be treated as a U.S. person for U.S. federal income tax purposes.
This discussion does not apply to holders subject to special rules, including persons who are not U.S. Holders, as well as brokers, dealers in securities or currencies, traders in securities that elect to use a mark-to-market method of accounting for securities holdings, tax-exempt organizations, insurance companies, regulated investment companies, banks, thrifts and other financial institutions, tax-exempt entities, persons liable for alternative minimum tax, persons that own or have owned, directly, indirectly or constructively at least 10% of the shares of FNF common stock by vote or value, persons that hold an interest in an entity that holds FNF shares or will hold F&G common stock, persons that hold FNF shares or will hold F&G common stock as part of a hedging, integration, conversion or constructive sale transaction or a straddle or other integrated transaction, persons that acquired their shares of FNF common stock through the exercise of an employee stock option or otherwise as compensation, U.S. expatriates or persons whose functional currency is not the U.S. dollar.
This discussion does not purport to be a complete analysis of all of the potential U.S. federal income tax considerations that may be relevant to U.S. Holders in light of their particular circumstances. Furthermore, it does not address any aspect of non-U.S., state, local or estate or gift taxation or the 3.8% Medicare tax imposed on certain net investment income. Each holder should consult its own tax advisor as to the U.S. federal, state, local, non-U.S. and any other tax consequences of the distribution.
If a partnership or other pass-through entity or arrangement holds shares of FNF common stock, the U.S. federal income tax treatment of a partner, beneficiary or other stakeholder in such partnership or other pass-through entity or arrangement will generally depend on the status of that person and activities of that person and the partnership or other pass-through entity or arrangement. A partnership or other pass-through entity or arrangement holding shares of FNF common stock, and a partner, beneficiary or other stakeholder in such partnership or other pass-through entity or arrangement should consult its own tax advisor with regard to the U.S. federal income tax treatment of the distribution.
We strongly urge each FNF shareholder to consult its own tax advisor to determine the shareholder’s particular U.S. federal, state or local or non-U.S. income or other tax consequences to it of the distribution.
U.S. Federal Income Tax Consequences to FNF
The distribution of F&G common stock will be treated as a taxable disposition by FNF for U.S. federal income tax purposes. FNF will generally recognize gain, but not loss, for U.S. federal income tax purposes equal to the excess of the fair market value of the distributed F&G common stock on the distribution date over FNF’s adjusted tax basis in the distributed F&G common stock. Gain recognized by FNF will generally increase FNF’s current earnings and profits for U.S. federal income tax purposes, which, as discussed below, will be relevant to the treatment of the distribution to holders of shares of FNF common stock.
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U.S. Federal Income Tax Consequences to U.S. Holders
The distribution of F&G common stock will be treated as a taxable distribution for U.S. federal income tax purposes. An amount equal to the fair market value on the distribution date of F&G common stock received by a U.S. Holder (plus any cash received in lieu of fractional shares) will generally be treated as a taxable dividend to the extent of such U.S. Holder’s allocable portion of FNF’s current or accumulated earnings and profits as determined for U.S. federal income tax purposes. To the extent that the amount of a distribution received by the U.S. Holder exceeds the U.S. Holder’s allocable portion of FNF’s current and accumulated earnings and profits, such distribution will be treated first as a tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis in its shares of FNF common stock, and thereafter as capital gain, which will be long-term capital gain if the U.S. Holder’s holding period for its shares of FNF common stock exceeds one year at the time of the distribution. Dividend income realized by individuals and certain other non-corporate U.S. Holders will generally be subject to taxation at the preferential rates applicable to long-term capital gains, provided applicable holding period requirements are met and certain other conditions are satisfied. Dividend income realized by U.S. Holders that are U.S. corporations will generally qualify for the dividends received deduction, provided that applicable holding period requirements are met and certain other conditions are satisfied.
Dividends that exceed certain thresholds in relation to a U.S. Holder’s tax basis in shares of FNF common stock could be characterized as “extraordinary dividends” under the Code. Certain non-corporate U.S. Holders who receive an extraordinary dividend will generally be required to treat any losses on the sale of shares of FNF common stock as long-term capital losses to the extent any such extraordinary dividends received by them with respect to their shares qualify for the preferential rates applicable to long-term capital gains. If a corporate U.S. Holder that has held shares of FNF common stock for two years or less before the dividend announcement date receives an extraordinary dividend, such holder will generally be required to reduce its tax basis in its shares of FNF common stock with respect to which such dividend was made by the non-taxed portion of such dividend (generally, an amount equal to the dividends received deduction). If the amount of the reduction exceeds the U.S. Holder’s tax basis in such shares of FNF common stock, the excess is treated as taxable gain.
In general, gain or loss will be recognized upon a sale or other disposition of shares of F&G common stock. The amount of such gain or loss will be the difference between the amount received in exchange for the shares of F&G common stock and the U.S. Holder’s adjusted basis in such shares. Following the distribution, a U.S. Holder will have an initial tax basis in the shares of F&G common stock equal to the fair market value on the distribution date of such shares and a new holding period that begins on the day of the distribution. Such gain or loss will generally be treated as capital gain or loss if the U.S. Holder held such shares as capital assets and will generally be long-term capital gain if the U.S. Holder’s holding period for its F&G common stock exceeds one year at the time of the sale.
Backup Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of dividends paid to the shareholder, the shareholder’s name and address, and the amount of tax withheld, if any. A similar report will be sent to the shareholder. Payments of dividends on shares of FNF common stock (including cash received in lieu of fractional shares) may be subject to additional information reporting and backup withholding at a current rate of 24% unless the shareholder: provides their correct taxpayer identification number (employer identification number or Social Security number) to the distribution agent or establishes an exemption from backup withholding and complies with applicable requirements of the backup withholding rules.
Backup withholding is not an additional tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the required information is furnished to the IRS in a timely manner.
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DIVIDEND POLICY
We intend to pay quarterly cash dividends on our common stock at an initial aggregate amount of $100 million per year beginning in early 2023, although any declaration of dividends will be at the discretion of F&G’s board of directors and will depend on our financial condition, earnings, liquidity and capital requirements, regulatory constraints, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by Delaware law, general business conditions and any other factors that F&G’s board of directors deems relevant in making such a determination. Therefore, there can be no assurance that we will pay any dividends to holders of our common stock, or as to the amount of any such dividends.
Delaware law requires that dividends be paid only out of “surplus,” which is defined as the fair market value of our net assets, minus our stated capital, or out of the current or the immediately preceding year’s earnings. F&G is a holding company and has no direct operations. All of our business operations are conducted through our subsidiaries. Any dividends we pay will depend upon the funds legally available for distribution, including dividends or distributions from our subsidiaries to us. The states in which our insurance subsidiaries are domiciled impose certain restrictions on our insurance subsidiaries’ ability to pay dividends to their parent companies. These restrictions are based in part on the prior year’s statutory income and surplus, as well as earned surplus. Such restrictions, or any future restrictions adopted by the states in which our insurance subsidiaries are domiciled, could have the effect, under certain circumstances, of significantly reducing dividends or other amounts payable by our subsidiaries without affirmative approval of state regulatory authorities. See “Risk Factors—Risks Relating to Our Indebtedness and Financing—We are a holding company and depend on distributions from our subsidiaries for cash.”
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and actual capitalization as of June 30, 2022.
This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Summary Historical Consolidated Financial Information” as well as our Consolidated Financial Statements and notes included elsewhere in this Information Statement.
June 30, 2022
Actual
(In millions)
Cash and cash equivalents$992 
Indebtedness:
Notes payable (aggregate principal amount)
$550 
Equity:
F&G common stock, $0.001 par value; authorized 500,000,000 shares; outstanding of 125,000,000; issued of 125,000,000— 
Additional paid-in-capital3,157 
Retained earnings1,467 
Accumulated other comprehensive loss(2,130)
Total equity2,494 
Total capitalization (1)
$3,044 
_______________
(1) Total capitalization is defined as Total equity plus Notes payable
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BUSINESS
Introductory Note
The following describes the business of F&G Annuities & Life, Inc. and its subsidiaries. Except where otherwise noted, all references to “we,” “us,” “our,” the “Company,” or “F&G” are to F&G Annuities & Life, Inc. and its subsidiaries, taken together.
Overview
Founded in 1959, F&G is a leading provider of insurance solutions serving retail annuity and life customers as well as institutional clients. Our mission is to help people turn their aspirations into reality and, as of June 30, 2022, F&G has approximately 594,000 policyholders who count on the safety and protection our fixed annuity and life insurance products provide.
Through our insurance subsidiaries, including FGL Insurance and FGL NY Insurance, we market a broad portfolio of annuities, including FIAs and MYGAs and PRT solutions, as well as IUL insurance and institutional funding agreements.
We were acquired on June 1, 2020, by FNF. We benefited from immediate financial strength ratings upgrades following the acquisition; S&P and Fitch upgraded us to A-, A.M. Best affirmed at A-, and Moody’s upgraded to Baa1. These upgrades, valued by our distribution partners, positioned us to quickly expand our business in our existing channels and gain access to new markets. In the first full year of ownership, we more than doubled sales from $4.5 billion in 2020 to $9.6 billion in 2021 and did so profitably. With our success in expanding distribution under FNF’s ownership, we have grown assets under management from $26.5 billion at the time of acquisition to $40.3 billion as of June 30, 2022. We now operate in and source significant premiums from five distinct channels, versus a single channel prior to the acquisition by FNF in June of 2020. For a discussion of the five distinct channels, see “We Play in Large and Growing Markets” and “Our Retail Distribution Channels” within this section of the Information Statement.
We believe the strength of our balance sheet provides confidence to our policyholders and business partners and positions us for continued growth. Our invested assets comprise what we believe to be a highly rated and well diversified portfolio. As of June 30, 2022, 92% of our fixed maturity securities were rated NAIC 1 or NAIC 2, the two highest credit rating designations under the NAIC’s criteria. These assets are managed against what we believe to be prudently underwritten liabilities. We have in-force liabilities of $38.7 billion at June 30, 2022, with a liability duration of 6 years, well matched to our assets. For the six months ended June 30, 2022, Net earnings attributable to common shareholders was $466 million, we produced ANE of $195 million, and we had an adjusted ROA of 102 basis points. We are focused on growing our in-force liabilities and AUM, driven by sales of attractively priced liabilities, including fixed indexed annuities, fixed rate annuities, indexed universal life, funding agreements, and pension risk transfer.
As of June 30, 2022, we had $2.5 billion of total F&G equity and $4.6 billion of total F&G shareholders’ equity excluding AOCI. FGL Insurance maintained a U.S. RBC ratio of 451%, 415% and 452% in 2021, 2020 and 2019, respectively. FGL Insurance expects to maintain its U.S. RBC ratio at or above our target of 400%. Going forward, we intend to fund our continued growth through strong and growing statutory earnings, reinsurance programs, and unused debt capacity.
The transaction – F&G Dividend Distribution (the “F&G Distribution” or “Partial Spin-off”)
On March 16, 2022, FNF announced its intention to partially spin off F&G through a dividend to FNF shareholders. FNF has publicly stated that it intends to maintain majority ownership and continue to benefit from F&G’s consistent earnings and growth prospects, and has articulated its belief the market has not fully realized the value of F&G as a wholly owned subsidiary of FNF due to the diverging natures of the title and life insurance businesses. FNF and F&G believe that the spin-off creates an opportunity to realize shareholder value for both FNF’s and F&G’s businesses.
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FNF will distribute, on a pro rata basis, approximately 15% of the common stock of its wholly owned subsidiary, F&G. The purpose of the distribution is to enhance and more fully recognize the overall market value of each company. F&G intends to have F&G common stock publicly listed and traded on the New York Stock Exchange under the ticker symbol “FG”. FNF will continue to trade under the ticker symbol “FNF” on the New York Stock Exchange following the Partial Spin-off.
FNF’s board of directors approved the distribution on March 14, 2022. The Partial Spin-off is structured as a taxable dividend to FNF shareholders and is targeted to be completed in the early fourth quarter of 2022. Upon completion of the F&G Distribution, FNF shareholders as of the record date of the distribution will own stock in both publicly traded companies; in addition to their FNF common stock, FNF shareholders as of the record date of the distribution will receive a taxable dividend of approximately 15% of F&G common stock in the aggregate. FNF will retain control of F&G through ownership of approximately 85% of F&G common stock and continue to benefit from F&G’s growth.
The transaction is subject to various conditions including the final approval by the FNF board of directors, filing and effectiveness of a Form 10 registration statement under the Exchange Act, and any applicable regulatory approvals. The record date and distribution settlement date will be determined by FNF’s board of directors prior to the distribution. The separation will be effected pursuant to a separation and distribution agreement between FNF and F&G (the “Separation and Distribution Agreement”).
Please see “Risk Factors — Risks Related to the Separation and Distribution”. FNF will be F&G’s principal shareholder following the completion of the separation and distribution and will retain significant rights with respect to our governance and certain corporate actions. Following the separation and distribution, we will continue to receive services from FNF through a Corporate Services Agreement and will continue to provide services to FNF through a Reverse Corporate Services Agreement. In certain cases, FNF may have interests which differ from other stockholders of F&G.
Our Strategy
Through a diversification growth strategy, F&G has demonstrated profitable, CAGRs in sales of 56%, AUM of 18%, and ANE of 44% for the two-year period 2019 to 2021 and, more recently, annual increases in sales of 31% and AUM of 27%, and an annual ANE decrease of 22% for the six month period ended June 30, 2022, as compared to the prior year. We have expanded our business in our traditional channels, and entered new markets. With this strategy, we will continue to deliver stable ROA driven by asset growth and increasing margins from scale as well as expansion into higher-margin, less capital-intensive products. We are positioned to accomplish our goals through the following areas of strategic focus:
•Targeting large and growing markets. The opportunity for our core annuity products remains significant, as policyholders seek to add safety and certainty to their retirement plans. Our investments in life insurance products allows us to penetrate the underserved middle market, which addresses the needs of many of our cultural communities. And as corporations continue to de-risk their pension funds, our buyout solutions can guarantee pension-holders the lifetime benefits they need and want. Finally, we continue to attract strong institutional annuity buyers with funding agreements. F&G is a national leader in the markets we play in, and demographic trends provide tailwinds and significant room to continue growing.
•Superior ecosystem. Our business model gives us a sustainable competitive advantage. We have strong and long-standing relationships with a diverse network of distributors, a durable investment edge through our Blackstone partnership, a scalable administrative platform, and a track record of attracting and retaining top talent.
•Consistent track record of success. F&G’s deep and experienced management team has successfully diversified products and channels in recent years and demonstrated our ability to deliver consistent top line growth, increase assets under management and generate steady spreads and ROA across varying market cycles.
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•F&G dividend distribution will unlock value. Investors will be able to invest directly in F&G to capitalize on the earnings and cash flow potential of our in-force book, as well as the upside potential of our new business platforms. F&G will continue to reap the benefits that come from our majority ownership by FNF. We view the Partial Spin-off as a vote of confidence for our business, and anticipate that the transition to being a public company will help to reinforce the value of F&G.
Our Sources of Competitive Advantages
Our business model is strong and positions us to capitalize on the growth prospects in our addressable markets.
•Trusted by distributors. We have long-standing relationships with a broad range of distributors representing more than 72,000 independent agents and financial advisors, and built on our reputation for transparency and a consistently competitive product portfolio. We offer fixed annuities and life insurance products through a network of 17 leading banks and broker dealers and approximately 270 Independent Marketing Organizations (“IMOs”) that provide back-office support for thousands of independent insurance agents.
•Winning in high-growth markets. The U.S. retirement and middle markets are growing, and we are both well-established and well-positioned for continued growth. Our strategic alignment with our distribution partners allows us to reach a diverse, growing and underserved middle market demographic in both our retail and institutional channels.
•Durable investment management edge. Our strategic partnership with Blackstone provides a sustained competitive advantage for our business. Blackstone and its affiliate BIS partners with our strategic investment office to deeply understand our liability profile when making asset allocation decisions and then originates unique investment opportunities not traditionally available to insurers. These investments allow us to enter higher-margin lines and create the potential to disintermediate investment banks in credit origination.
•Clean and profitable in-force book. As a life insurer, we generate spread earnings based on our assets under management and over the lifetime of the liabilities in place. Our disciplined new business underwriting process provides us with stable liabilities, primarily in products that reset annually, which has allowed us to achieve consistently attractive lifetime returns. Approximately 90% of our $28.5 billion fixed indexed and fixed rate annuities account value are surrender-charge protected and our asset and liability cash flows are well matched.
•Track record of attracting top talent. F&G’s management team and nearly 750 employees have a record of long-term success and have delivered impressive results in the last few years. Our commitment to our cultural values is the cornerstone of our success, whereby F&G is a company of individuals who believe in the power of partnerships, encourage innovation and creativity, and are transparent about decisions while delivering on their commitments. This is borne out by consistently being recognized as an employer of choice as well as an involuntary turnover rate that is well below that of other financial services companies. We believe our flexible, employee-centric return to work approach will continue to position us as an employer of choice.
•Clear governance structure. We have a disciplined approach for considering new lines of business to enter, the appropriate product/channel mix for achieving our targeted new business profitability, and the management of our capital and in-force liabilities. Further, we target and pursue opportunities that leverage our strengths.
We Play in Large and Growing Markets
We are in the midst of an age wave, with 10,000 Baby Boomers retiring each day through 2029. Today’s retirees face unique challenges: guaranteed income traditionally provided by pensions is going away, requiring retirees to rely solely on their personal assets; for many, Social Security income is not enough and the value of Certificates of Deposit (“CDs”), once a reliable source of income, has eroded; finally, today’s retirees must plan for a retirement that could last 30 or 40 years, weathering the ups and downs of the markets along the way. Insurance
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solutions can simplify retirement planning through features that generate more accumulation than traditional fixed income vehicles and generate more (and guaranteed) retirement income than traditional strategies.
The U.S. retirement market opportunity is vast and comprised of the $2.3 trillion U.S. consumer savings market, the $600 billion CD market and the $354 billion retail life and annuities market. While insured products are designed to effectively serve the needs of retirees, annuities and life insurance solutions continue to be underutilized. We believe middle market consumers, in particular, lack the guidance they need and want and can benefit greatly from insurance solutions.
Until recently, F&G distributed our flagship annuity and life insurance products solely through our longstanding IMO relationships. In mid-2020, we expanded into the bank and broker dealer channels to broaden our reach and capture share of the personal savings and CDs markets. Our entry into these channels was successful, resulting in $1 billion in new business within the first ten months. Annuity sales through the bank and broker dealer channels were $1.7 billion for the full year ended December 31, 2021 and $1.5 billion for the six months ended June 30, 2022. The 17 banks and broker dealers we work with account for 41% of all annuity sales. F&G ranks: (i) 3rd and 10th in FIA sales in the IMO and bank channels and 6th in FIA industry sales; (ii) 2nd and 7th in MYGA sales in the broker dealer and bank channels and 8th in MYGA industry sales; and (iii) 7th in IUL sales in the IMO channel, 4th in the number of IUL policies sold and 8th in IUL industry sales, in each case, for the first quarter of 2022, as sourced from Wink’s Sales and Market Report.
We successfully expanded into new retail channels and diversified our annuity distribution, yet not at the expense of our traditional IMO channel. Over the same period, we grew our IMO channel sales by 16% in the full year 2021, above and beyond the industry’s 14%, and by 2% for the six months ended June 30, 2022, as compared to the prior year.
We continue to invest in our life insurance business, focusing our approach to meet the needs of the underserved middle market which we reach largely through Network Marketing Groups (“NMGs”). The Middle Market segment is the largest in 2019, at 37% of households. NMGs are unique and growing, recruiting members of diverse communities for careers in insurance and penetrating cultural segments. NMGs have proven to be one of our most cost-efficient distribution channels, in large part because they tend to work with a smaller number of strategic product providers. This has allowed us to build deep and lasting relationships with both the NMGs and the agents. Since 2018, largely due to our NMG strategy, F&G’s IUL sales growth has far outpaced the industry, with a three-year combined annual growth rate of 46% compared to the industry’s 3.4%. This makes F&G the fastest growing IUL company of the top 20 IUL sellers in the market. Untapped opportunities remain in this channel, particularly among younger and more diverse demographics. The life insurance protection gap has widened to $23.4 trillion, which is equivalent to over 60% of the current in-force individual life insurance. Hispanics, the second largest ethnic group behind Caucasians, have the largest uninsured population among adults at 40%, representing significant opportunity for us to serve this market. We purchased a 30% minority ownership stake in Freedom Equity Group (“FEG”) in October 2021. FEG is a nearly 4,000 agent strong NMG that focuses on cultural markets including Mexican-American, Hmong, Laotian, Filipino, Burmese, Congolese-American, Samoan, African-American, Thai and Vietnamese. While we will look to additional opportunities of ownership in cultural markets that will allow us to own more components of the value chain and drive future success of the business, we have no additional finalized agreements at this time.
In 2021, F&G entered two institutional business lines to further diversify our sources of revenue. Our competitive asset management advantage through Blackstone allows us to have very competitive offerings in our spread lending products as well as in the PRT market, while still meeting our internal pricing targets.
•We now offer the proven ability to originate FABN, a $140 billion market. Our FABN Program (the “FABN Program”) offers funding agreements to institutional clients by means of capital markets transactions through investment banks. This business line has generated $1.9 billion in sales for F&G in 2021, its year of inception, and $0.7 billion in sales for the six month period ended June 30, 2022.
•We also offer PRT solutions to a $40 billion (of $2 trillion total defined benefit plan assets) market. We launched our PRT business by building an experienced team with access to brokers and institutional
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consultants for distribution. We expect our opportunity to continue to grow as employers shift away from traditional defined benefit pension plans and seek to de-risk frozen pension plans. This line of business generated $1.1 billion in sales for F&G in 2021, its year of inception, and $0.5 billion in sales for the six month period ended June 30, 2022.
We Have Meaningfully Diversified Our Business
With the addition of the retail bank and broker dealer channels and our success in entering the PRT and funding agreement institutional markets, F&G has diversified our product and distribution capabilities from one primary channel to now five, and from one primary product to now five. We completed this expansion over a two-year period and, combined with organic growth in our core IMO channel, increased total sales by 146%, from $3.9 billion in 2019 to $9.6 billion in 2021.
We have reinforced our earnings engine in addition to driving top-line growth. We have acquired and retained customers through the COVID years, growing AUM from $26.5 billion at the time of FNF’s acquisition to $40.3 billion as of June 30, 2022. Profitable growth in AUM is the most important driver of F&G’s earnings and our ability to return capital to shareholders.
An Inflection Point: Numerous opportunities to create value for our stockholders
Through a diversified growth strategy, F&G seeks to deliver stockholder value by increasing ANE driven by asset growth. The successful execution of this strategy has provided a clear line of sight to both AUM and ANE growth. We are able to optimize sales growth by products and channels for sales growth based on market and competitive conditions. We are also able to adjust capital usage by, for example, moving to higher margin or less capital-intensive products, particularly cultural market life. This leads to increasing margins and higher returns on capital. In addition, as we scale, we expect our expense ratios to decline due to our significant investments in technology and other operating platforms over the last three years. Finally, we have reached an inflection point where we expect an increasing percentage of our ANE to be distributable to stockholders over time.
Our Financial Goals
Our competitive advantages – product and channel diversification, as well as our strategic partnership with Blackstone – enable us to address a greater share of the markets in which we play. Further, the strength of our distribution partner relationships has allowed the Company to achieve double digit profitable sales growth, increase AUM and retain the higher margin business such as FIA and middle market cultural life insurance while diversifying sources of margin. We will continue using retained sales as a lever for capital efficient diversified margins as we earn additional fee income through reinsurance. We will also strategically use reinsurance to further diversify our sources of earnings into less capital-intensive adjacent products and services. We began our reinsurance program in 2021 by ceding 50% of our MYGA premiums, which amounted to approximately $869 million in 2021 and $780 million through June 30, 2022. On September 30, 2022, we amended our agreement with Aspida Re to provide for the cession to Aspida Re of 75% of our MYGA premiums dating from and following September 1, 2022. The reinsurer pays the Company an up-front fee on the premium as well as an ongoing annual fee for generating the business. The reinsurance enhances our overall return of the business issued and diversifies a portion of earnings to fee income. Over the next several months, the Company will be completing a strategic review to determine additional products and services that could benefit from the Company’s core competency of new business generation and could result in the Company earning fees from third parties that utilize the Company’s capabilities, including by adding to our reinsurance partnerships.
The Products We Offer
F&G’s expertise in annuities, life insurance, pension risk transfer solutions and funding agreements will allow us to continue to introduce innovative products and solutions designed to meet customers’ changing needs. We work hand-in-hand with our distributors and institutional advisors to devise the most suitable solutions for the ever-changing market. Our retail annuities serve as a retirement and savings tool on which our customers rely for principal protection and predictable income streams. In addition, our life insurance products provide our customers with a complementary product that allows them to build on their savings and provide a payment to their designated
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beneficiaries upon the policyholder’s death. Our most popular products are FIAs that tie contractual returns to specific market indices, such as the S&P 500 Index. Our customers value our FIAs, which provide a portion of the gains of an underlying market index, while also providing principal protection. We believe this principal protection fills the need for middle-income Americans who must save for retirement but who want to limit the risk of decline in their savings.
For the six months ended June 30, 2022, FIAs generated approximately 37% of our total gross sales. The remaining 63% of sales were primarily generated from fixed rate annuities (28%), funding agreements (25%), PRT sales (9%) and IUL (1%) during the year. We invest the proceeds primarily in fixed income securities, options and futures that hedge the index credit of our FIA and IUL liabilities by replicating the market index returns to our policyholders. We invest predominantly in options on the S&P 500 Index. The majority of our products allow for active management to achieve targeted lifetime returns. In addition, our annuity contracts generally either cannot be surrendered or include surrender charges that discourage early redemptions.
Annuities. Through F&G’s insurance subsidiaries, we issue a broad portfolio of deferred annuities (FIA and fixed rate annuities), immediate annuities, and PRT solutions. A deferred annuity is a type of contract that accumulates value on a tax deferred basis and typically begins making specified periodic or lump sum payments a certain number of years after the contract has been issued. An immediate annuity is a type of contract that begins making specified payments within one annuity period (e.g., one month or one year) and typically pays principal and earnings in equal payments over some period of time.
Deferred Annuities – FIAs. Our FIAs allow contract owners the possibility of earning returns linked to the performance of a specified market index, predominantly the S&P 500 Index, while providing principal protection. The contract owners typically make a single deposit into our deferred annuities. The contracts include a provision for a minimum guaranteed surrender value calculated in accordance with applicable law. A market index tracks the performance of a specific group of stocks representing a particular segment of the market, or in some cases an entire market. For example, the S&P 500 Composite Stock Price Index is an index of 500 stocks intended to be representative of a broad segment of the market. All FIA products allow policyholders to allocate funds once a year among several different crediting strategies, including one or more index-based strategies and a traditional fixed rate strategy. High surrender charges apply for early withdrawal, typically for seven to fourteen years after purchase.
We purchase derivatives consisting predominantly of over-the-counter options and, to a lesser degree, futures contracts (specifically for FIA contracts) on the equity indices underlying the applicable policy such as the S&P 500. These derivatives are used to fund the index credits due to policyholders under the FIA and IUL contracts based upon policyholders’ contract elections. The down-side risk to F&G is limited to the cost of the options because if the value of the options decreases there is no index credit. The cost of the hedge is included in the pricing of the product and can be reset on an annual basis for each policy based on market conditions. The majority of all such call options are one-year options purchased to match the funding requirements underlying the FIA/IUL contracts. On the anniversary dates of the FIA/IUL contracts, the market index used to compute the annual index credit under the contracts is reset. At such time, we purchase new call options to fund the next index credit. We manage the cost of these purchases through the terms of our FIA/IUL contracts, which permit us to change caps or participation rates, subject to certain guaranteed minimums on each contract’s anniversary date. The change in the fair value of the options and futures contracts is generally designed to offset the equity market related change in the fair value of the FIA/IUL contract’s related reserve liability. The options and futures contracts are marked to fair value with the change in fair value included as a component of “Recognized gains and losses, net” in our Consolidated Statements of Earnings. The change in fair value of the options and futures contracts includes the gains and losses recognized at the expiration of the instrument’s term or upon early termination and the changes in fair value of open positions. GAAP accounting of the reserve liability for products with embedded derivatives such as FIA creates additional volatility beyond the accounting for the options and the futures. Non-GAAP measures are created to remove the volatility to provide the underlying profitability of the product.
The contract holder account value of a FIA contract is equal to the sum of deposits paid, premium bonuses, if any, (described below), and index credits based on the change in the relevant market index (subject to a cap, spread and/or a participation rate) less any fees for riders and any withdrawals taken to-date. Caps (a maximum rate that may be credited) generally range from 1% to 5% when measured annually and 1% to 3% when measured monthly,
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spreads (a credited rate determined by deducting a specific rate from the index return) generally range from 0% to 3% when measured annually, and participation rates (a credited rate equal to a percentage of index return) generally range from 100% to 140% of the performance of the applicable market index. The cap, spread and participation rate can typically be reset annually and in some instances every two to five years. Certain riders provide a variety of benefits, such as the ability to increase their cap, lifetime income or additional liquidity for a set fee. As this fee is fixed, the contract holder may lose principal if the index credits received do not exceed the amount of such fee.
Approximately 32% of the FIA sales for the six months ended June 30, 2022, involved “premium bonuses” or vesting bonuses. Premium bonuses increase the initial annuity deposit by a specified rate of 2% to 3%. The vesting bonuses, which range from 1% to 12%, increase the initial annuity deposit liability but are subject to adjustment for unvested amounts in the event of surrender by the policyholder prior to the end of the vesting period. We made compensating adjustments in the commission paid to the agent or the surrender charges on the policy to offset the premium bonus.
Approximately 33% of our FIA contracts were issued with a GMWB rider for the six months ended June 30, 2022. With this rider, a contract owner can elect to receive guaranteed payments for life from the FIA contract without requiring the owner to annuitize the FIA contract value. The amount of the income benefit available is determined by the growth in the policy’s benefit base value as defined in the FIA contract rider. Typically, this accumulates for 10 years based on a guaranteed rate of 3% to 8%. Guaranteed withdrawal payments may be stopped and restarted at the election of the contract owner. Some of the FIA contract riders that we offer include an additional death benefit or an increase in benefit amounts under chronic health conditions. Rider fees range from 0% to 1%. Unlike a variable annuity, policyholder values do not decline with market movements.
Deferred Annuities – Fixed Rate Annuities. Fixed rate annuities are typically single deposit contracts and include annual reset and multi-year rate guaranteed policies. Fixed rate annual reset annuities issued by us have an annual interest rate (the “crediting rate”) that is guaranteed for the first policy year. After the first policy year, we have the discretionary ability to change the crediting rate once annually to any rate at or above a guaranteed minimum rate. MYGAs are similar to fixed rate annual reset annuities except that the initial crediting rate is guaranteed for a specified number of years before it may be changed at our discretion. As of June 30, 2022, crediting rates on outstanding (i) single-year guaranteed annuities generally ranged from 2% to 6% and (ii) MYGA ranged from 1% to 6%. The average crediting rate on all outstanding fixed rate annuities at June 30, 2022, was 3%.
Withdrawal Options for Deferred Annuities. After the first year following the issuance of a deferred annuity policy, holders of deferred annuities are typically permitted penalty-free withdrawals up to a contractually specified amount. The penalty-free withdrawal amount is typically 10% of the prior year account value for FIAs, and is typically up to accumulated interest for fixed rate annuities, subject to certain restrictions. Withdrawals in excess of allowable penalty-free amounts are assessed a surrender charge if such withdrawals are made during the penalty period of the deferred annuity policy. The penalty period typically ranges from seven to fourteen years for FIAs and three to ten years for fixed rate annuities. This surrender charge initially ranges from 8% to 15% of the contract value for FIAs and is 9% of the contract value for fixed rate annuities and generally decreases by approximately one to two percentage points per year during the penalty period. The average surrender charge was 7% for our FIAs and 7% for our fixed rate annuities as of June 30, 2022. A market value adjustment (“MVA”) will also apply in most states to any withdrawal that incurs a surrender charge, subject to certain exceptions. The MVA is based on a formula that takes into account changes in interest rates since contract issuance. Generally, if interest rates have risen, the MVA will decrease surrender value, whereas if rates have fallen, it will increase surrender value. At June 30, 2022, approximately 70% of our business included an MVA feature.
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The following table summarizes our deferred annuity account values and surrender charge protection as of June 30, 2022 (dollars in millions):
SURRENDER CHARGE EXPIRATION BY YEARFixed Rate and Fixed Indexed Annuities Account ValuePercent of TotalWeighted Average Surrender Charge
Out of surrender charge$2,702 10 %— %
2022683 2 %4 %
2023-20255,457 19 %6 %
2026-20274,791 17 %7 %
2028-20295,060 18 %8 %
Thereafter9,784 34 %10 %
Total$28,477 100 %7 %
Subsequent to the penalty period, the policyholder may elect to take the proceeds of the surrender either in a single payment or in a series of payments over the life of the policyholder or for a fixed number of years (or a combination of these payment options). In addition to the foregoing withdrawal rights, policyholders may also elect to have additional withdrawal benefits by purchasing a GMWB.
Single Premium Immediate Annuities. We have previously sold single premium immediate annuities (or “SPIAs”), which provide a series of periodic payments for a fixed period of time or for the life of the policyholder, according to the policyholder’s choice at the time of issue. The amounts, frequency and length of time of the payments are fixed at the outset of the annuity contract. SPIAs are often purchased by persons at or near retirement age who desire a steady stream of payments over a future period of years. Existing policyholders may elect to surrender their contract and use the proceeds to purchase a supplementary contract which functions as a SPIA.
Pension Risk Transfer. In July 2021, we entered the pension risk transfer market. A pension risk transfer occurs when a defined-benefit pension provider seeks to remove some or all of its obligation to pay guaranteed retirement income or post-retirement benefits to plan participants. There are four major types of PRT strategies: longevity reinsurance, buy-in, buy-out, and paying in lump sums. We are currently active in plan buy-outs, where we have a direct, irrevocable commitment to each covered participant to make the specified annuity payments based upon the terms of the pension plan. PRT transactions fully and permanently transfer all investment, mortality, and administrative risk, associated with covered benefits, from the pension plan sponsor to the insurance provider.
Our PRT products are comparable to income annuities, as we generally receive a single, upfront premium in exchange for paying a guaranteed stream of future income payments which are fixed in nature, but vary in duration based on participant mortality experience. These products primarily create earnings through spread income. In each transaction FGL Insurance and/or FGL NY Insurance issues a group annuity contract to discharge pension plan liabilities from a pension plan sponsor, either through a separate account or through a general account guarantee. Annuitants covered under a group annuity contract have a direct right to enforce their guaranteed benefit against the insurance company.
We entered the PRT solutions business by building an experienced team and then working with brokers and institutional consultants for distribution. As of June 30, 2022, we had completed PRT transactions that represented pension obligations of $1.7 billion.
Life Insurance. We currently offer IUL insurance policies and have previously sold universal life, term and whole life insurance products. Holders of universal life insurance policies may make periodic payments over the life of the contract and earn returns on their policies, which are credited to the policyholder’s cash value account. The insurer periodically deducts its expenses and the cost of life insurance protection from the cash value account. The balance of the cash value account is credited interest at a fixed rate or returns based on the performance of a market index, or both, at the option of the policyholder, using a method similar to that described above for FIAs.
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Almost all of the life insurance policies in force, except for the return of premium benefits on term life insurance products and universal life contracts issued after March 1, 2010, are subject to a reinsurance arrangement with Wilton Re. See “—Wilton RE Transaction.”
Funding Agreements. As defined by the IID, a funding agreement is an agreement for an insurer to accept and accumulate funds and to make one or more payments at future dates in amounts that are not based on mortality or morbidity contingencies of the person to whom the funding agreement is issued. In essence, funding agreement providers are agreeing to a defined stream of future payments in exchange for a single upfront premium. This type of business is sometimes referred to as spread lending, as funding agreement providers invest upfront premiums with the intent to earn an investment spread on the funds prior to making agreed upon maturity and interest payments. The structure of the payments can take several forms, but are commonly a fixed or variable interest payment with a single maturity principal re-payment.
F&G currently utilizes two forms of funding agreement offerings. The first is through the issuance of collateralized funding agreements with the Federal Home Loan Bank of Atlanta. This capability generates spread-based income without significant longevity or mortality exposure, which enables us to optimize our asset portfolio and improve our returns given the certainty in liability profile. Funding agreements through the FHLB are flexible in their format and the ability to issue during broad windows, as long as sufficient eligible collateral has been deposited with the bank.
In June 2021, we established a FABN Program, which is a medium term note program under which funding agreements are issued to a special-purpose trust that issues marketable notes. The notes are underwritten and marketed by major investment banks’ broker-dealer operations and are sold to institutional investors. FABN offerings are more limited regarding timing of issuance, but do not require collateralization as with the FHLB. The maximum aggregate principal amount permitted to be outstanding at any one time under the FABN Program is currently $5.0 billion. As of June 30, 2022, we had approximately $2.6 billion outstanding under the FABN Program.
Reinsurance philosophy/arrangements. Our insurance subsidiaries cede insurance to other insurance companies. We use reinsurance to diversify risks and earnings, to manage loss exposures, to enhance our capital position, and to manage new business volume. The effects of certain reinsurance agreements are not accounted for as reinsurance as they do not reinsure insurance contracts or they do not transfer the risks of the reinsured policies.
In instances where we are the ceding company, we pay a premium to a reinsurer in exchange for the reinsurer assuming a portion of our liabilities under the policies we issued and collect expense allowances in return for our administration of the ceded policies. Use of reinsurance does not discharge our liability as the ceding company because we remain directly liable to our policyholders and are required to pay the full amount of our policy obligations in the event that our reinsurers fail to satisfy their obligations. We collect reimbursement from our reinsurers when we pay claims on policies that are reinsured.
We monitor the credit risk related to the ability of our reinsurers to honor their obligations under various agreements. To minimize the risk of credit loss on such contracts, we generally diversify our exposures among many reinsurers and limit the amount of exposure to each based on financial strength ratings, which are reviewed annually. We are able to further manage risk via funds withheld arrangements.
Please refer to the section titled “Quantitative and Qualitative Disclosure about Market Risk” in this Information Statement for further discussion on credit risk and counterparty risk.
Please refer to “Risk Factors” for additional details regarding credit risk related to reinsurance agreements. A description of significant ceded reinsurance transactions appears below.
Wilton RE Transaction. Pursuant to the agreed upon terms, Wilton Re purchased through a 100% quota share reinsurance agreement certain FGL Insurance life insurance policies that are subject to redundant reserves, reported on a statutory basis, under Regulation XXX and Guideline AXXX, as well as another block of FGL Insurance’s in-force traditional, universal life and IUL insurance policies. The effects of this agreement are accounted for as
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reinsurance as the ceded policies qualify as insurance products and because the agreement satisfies the risk transfer requirements for GAAP.
Hannover Reinsurance Transaction. FGL Insurance has a reinsurance agreement with Hannover Life Reassurance Company of America (Bermuda) Ltd. (“Hannover Re”), an unaffiliated reinsurer, to reinsure an in-force block of FGL Insurance’s FIA and fixed deferred annuity contracts with GMWB and Guaranteed Minimum Death Benefit (“GMDB”) guarantees. In accordance with the terms of this agreement, we cede 70% net retention of secondary guarantee payments in excess of account value for GMWB and GMDB guarantees. The effects of this agreement are not accounted for as reinsurance as it does not satisfy the risk transfer requirements for GAAP; therefore, deposit accounting is applied.
Canada Life Transaction. Effective May 1, 2020, FGL Insurance entered into an indemnity reinsurance agreement with Canada Life Assurance Company United States Branch, a third-party reinsurer, to reinsure FIA policies with GMWB. In accordance with the terms of this agreement, FGL Insurance cedes a quota share percentage of the net retention of guarantee payments in excess of account value for GMWB. The effects of this agreement are not accounted for as reinsurance as it does not satisfy the risk transfer requirements for GAAP; therefore, deposit accounting is applied.
Kubera Reinsurance Transactions. FGL Insurance entered into a reinsurance agreement with Kubera Insurance (SAC) Ltd. (“Kubera”), an unaffiliated reinsurer, effective December 31, 2018, to cede certain MYGA and deferred annuity reserves on a coinsurance funds withheld basis, net of applicable existing reinsurance. Effective October 31, 2021, this agreement was novated from Kubera to Somerset, a certified third-party reinsurer. As the policies ceded to Somerset are investment contracts, there is no significant insurance risk present and therefore the reinsurance agreement is accounted for as a separate investment contract. The presentation of this agreement is similar to other reinsurance agreements that apply reinsurance accounting as discussed in further detail within Note L — Reinsurance to our Consolidated Financial Statements included in this Information Statement.
Aspida Re Transaction. FGL Insurance has a reinsurance agreement with Aspida Re, an unaffiliated reinsurer, to cede certain MYGA business, on a funds withheld coinsurance basis, net of applicable existing reinsurance. As the policies ceded to Aspida Re are investment contracts, there is no significant insurance risk present and therefore the reinsurance agreement is accounted for as a separate investment contract. The presentation of this agreement is similar to other reinsurance agreements that apply reinsurance accounting as discussed in further detail within Note L — Reinsurance to our Consolidated Financial Statements included in this Information Statement.
The CARVM Facility. Life insurance companies operating in the United States must calculate required reserves for life and annuity policies based on statutory principles. The insurance divisions have adopted the methodology contained in the NAIC Valuation Manual (“VM”) as the prescribed methodology for the insurance industry. The industry has reduced or eliminated redundancies thereby increasing capital using a variety of techniques including reserve facilities.
FGL Insurance has a reinsurance treaty with Raven Reinsurance Company (“Raven Re”), its wholly owned captive reinsurance company, to cede the Commissioners Annuity Reserve Valuation Method (“CARVM”) liability for annuity benefits where surrender charges are waived. In connection with the CARVM reinsurance agreement (the “CARVM Treaty”), FGL Insurance and Raven Re entered into an agreement with Nomura Bank International plc (“NBI”) to establish a reserve financing facility in the form of a letter of credit issued by NBI. The financing facility has $50 million available to draw on as of June 30, 2022. The facility may terminate earlier than the current termination date of October 1, 2022, in accordance with the terms of the reimbursement agreement. Under the terms of the reimbursement agreement, in the event the letter of credit is drawn upon, Raven Re is required to repay the amounts utilized, and Fidelity & Guaranty Life Holdings, Inc. (“FGLH”) is obligated to repay the amounts utilized if Raven Re fails to make the required reimbursement. FGLH also is required to make capital contributions to Raven Re in the event that Raven Re’s statutory capital and surplus falls below certain defined levels. As of June 30, 2022, December 31, 2021 and December 31, 2020, Raven Re’s statutory capital and surplus was $26 million, $62 million and $29 million, respectively, in excess of the minimum level required under the reimbursement agreement. As this letter of credit is provided by an unaffiliated financial institution, Raven Re is permitted to carry the letter of credit as an admitted asset on the Raven Re statutory balance sheet.
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Our Retail Distribution Channels
We distribute our annuity and life insurance products through three main retail channels of distribution: independent agents, banks, and broker dealers.
In our independent agent channel, the sale of our products typically occurs as part of a four party, three stage sales process between FGL Insurance, an IMO, the agent and the customer. FGL Insurance designs, manufactures, issues, and services the product. The IMOs will typically sign contracts with multiple insurance carriers to provide their agents with a broad and competitive product portfolio. The IMO provides training and discusses product options with agents in preparation for meetings with clients. The IMO staff also provide assistance to the agent during the selling and application process. The agent may get customer leads from the IMOs. The agent conducts a fact finding and presents suitable product choices to the customers. We monitor the business issued by each distribution partner for pricing metrics, mortality, persistency, as well as market conduct and suitability.
We offer our products through a network of approximately 270 IMOs, representing approximately 64,000 agents. We believe that our relationships with these IMOs are strong. The average tenure of the Power Partners is approximately 18 years. We identify Power Partners as those who have demonstrated the ability to generate significant production for our business. We currently have 26 Power Partners, comprised of 16 annuity IMOs and 10 life insurance IMOs.
We took a similar approach in launching products as a new entrant into the bank and broker dealer channels by partnering with one of the largest broker dealers in the industry. In 2020, F&G launched a set of fixed rate annuity and FIA products to banks and broker dealers, and gained selling agreements with some of the largest banks and broker dealers in the United States. We offer our products through a network of approximately 17 banks and broker dealers, representing approximately 8,000 financial advisers. The financial advisers at our bank and broker dealer partners are able to offer their clients guaranteed rates of return, protected growth, and income for life through our Secure series of annuity products. We employ a hybrid distribution model in this channel, whereby some financial institutions partner directly with F&G and our sales team, and others work with an intermediary. As such, we partner with a select number of financial institution intermediaries who have expertise in the channel and maintain the appropriate field wholesaling forces to be successful in this channel. In 2021, the top 5 firms represented 98% of channel sales. The first full year of sales in banks and broker dealers represented almost 29% of annuity sales in a year that marked record sales for F&G. Bank and broker dealers represented 41% of annuity sales for the six month period ended June 30, 2022.
The top five states for the distribution of F&G’s retail products in the six months ended June 30, 2022 were Florida, California, Texas, New Jersey and Pennsylvania, which together accounted for 38% of F&G’s retail sales.
Our Investment Management Governance and Approach
We embrace a long-term conservative investment philosophy, investing nearly all the insurance premiums we receive in a wide range of high-quality debt securities. Our investment strategy is designed to (i) preserve capital, (ii) provide consistent yield and investment income, and (iii) achieve attractive absolute returns. We base all of our decisions on fundamental, bottom-up research, coupled with a top-down view that respects the cyclicality of certain asset classes. The types of assets in which we may invest are influenced by various state laws, which prescribe qualified investment assets applicable to insurance companies.
FGL Insurance and certain other subsidiaries of F&G (other than FGL NY Insurance) are party to IMAs with BIS pursuant to which BIS is appointed as investment manager of the F&G Accounts. There are no specified minimum amounts of assets that we have agreed that BIS will manage; however, BIS has the right to manage (and receive fees based on) all assets in the F&G Accounts with limited exceptions. For certain asset classes, we continue to utilize specialized third-party investment managers. As of December 31, 2021, approximately 93% of our $37 billion investment portfolio was managed by BIS, with 6% managed by other third parties, and the remaining 1% internally managed. BIS, in accordance with our IMAs, has delegated certain investment services to its affiliates, including Blackstone’s Credit, Real Estate Debt and Asset-Based Finance businesses, in each case, pursuant to separate sub-management agreements executed between BIS and each such affiliate.
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The management fees payable to BIS under the IMAs are calculated based on the aggregate assets under management in the F&G Accounts, such that that BIS’s per annum management fee is based upon:
•for aggregate assets under management in the F&G Accounts up to $25 billion, 0.26% of such aggregate assets under management;
•for aggregate assets under management in the F&G Accounts above $25 billion and up to $34 billion, a rate equal to (x) the sum of $25 billion multiplied by 0.26% and the excess over $25 billion multiplied by 0.24% divided by (y) total aggregate assets under management; and
•for aggregate assets under management in the F&G Accounts above $34 billion, a rate equal to (x) the sum of $25 billion multiplied by 0.26%, $9 billion multiplied by 0.24%, 80% of the aggregate assets under management above $34 billion multiplied by 0.12% and 20% of the aggregate assets under management above $34 billion multiplied by 0.24% divided by (y) total aggregate assets under management; provided, that in the event BIS and MVB Management amend their participation fee agreement in the future to reduce the fee payable for assets under management in the F&G Accounts over $34 billion by 50%, BIS’s per annum management fee for assets under management in the F&G Accounts over $34 billion will be reduced such that all aggregate assets under management above $34 billion will be multiplied by 0.12%.
Aggregate fees paid to BIS were $132 million for the year ended December 31, 2021, $62 million for the seven month period between June 1, 2020 and ended December 31, 2020, $39 million for the five months ended May 31, 2020 (or $101 million for the year ended December 31, 2020), and $86 million for the year ended December 31, 2019. In the third quarter of 2021, we negotiated a reduction in the fee rates charged by BIS for AUM in the F&G Accounts in excess of $34 billion (which prior to such amendment would have been charged at a fee rate of 0.22% or 0.20%).
F&G has a robust governance process and framework to manage the investment portfolio. While BIS is primarily responsible for security selection, F&G makes all investment strategy decisions and sets risk parameters. All major decisions need to be reviewed and approved by the F&G Investment Committee, and new investment asset classes go through an internal risk assessment process ‘RAP’ at F&G to ensure the investments are suitable for an insurance company balance sheet. We define risk tolerance across a wide range of factors, including credit risk, liquidity risk, concentration (issuer and sector) risk, and caps on specific asset classes, which in turn establish conservative risk thresholds.
F&G and BIS undertook a substantial investment portfolio reposition to improve the credit quality and asset-liability duration match of the portfolio, as well as to add diversification, by reducing exposure to BBB rated corporates and adding higher quality structured credit, specialty finance assets, commercial & residential mortgage loans, and alternative investments. This was completed in 2018, and the result was a meaningful yield pick-up along with improved credit quality which was accomplished by taking advantage of illiquidity and structural complexity premiums, and not by increasing credit risk in the portfolio. Since then several de-risking programs have been undertaken to take advantage of the extended credit cycle and favorable market conditions or to undertake prudent risk management in anticipation of an unfavorable economic environment. We have also added several new asset classes to the investment portfolio to further enhance diversification.
Each of our subsidiaries that is party to an investment management agreement with BIS may terminate such agreement upon 30 days’ notice. BIS may also terminate any investment management agreement upon 30 days’ notice. However, F&G and FNF are party to an omnibus termination side letter under which they are required to cause our insurance subsidiaries to engage BIS as an investment manager and to generally not engage any other person as an investment manager. See also “Risk Factors—Risks Relating to Our Business—We rely on our investment management or advisory agreements with BIS and other investment managers and sub-managers for the management of portions of certain of our life insurance companies’ investment portfolios.”
The initial term of the side letter expires in 2027 and will automatically renew for successive one-year terms unless F&G terminates the side letter. Prior to June 1, 2027, we and FNF may only terminate the side letter for cause. Cause is generally limited to circumstances where BIS is legally unable to manage our assets, if BIS fails to offer us “most favored nations” rights with respect to certain products it may issue to third parties, or where BIS has
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acted with gross negligence, willful misconduct or reckless disregard of its obligations under the investment management agreements. In addition, at the expiration of the initial term of the side letter in 2027, or at the end of any renewal term, we may with prior notice terminate the side letter for (i) unsatisfactory long term performance by BIS that is materially detrimental to one of our subsidiaries or (ii) unfair and excessive fees charged by BIS compared to those that would be charged by a comparable asset manager (taking into account the experience, education and qualification of BIS’s personnel, the scale and scope of the services being provided by BIS, and the composition of the managed investment portfolio and comparable investment guidelines). If we provide any such notice, the termination would not become effective for two years from the date of termination given in the notice, during which time BIS may seek to cure the events giving arise to the termination notice.
Because our subsidiaries can terminate an investment management agreement at any time upon 30 days' notice, it is possible that such a termination by one of our subsidiaries could cause us to be in breach of our obligations under the side letter. BIS’s contractual remedies under the side letter include specific performance and the right to seek damages including, in the event of a non-permitted termination of an investment management agreement by one of our subsidiaries, as compensation for the costs incurred in performing services under, and the failure to receive the benefits reasonably anticipated by, an IMA, the full amount of damages available at law in the same manner and to the same extent as if such IMA had been terminated by us our at our direction in violation of the terms of the side letter.
Our investment portfolio consists of high-quality fixed maturities, including publicly issued and privately issued corporate bonds, municipal and other government bonds, ABS, residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), commercial mortgage loans (“CMLs”), residential mortgage loans (“RMLs”), limited partnership investments, and other investments. We also maintain holdings in floating rate, and less rate-sensitive investments, including senior tranches of CLOs, non-agency RMBS, and various types of ABS. It is our expectation that our investment portfolio will broaden in scope and diversity to include other asset classes held by life and annuity insurance writers. We also have a small amount of equity holdings required as part of our funding arrangements with the FHLB.
The portfolio also has exposure to U.S. dollar denominated emerging market bonds, highly rated preferred stocks and hybrids, and structured securities including ABS. We currently maintain:
•a well-matched asset/liability profile (asset duration, including cash and cash equivalents, of 5.4 years vs. liability duration of 5.7 years); and
•an exposure to less rate-sensitive assets of 29% of invested assets as of June 30, 2022.
Please refer to Note E — Investments in the Consolidated Financial Statements, Note C — Investments in the unaudited Condensed Consolidated Financial Statements, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Adjusted Net Earnings” in this Information Statement for additional information about our investment portfolio.
Mature Risk Management Framework and Governance
Risk management is a critical part of our business to manage our financial strength and meet or exceed regulatory requirements. We seek to assess risk to our business through a comprehensive, formal process involving:
a.identifying short-term and long-term strategic and operational objectives;
b.development of risk appetite statements that establish what the Company is willing to accept in terms of risks to achieving its goals and objectives;
c.identifying the levers that control the risk appetite of the Company;
d.establishing the overall limits of risk acceptable for a given risk driver;
e.establishing operational risk limits that are aligned with the tolerances;
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f.assigning risk limit quantification and mitigation responsibilities to individual team members within functional groups;
g.analyzing the potential qualitative and quantitative impact of individual risks, including but not limited to stress and scenario testing covering over eight economic and insurance related risks;
h.mitigating risks by appropriate actions; and
i.identifying, documenting and communicating key business risks in a timely fashion.
Our most significant risks are governed through holding company governance committees and overall by the enterprise risk management committee. Our most significant risks such as credit risk, liquidity risk, and policyholder behavior associated with interest rate risk have established risk limits associated with our risk appetite statements. These include investment limits by asset class, ratings and issuer. Liquidity risk is managed through frequent forecasting of sources and uses of cash and managed to our Liquidity Policy. Asset liability management procedures and limits protect the Company, within limits, against significant changes in interest rates. In addition, the risks are stressed as part of our scenario testing process to identify areas requiring mitigation plans based on the macroeconomic environment. Risk limits, risk appetite and scenario testing results of the stresses are discussed with stakeholders such as the F&G ERM Committee, the Board of Directors of F&G, regulators and rating agencies.
The responsibility for monitoring, evaluating and responding to risk embedded across the organization: first assigned to our management and employees, second to those occupying specialist functions, such as legal compliance and risk teams, and third to those occupying supervisory functions, such as internal audit and the board of directors.
Operations/Outsourcing
We believe we have designed an efficient corporate platform which enables us to be highly scalable with volume over time, and allows us to onboard incremental business with low incremental fixed operating cost. As a result, we believe we should be able to convert a significant portion of incremental net investment income from additional invested assets and liabilities into operating income.
We outsource the following functions to third-party service providers:
•new business administration (data entry and policy issue only);
•service of existing policies;
•underwriting administration of life insurance applications;
•life reinsurance administration;
•call centers;
•information technology development and maintenance;
•investment accounting and custody; and
•co-located data centers and hosting of financial systems.
We closely manage our outsourcing partners and integrate their services into our operations. We believe that outsourcing such functions allows us to focus capital and our employees on our core business operations and perform differentiating functions, such as finance, actuarial, product development and risk management functions. In addition, we believe an outsourcing model provides predictable pricing, service levels and volume capabilities and allows us to benefit from technological developments that enhance our customer self-service and sales processes. We believe that we have a good relationship with our principal outsource service providers.
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Our Financial Strength/Ratings
Our access to funding and our related cost of borrowing, the attractiveness of certain of our products to customers and requirements for derivatives collateral posting are affected by our credit ratings and insurance financial strength ratings, which are periodically reviewed by the rating agencies. Financial strength ratings and credit ratings are important factors affecting public confidence in an insurer and its competitive position in marketing products.
As of the date of this Information Statement, A.M. Best, Fitch, Moody’s, and S&P had issued credit ratings, financial strength ratings and/or outlook statements regarding us, as listed below. Credit ratings represent the opinions of rating agencies regarding an entity’s ability to repay its indebtedness. Financial strength ratings represent the opinions of rating agencies regarding the ability of an insurance company to meet its financial obligations under an insurance policy and generally involve quantitative and qualitative evaluations by rating agencies of a company’s financial condition and operating performance. Generally, rating agencies base their financial strength ratings upon information furnished to them by the insurer and upon their own investigations, studies and assumptions. Financial strength ratings are based upon factors of concern to policyholders, agents and intermediaries and are not directed toward the protection of investors. Credit and financial strength ratings are not recommendations to buy, sell or hold securities and they may be revised or revoked at any time at the sole discretion of the rating organization.
In addition to the financial strength ratings, rating agencies use an “outlook statement” to indicate a medium- or long-term trend that, if continued, may lead to a rating change. A positive outlook indicates a rating may be raised and a negative outlook indicates a rating may be lowered. A stable outlook is assigned when ratings are not likely to be changed. A developing outlook is assigned when a rating may be raised, lowered, or affirmed. Outlooks should not be confused with expected stability of the issuer’s financial or economic performance. A rating may have a “stable” outlook to indicate that the rating is not expected to change, but a “stable” outlook does not preclude a rating agency from changing a rating at any time without notice.
The rating organizations may take various actions, positive or negative. Such actions are beyond our control and we cannot predict what these actions may be and the timing thereof.
A.M. BestS&PFitchMoody’s
Holding Company Ratings
F&G Annuities & Life, Inc.
Issuer Credit / Default RatingNot RatedBBB-BBBBa2
OutlookStableStablePositive
CF Bermuda Holdings Limited
Issuer Credit / Default RatingNot RatedBBB-BBBBa1
OutlookStableStablePositive
Fidelity & Guaranty Life Holdings, Inc.
Issuer Credit / Default Ratingbbb-BBB-BBBNot Rated
OutlookStableStableStable
Senior Unsecured Notesbbb-BBBBBBBaa2
OutlookStableStable
Operating Subsidiary Ratings
Fidelity & Guaranty Life Insurance Company
Financial Strength RatingA-A-A-Baa1
OutlookStableStableStablePositive
Fidelity & Guaranty Life Insurance Company of New York
Financial Strength RatingA-A-A-Not Rated
OutlookStableStableStable
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F&G Life Re Ltd
Financial Strength RatingNot RatedA-A-Baa1
OutlookStableStablePositive
F&G Cayman Re Ltd
Financial Strength RatingNot RatedNot RatedA-Not Rated
OutlookStable
A.M. Best, S&P, Fitch and Moody’s review their ratings of insurance companies from time to time. There can be no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if, in their judgment, circumstances so warrant. While the degree to which ratings adjustments will affect sales and persistency is unknown, we believe if our ratings were to be negatively adjusted for any reason, we could experience a material decline in the sales of our products and the persistency of our existing business. See “Risk Factors” in this Information Statement.
Potential Impact of a Ratings Downgrade. We are required to maintain minimum ratings as a matter of routine practice as part of our over-the-counter derivatives agreements on ISDA forms. Under some ISDA agreements, we have agreed to maintain certain financial strength ratings. Please refer to Note F — Derivative Financial Instruments to the Consolidated Financial Statements and Note D — Derivative Financial Instruments to the unaudited Condensed Consolidated Financial Statements included in this Information Statement for disclosure around our requirement to maintain minimum ratings.
If the insurance subsidiaries held net short positions against a counterparty, and the subsidiaries’ financial strength ratings were below the levels required in the ISDA agreement with the counterparty, the counterparty would demand immediate further collateralization, which could negatively impact overall liquidity. Based on the fair value of our derivatives as of June 30, 2022, we hold no net short positions against a counterparty; therefore, there is currently no potential exposure for us to post collateral.
A downgrade of the financial strength rating of one of our principal insurance subsidiaries could affect our competitive position in the insurance industry and make it more difficult for us to market our products, as potential customers may select companies with higher financial strength ratings. A downgrade of the financial strength rating could also impact our borrowing costs.
Our Approach to Environmental, Social, and Governance
F&G’s solutions inherently provide a social good, and that sentiment of service also provides the foundation for F&G’s culture and guides business operations as well as interactions within our communities.
Being Environmentally Conscious: F&G aims to reduce the Company’s environmental footprint through a variety of sustainable and environmentally sound programs throughout its new headquarters building in Des Moines, Iowa. This includes:
•Sensors on restroom equipment to limit excess water flow
•Recycling bins at each workspace
•Installation of motion sensors to reduce electricity use
•Flexible work from home arrangements which reduce commute time and paper usage
Being the Best Place to Work: F&G is committed to providing employees with the opportunities and flexibility they need to succeed, as well as ensuring a culture of belonging and inclusion by:
•Providing competitive benefits offerings to meet diverse employee needs including more flexible PTO and a wellness reimbursement
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•Supporting employee growth through learning programs, tuition reimbursement, and manager and leadership training
•Increasing the percentage of women and people of color in leadership roles; F&G’s executive team is now comprised of 40% female leadership
•Driving diversity and inclusion in the workplace and beyond through partnerships including:
◦The International Association of Black Actuaries and The Organization of Latino Actuaries where F&G employees are members and serve as a network for potential new hires
◦Women Lead Change, an organization dedicated to the development, advancement and promotion of women, their organizations, and impact to the economy and future workforce
◦Capitol City Pride, brings together members of Iowa’s LGBTQ+ community, allies and businesses and honored F&G as the 2021 Corporate Partner of the Year
•Enabling our employee-led Diversity, Equity and Inclusion (“DEI”) Committee’s work in creating awareness and support around important topics such as mental health awareness
•Ranking as a Top Workplaces company for 4 consecutive years according to the 2021 Des Moines Register Top Workplace Survey
Being a Responsible & Award-Winning Community Partner: F&G believes people are not in a position to turn their aspirations into reality if their most essential needs are not satisfied. Therefore, F&G focuses its community engagement and charitable giving to support essential needs such as food insecurity and housing. In 2021 and 2020, F&G won awards from the United Way for its corporate support and employee involvement. Other community investments include:
•Serving as founding partner of the American Council of Life Insurers’ Impact Investments Initiative to make housing affordable and sustainable in underserved communities
•Fostering partnerships in the Des Moines community with the Iowa Food Bank and Polk County Housing Trust
•Offering company-wide volunteer events for employees to make an impact locally with organizations such as Rebuilding Together
•Providing employees with 16 hours of paid time off per year for volunteering
•Supporting dozens of other community organizations identified by F&G employees in support of essential needs within the community where they live and work
Legal Proceedings
In the ordinary course of business, we are involved in various pending and threatened litigation matters related to our operations, some of which include claims for punitive or exemplary damages. Like other companies, our ordinary course litigation includes a number of class action and purported class action lawsuits, which make allegations related to aspects of our operations. We believe that no actions, other than the matters discussed below, if any, depart from customary litigation incidental to our business.
We review lawsuits and other legal and regulatory matters (collectively “legal proceedings”) on an ongoing basis when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, management bases its decision on its assessment of the ultimate outcome assuming all appeals have been exhausted. For legal proceedings in which it has been determined that a loss is both probable and reasonably estimable, a liability based on known facts and which represents our best estimate has been recorded. None of the amounts we have currently recorded are considered to be material to our financial condition individually or in the aggregate. Actual losses may materially differ from the amounts recorded and the ultimate outcome of our pending legal
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proceedings is generally not yet determinable. While some of these matters could be material to our operating results or cash flows for any particular period if an unfavorable outcome results, at present we do not believe that the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on our financial condition.
On August 17, 2020, a lawsuit styled, In the Matter of FGL Holdings, was filed in the Grand Court of the Cayman Islands where dissenting shareholders, Kingfishers LP, Kingstown 1740 Fund LP, Kingstown Partners II LP, Kingstown Partners Master Ltd., and Ktown LP, have asserted statutory appraisal rights relative to their ownership of 12,000,000 shares of F&G stock in connection with the acquisition. They seek a judicial determination of the fair value of their shares of F&G stock under the law of the Cayman Islands, together with interest. On September 5, 2022 the Grand Court of the Cayman Islands decided in favor of F&G. Kingstown Capital Management LP failed to appeal, and its appeal period expired on October 20, 2022. We do not believe the result in this case will have a material adverse effect on our financial condition.
From time to time we receive inquiries and requests for information from state insurance departments, attorneys general and other regulatory agencies about various matters relating to our business. Sometimes these take the form of civil investigative demands or subpoenas. We cooperate with all such inquiries and we have responded to or are currently responding to inquiries from multiple governmental agencies. Various governmental entities are studying insurance products, market, pricing, and business practices, and potential regulatory and legislative changes, which may materially affect our business and operations. From time to time, we are assessed fines for violations of regulations or other matters or enter into settlements with such authorities, which may require us to pay fines or claims or take other actions. We do not anticipate such fines and settlements, either individually or in the aggregate, will have a material adverse effect on our financial condition.
Properties
In December 2019, we entered into a lease for a new headquarters located at 801 Grand Avenue, Des Moines, Iowa, commencing June 1, 2021. That lease expires on January 1, 2031. In March 2022, we entered into a lease for space in New York, New York. That lease expires on September 30, 2025. We believe our existing facilities are suitable and adequate for our present purposes. We believe that our Des Moines, Iowa, and New York, New York, properties will be sufficient for us to conduct our operations.
Available Information
Our web address is www.fglife.com. Our electronic filings with the SEC (including all Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and if applicable, amendments to those reports) will be available free of charge on the website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information posted on our website is not incorporated into this document.
The SEC maintains a website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that site is www.sec.gov.
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REGULATION OF F&G
U.S. Regulatory Overview
FGL Insurance, FGL NY Insurance and Raven Re are subject to comprehensive regulation and supervision in their domiciles, Iowa, New York and Vermont, respectively, and in each state in which they do business. FGL Insurance does business throughout the United States and Puerto Rico, except for New York. FGL NY Insurance only does business in New York. Raven Re is a special purpose captive reinsurance company that only provides reinsurance to FGL Insurance under the CARVM Treaty. FGL Insurance’s principal insurance regulatory authority is the IID; however, state insurance departments throughout the United States also monitor FGL Insurance’s insurance operations as a licensed insurer. The NYDFS regulates the operations of FGL NY Insurance. The purpose of these regulations is primarily to protect insurers’ policyholders and beneficiaries and not their general creditors and shareholders of those insurers or of their holding companies. Many of the laws and regulations to which FGL Insurance and FGL NY Insurance are subject are regularly re-examined and existing or future laws and regulations may become more restrictive or otherwise adversely affect their operations.
Generally, insurance products underwritten by, and rates used by, FGL Insurance and FGL NY Insurance must be approved by the insurance regulators in each state or territory in which they are sold. In addition, insurance products may also be subject to ERISA.
State insurance authorities have broad administrative powers over FGL Insurance and FGL NY Insurance with respect to all aspects of the insurance business, including:
•licensing to transact business;
•licensing agents;
•prescribing which assets and liabilities are to be considered in determining statutory surplus;
•regulating premium rates for certain insurance products;
•approving policy forms and certain related materials;
•requiring insurers and agents to act in the best interests of consumers when making recommendations to purchase annuities, or to determine whether a reasonable basis exists as to the suitability of such investments for consumers;
•regulating unfair trade and claims practices;
•establishing reserve requirements and solvency standards;
•regulating the amount of dividends that may be paid in any year by insurance companies;
•regulating the availability of reinsurance or other substitute financing solutions, the terms thereof and the ability of an insurer to take credit on its financial statements for insurance ceded to reinsurers or other substitute financing solutions;
•fixing maximum interest rates on life insurance policy loans and minimum accumulation or surrender values; and
•regulating the type, amounts, and valuations of investments permitted, transactions with affiliates and other matters.
Financial Regulation
State insurance laws and regulations require FGL Insurance, FGL NY Insurance and Raven Re to file reports, including financial statements, with state insurance departments in each state in which they do business, and their operations and accounts are subject to examination by those departments at any time. FGL Insurance, FGL NY
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Insurance and Raven Re prepare statutory financial statements in accordance with accounting practices and procedures prescribed or permitted by these departments.
The NAIC has approved a series of statutory accounting principles and various model regulations that have been adopted, in some cases with certain modifications, by all state insurance departments. These statutory principles are subject to ongoing change and modification. Moreover, compliance with any particular regulator’s interpretation of a legal or accounting issue may not result in compliance with another regulator’s interpretation of the same issue, particularly when compliance is judged in hindsight. Any particular regulator’s interpretation of a legal or accounting issue may change over time to FGL Insurance’s, FGL NY Insurance’s and Raven Re’s detriment, or changes to the overall legal or market environment, even absent any change of interpretation by a particular regulator, may cause FGL Insurance, FGL NY Insurance and Raven Re to change their views regarding the actions they need to take from a legal risk management perspective, which could necessitate changes to FGL Insurance’s, FGL NY Insurance’s or and Raven Re’s practices that may, in some cases, limit their ability to grow and improve profitability.
State insurance departments conduct periodic examinations of the books and records, financial reporting, policy and rate filings, market conduct and business practices of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC. State insurance departments also have the authority to conduct examinations of non-domiciliary insurers that are licensed in their states.
Dividend and Other Distribution Payment Limitations
The insurance laws of Iowa and New York regulate the amount of dividends that may be paid in any year by FGL Insurance and FGL NY Insurance, respectively.
Pursuant to Iowa insurance law, ordinary dividends are payments, together with all other such payments within the preceding twelve months, that do not exceed the greater of (i) 10% of FGL Insurance’s statutory surplus as regards policyholders as of December 31 of the preceding year; or (ii) the net gain from operations of FGL Insurance (excluding realized capital gains) for the 12-month period ending December 31 of the preceding year.
Dividends in excess of FGL Insurance’s ordinary dividend capacity are referred to as extraordinary and require prior approval of the Iowa Insurance Commissioner. In deciding whether to approve a request to pay an extraordinary dividend, Iowa insurance law requires the Iowa Insurance Commissioner to consider the effect of the dividend payment on FGL Insurance’s surplus and financial condition generally and whether the payment of the dividend will cause FGL Insurance to fail to meet its required U.S. RBC ratio. FGL Insurance may only pay dividends out of statutory earned surplus.
In 2021, FGL Insurance paid extraordinary dividends to FGLH of $38 million. FGL Insurance’s maximum ordinary dividend capacity for 2022 is $0.
Any payment of dividends by FGL Insurance is subject to the regulatory restrictions described above and the approval of such payment by the board of directors of FGL Insurance, which must consider various factors, including general economic and business conditions, tax considerations, FGL Insurance’s strategic plans, financial results and condition, FGL Insurance’s expansion plans, any contractual, legal or regulatory restrictions on the payment of dividends and its effect on RBC and such other factors the board of directors of FGL Insurance considers relevant. For example, payments of dividends could reduce FGL Insurance’s RBC and financial condition and lead to a reduction in FGL Insurance’s financial strength rating. See "Risk Factors—Risks Relating to Our Business—A financial strength ratings downgrade, potential downgrade, or any other negative action by a rating agency could increase our cost of capital, making it challenging to grow our business, and could hinder our ability to participate in certain market segments, thereby adversely affecting our results of operations and our financial condition” in this Information Statement.
Each year, FGL NY Insurance may pay a certain limited amount of ordinary dividends or other distributions as calculated under New York insurance laws without being required to obtain the prior consent of the NYDFS.
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However, to pay any dividends or distributions (including the payment of any dividends or distributions for which prior consent is not required), FGL NY Insurance must provide advance written notice to the NYDFS.
FGL NY Insurance has historically not paid dividends.
Surplus and Capital
FGL Insurance and FGL NY Insurance are subject to the supervision of the regulators in states where they are licensed to transact business. Regulators have discretionary authority in connection with the continued licensing of these entities to limit or prohibit sales to policyholders if, in their judgment, the regulators determine that such entities have not maintained the minimum surplus or capital or that the further transaction of business would be hazardous to policyholders.
Risk-Based Capital
In order to enhance the regulation of insurers’ solvency, the NAIC adopted a model law to implement RBC requirements for life, health and property and casualty insurance companies. All states have adopted the NAIC’s model law or a substantially similar law. RBC is used to evaluate the adequacy of capital and surplus maintained by an insurance company in relation to risks associated with: (i) asset risk, (ii) insurance risk, (iii) interest rate risk, and (iv) business risk. In general, RBC is calculated by applying factors to various asset, premium and reserve items, taking into account the risk characteristics of the insurer. Within a given risk category, these factors are higher for those items with greater underlying risk and lower for items with lower underlying risk. The RBC formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. Insurers that have less statutory capital than the RBC calculation requires are considered to have inadequate capital and are subject to varying degrees of regulatory action depending upon the level of capital inadequacy. As of the most recent annual statutory financial statements filed with insurance regulators, the RBC ratios for FGL Insurance and FGL NY Insurance each exceeded the minimum RBC requirements.
It is desirable to maintain an RBC ratio in excess of the minimum requirements in order to maintain or improve financial strength ratings. We ended 2021 with an estimated RBC ratio above our 400% target for FGL Insurance. See “Risk Factors — Risks Relating to Our Business — A financial strength ratings downgrade, potential downgrade, or any other negative action by a rating agency could increase our cost of capital, making it challenging to grow our business, and could hinder our ability to participate in certain market segments, thereby adversely affecting our results of operations and our financial condition” in this Information Statement.
See “—Bermuda Regulatory Overview — ECR and Bermuda Solvency Capital Requirements” for a discussion of Bermuda regulatory requirements that impact F&G Life Re.
Insurance Regulatory Information System Tests
The NAIC has developed a set of financial relationships or tests known as the Insurance Regulatory Information System ("IRIS") to assist state regulators in monitoring the financial condition of U.S. insurance companies and identifying companies that require special attention or action by insurance regulatory authorities. A ratio falling outside the prescribed “usual range” is not considered a failing result. Rather, unusual values are viewed as part of the regulatory early monitoring system. In many cases, it is not unusual for financially sound companies to have one or more ratios that fall outside the usual range. Insurance companies generally submit data annually to the NAIC, which in turn analyzes the data using prescribed financial data ratios, each with defined “usual ranges”. Generally, regulators will begin to investigate or monitor an insurance company if its ratios fall outside the usual ranges for four or more of the ratios. IRIS consists of a statistical phase and an analytical phase whereby financial examiners review insurers’ annual statements and financial ratios. The statistical phase consists of 12 key financial ratios based on year-end data that are generated from the NAIC database annually; each ratio has a “usual range” of results.
As of December 31, 2021, FGL Insurance, FGL NY Insurance and Raven Re had two, three and two ratios outside the usual range, respectively. The IRIS ratios for total affiliated investments to capital and surplus and change in premium for FGL Insurance were outside the usual range. The IRIS ratios for change in premium, change
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in product mix, and change in reserving ratio for FGL NY Insurance were outside the usual range. The IRIS ratios for change in premium and adequacy of investment income for Raven Re were outside the usual range.
In all instances in prior years, regulators have been satisfied upon follow-up that no regulatory action was required. FGL Insurance, FGL NY Insurance and Raven Re are not currently subject to regulatory restrictions based on these ratios.
Group Capital Calculation
The NAIC developed a group capital calculation tool using an RBC methodology for all entities within the insurance holding company system, including non-U.S. entities. In December 2020, the NAIC adopted the Group Capital Calculation Template and Instructions, as well as amendments to the Model Holding Company Act and Regulation. The amendments implement the annual filing requirement for the group capital calculation but will not become effective until adopted by state legislatures or regulatory agencies. Legislation was introduced in New York in May 2022 that would require a group capital calculation.
Insurance Reserves
State insurance laws require insurers to analyze the adequacy of reserves. Following the implementation of principle-based reserving for life insurance products, the NAIC is now developing a principle-based reserving framework for fixed annuity products. The respective appointed actuaries for FGL Insurance, FGL NY Insurance and Raven Re must each submit an opinion on an annual basis that their respective reserves, when considered in light of the respective assets FGL Insurance, FGL NY Insurance and Raven Re hold with respect to those reserves, make adequate provision for the contractual obligations and related expenses of FGL Insurance, FGL NY Insurance and Raven Re. FGL Insurance, FGL NY Insurance and Raven Re have filed all of the required opinions with the insurance departments in the states in which they do business.
Credit for Reinsurance Regulation
States regulate the extent to which insurers are permitted to take credit on their financial statements for the financial obligations that the insurers cede to reinsurers. Where an insurer cedes obligations to a reinsurer that is neither licensed nor accredited by the state insurance department, the ceding insurer is not permitted to take such financial statement credit unless the unlicensed or unaccredited reinsurer secures the liabilities it will owe under the reinsurance contract.
Under the laws regulating credit for reinsurance issued by such unlicensed or unaccredited reinsurers, the permissible means of securing such liabilities are (i) the establishment of a trust account by the reinsurer to hold certain qualifying assets in a qualified U.S. financial institution, such as a member of the Federal Reserve, with the ceding insurer as the exclusive beneficiary of such trust account with the unconditional right to demand, without notice to the reinsurer, that the trustee pay over to it the assets in the trust account equal to the liabilities owed by the reinsurer; (ii) the posting of an unconditional and irrevocable letter of credit by a qualified U.S. financial institution in favor of the ceding company allowing the ceding company to draw upon the letter of credit up to the amount of the unpaid liabilities of the reinsurer and (iii) a “funds withheld” arrangement by which the ceding company withholds transfer to the reinsurer of the assets, which support the liabilities to be owed by the reinsurer, with the ceding insurer retaining title to and exclusive control over such assets.
In addition, all U.S. states, including Iowa and New York, permit an insurer to take credit for reinsurance ceded to a non-U.S. reinsurer that posts collateral in amounts less than 100% of the reinsurer’s obligations if the reinsurer has been designated as a “certified reinsurer” and is domiciled in a country recognized by the state and the NAIC as a “Qualified Jurisdiction.” The reduced percentage of full collateral applied to a certified reinsurer is based upon an assessment of the reinsurer and its financial ratings. Iowa and New York both also recognize certain qualified non-U.S. insurers as reciprocal jurisdiction reinsurers such that ceding domestic insurers may receive credit for reinsurance ceded to such unauthorized reinsurers without the requirement for the reinsurer to provide collateral.
FGL Insurance and FGL NY Insurance are subject to the credit for reinsurance rules described above in Iowa and New York, respectively, insofar as they enter into any reinsurance contracts with reinsurers that are neither
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licensed, accredited nor certified in Iowa and New York, respectively, or recognized as a reciprocal reinsurer in such jurisdictions.
Insurance Holding Company Regulation
F&G, as the indirect parent company of FGL Insurance and FGL NY Insurance, is subject to the insurance holding company laws in Iowa and New York. These laws generally require each insurance company directly or indirectly owned by the holding company to register with the insurance department in the insurance company’s state of domicile and to furnish annually financial and other information about the operations of companies within the holding company system. Generally, all transactions between insurers and affiliates within the holding company system are subject to regulation and must be fair and reasonable, and may require prior notice and approval or non-disapproval by its domiciliary insurance regulator.
Most states, including Iowa and New York, have insurance laws that require regulatory approval of a direct or indirect change of control of an insurer or an insurer’s holding company. Such laws prevent any person from acquiring control, directly or indirectly, of F&G, FGL US Holdings Inc. (“FGL US Holdings”), CF Bermuda Holdings Limited (“CF Bermuda”), FGLH, FGL Insurance or FGL NY Insurance or certain of their affiliates unless that person has filed a statement with specified information with the insurance regulators and has obtained their prior approval. In addition, investors deemed to have a direct or indirect controlling interest are required to make regulatory filings and respond to regulatory inquiries. Under most states’ statutes, including those of Iowa and New York, acquiring 10% or more of the voting stock of an insurance company or its parent company is presumptively considered a change of control, although such presumption may be rebutted. In addition, the insurance laws of Iowa and New York permit a determination of control in circumstances where the thresholds for the presumption of control have not been crossed. Similar laws apply to a direct or indirect change of ownership of Raven Re. Any person who is deemed to acquire control over F&G, FNF, FGL US Holdings, CF Bermuda, FGLH, FGL Insurance, FGL NY Insurance, Raven Re or certain of their affiliates including any person who acquires 10% or more of our or FNF’s voting securities of FGL Insurance, FGL NY Insurance or certain of their affiliates, without the prior approval of the insurance regulators of Iowa and New York, will be in violation of those states’ laws and may be subject to injunctive action requiring the disposition or seizure of those securities by the relevant insurance regulator or prohibiting the voting of those securities and to other actions determined by the relevant insurance regulator.
Insurance Guaranty Association Assessments
Each state has insurance guaranty association laws under which insurers doing business in the state may be assessed by state insurance guaranty associations for certain obligations of insolvent insurance companies to policyholders and claimants. Typically, states assess each member insurer in an amount related to the member insurer’s proportionate share of the business written by all member insurers in the state. Although no prediction can be made as to the amount and timing of any future assessments under these laws, FGL Insurance and FGL NY Insurance have established reserves that they believe are adequate for assessments relating to insurance companies that are currently subject to insolvency proceedings.
Market Conduct Regulation
State insurance laws and regulations include numerous provisions governing the marketplace activities of insurers, including provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales and complaint process practices. State regulatory authorities generally enforce these provisions through periodic market conduct examinations. In addition, FGL Insurance and FGL NY Insurance must file, and in many jurisdictions and for some lines of business obtain regulatory approval for, rates and forms relating to the insurance written in the jurisdictions in which they operate. FGL Insurance is currently the subject of two ongoing market conduct examinations in various states. Market conduct examinations can result in monetary fines or remediation and generally require FGL Insurance to devote significant resources to the management of such examinations. FGL Insurance does not believe that any of the current market conduct examinations it is subject to will result in any fines or remediation orders that will be material to its business.
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Regulation of Investments
FGL Insurance, FGL NY Insurance and Raven Re are subject to state laws and regulations that require diversification of their investment portfolios and limit the amount of investments in certain asset categories, such as below investment grade fixed income securities, equity, real estate, other equity investments and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as either non-admitted assets for purposes of measuring surplus or as not qualified as an asset held for reserve purposes and, in some instances, would require divestiture or replacement of such non-qualifying investments. We believe that the investment portfolios of FGL Insurance, FGL NY Insurance, and Raven Re as of December 31, 2021, complied in all material respects with such regulations.
Privacy Regulation
Our operations are subject to certain federal and state laws and regulations that require financial institutions and other businesses to protect the security and confidentiality of personal information, including health-related and customer information, and to notify customers and other individuals about their policies and practices relating to their collection and disclosure of health-related and customer information and their practices relating to protecting the security and confidentiality of such information. These laws and regulations require notice to affected individuals, law enforcement agencies, regulators and others if there is a breach of the security of certain personal information, including social security numbers, and require holders of certain personal information to protect the security of the data. Our operations are also subject to certain federal regulations that require financial institutions and creditors to implement effective programs to detect, prevent and mitigate identity theft. In addition, our ability to make telemarketing calls and to send unsolicited email or fax messages to consumers and customers and our uses of certain personal information, including consumer report information, are regulated. Federal and state governments and regulatory bodies may be expected to consider additional or more detailed regulation regarding these subjects and the privacy and security of personal information.
The Dodd-Frank Act
The Dodd-Frank Act made sweeping changes to the regulation of financial services entities, products and markets. Certain provisions of the Dodd-Frank Act are applicable to us, our competitors or those entities with which we do business. These provisions may impact us in many ways, including, but not limited to, having an effect on the overall business climate, requiring the allocation of certain resources to government affairs, and increasing our legal and compliance related activities and the costs associated therewith.
Under the Dodd-Frank Act, annuities that meet specific requirements, including requirements relating to certain state suitability rules, are specifically exempted from being treated as securities by the SEC. We believe that the types of FIAs that FGL Insurance and FGL NY Insurance sell will meet these requirements and, therefore, are exempt from being treated as securities by the SEC and state securities regulators. However, there can be no assurance that federal or state securities laws or state insurance laws and regulations will not be amended or interpreted to impose further requirements on FIAs. If FIAs were to be treated as securities, federal and state securities laws would require additional registration and licensing of these products and the agents selling them, and FGL Insurance and FGL NY Insurance would be required to seek additional marketing relationships for these products, any of which could impose significant restrictions on its ability to conduct operations as currently operated.
ERISA and Fiduciary Standards
We may offer certain insurance and annuity products to employee benefit plans governed by ERISA and/or the Code, including group annuity contracts designated to fund tax-qualified retirement plans. ERISA and the Code provide (among other requirements) standards of conduct for employee benefit plan fiduciaries, including investment managers and investment advisers with respect to the assets of such plans, and hold fiduciaries liable if they fail to satisfy fiduciary standards of conduct.
State and federal regulators have been adopting stronger consumer protection regulations that may materially impact our company, business, distribution, and products. The NAIC adopted an amended Suitability in Annuity
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Transactions Model Regulation in February 2020 incorporating a requirement that agents act in the best interest of consumers without putting their own financial interests or insurer’s interests ahead of consumer interests. The best interest requirement is satisfied by complying with four regulatory obligations relating to care, disclosure, conflict of interest, and documentation. The amended model regulation also requires agents to provide certain disclosures to consumers, obligates insurers to supervise agent compliance with the new requirements, and prohibits sales contests or other incentives based on sales of specific annuities within a limited period of time.
Several states have adopted the revised NAIC model regulation, including FGL Insurance’s domiciliary state of Iowa. Management has instituted business procedures to comply with these revised requirements where required. FGL NY Insurance separately instituted new business procedures in response to the NYDFS best interest rule adopted in August 2019 which deviates from the NAIC model regulation and is considered more onerous in certain respects including its broader application to life insurance sales. Management is monitoring an ongoing legal challenge to nullify the NYDFS rule.
In December 2020, the DOL issued its final version of an investment advice rule replacing the previous “Fiduciary Rule” that had been challenged by industry participants and vacated in March 2018 by the United States Fifth Circuit Court of Appeals. The new investment advice rule reinstates the five-part test for determining whether a person is considered a fiduciary for purposes of ERISA and the Code and sets forth a new PTE referred to as PTE 2020-02. The rule’s preamble also contains the DOL’s reinterpretation of elements of the five-part test that appears to encompass more insurance agents selling IRA products and withdraws the agency’s longstanding position that rollover recommendations out of employer plans are not subject to ERISA. The new rule took effect on February 16, 2021.
The DOL investment advice rule leaves in place PTE 84-24, which is a longstanding class exemption providing prohibited transaction relief for insurance agents selling annuity products, provided certain disclosures are made to the plan fiduciary, which is the policyholder in the case of an IRA, and certain other conditions are met. Among other things, these disclosures include the agent’s relationship to the insurer and commissions received in connection with the annuity sale. FGL Insurance along with FGL NY Insurance, designed and launched a compliance program in January 2022 requiring all agents selling IRA products to submit an acknowledgment with each IRA application indicating the agent has satisfied PTE 84-24 requirements on a precautionary basis in case the agent acted or is found to have acted as a fiduciary. Meanwhile, the DOL has publicly announced its intention to consider future rulemaking that may revoke or modify PTE 84-24.
Management believes these current and emerging developments relating to market conduct standards for the financial services industry may over time materially affect the way in which our agents do business, the role of IMOs, sale of IRA products including IRA-to-IRA and employer plan rollovers, how the company supervises its distribution force, compensation practices, and liability exposure and costs. In addition to implementing the compliance procedures described above, management is monitoring further developments closely and will be working with IMOs and distributors to adapt to evolving regulatory requirements and risks.
Structured Securities
On December 7, 2021, the NAIC assigned to its Macroprudential Working Group, the evaluation of a list of “Regulatory Considerations Applicable (But Not Exclusive) to Private Equity (PE) Owned Insurers.” Included within this list is the consideration of material increases in privately structured securities (both by affiliated and non-affiliated asset managers), which the NAIC says introduces other sources of risk or increases traditional credit risk, such as complexity risk and illiquidity risk. The NAIC is considering proposals to increase disclosure requirements for these risks, as well as additional disclosure regarding private securities.
In addition, the NAIC continues to refine its application of RBC factors for certain investments and is considering changes related to the risk assessment of structured securities.
The SECURE Act
New and recently passed legislation may also impact the industry in which F&G competes. For example, the SECURE Act, which took effect January 1, 2020, creates an opportunity for F&G and its competitors to pursue sales
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to employer retirement plan sponsors as well as its traditional customers. Moreover, as noted above, Congress is exploring potential successor legislation in this area. In addition, F&G and its competitors may implement operational changes to adapt to the effect of the new legislation. See “Risk Factors—Legal, Regulatory and Tax Risks—The SECURE Act of 2019 may impact our business and the markets in which we compete.”
Climate Risk
On November 15, 2021, NYDFS issued final Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change, detailing NYDFS’s expectations related to domestic insurers' management of the financial risks from climate change. These guidelines are applicable to FGL NY Insurance and are effective in 2022. Under the guidelines, climate change risk must be specifically included in an insurance group's enterprise risk management function.
Diversity and Corporate Governance
The NAIC and certain state insurance regulators are focused on the issue of diversity within the insurance industry, such as the diversity of an insurer’s board of directors and management. The NAIC is developing a framework for approaching issues related to race and insurance. On March 16, 2021, the NYDFS issued a circular letter that states that the NYDFS expects the insurers it regulates to make diversity of their leadership a business priority and key element of their corporate governance. This guidance is applicable to FGL NY Insurance. NYDFS intends to include questions relating to diversity and inclusion efforts in its examination process starting in 2022.
Bermuda Regulatory Overview
F&G Life Re is a Bermuda exempted company incorporated under the Companies Act 1981, as amended (the “Companies Act”) and registered as a Class E insurer under the Insurance Act. F&G Life Re is regulated by the BMA.
The Insurance Act provides that no person may carry on an insurance business in or from within Bermuda unless registered as an insurer under the Insurance Act by the BMA. In deciding whether to grant registration, the BMA has broad discretion to act as it thinks fit in the public interest. The BMA is required by the Insurance Act to determine whether the applicant is a fit and proper body to be engaged in the insurance business and, in particular, whether it has, or has available to it, adequate knowledge and expertise. The registration of an applicant as an insurer is subject to the insurer complying with the terms of its registration and such other conditions as the BMA may impose at any time. In addition, the Insurance Act requires BMA approval of increases in control or dispositions of control of an insurance company.
Bermuda has been awarded full equivalence for commercial insurers under Europe’s Solvency II regime applicable to insurance companies, which regime came into effect on January 1, 2016.
All insurers are required to implement corporate governance policies and processes as the BMA considers appropriate given the nature, size, complexity and risk profile of the insurer and all insurers, on an annual basis, are required to deliver a declaration to the BMA confirming whether or not they meet the minimum criteria for registration under the Insurance Act.
All insurers are required to comply with the Bermuda Insurance Code of Conduct, which is a codification of best practices for insurers provided by the BMA, and to submit annually to the BMA with its statutory financial return a declaration of compliance confirming it complies with the Bermuda Insurance Code of Conduct.
The BMA utilizes a risk-based approach when it comes to licensing and supervising insurance and reinsurance companies. As part of the BMA’s risk-based system, an assessment of the inherent risks within each particular class of insurer or reinsurer is used to determine the limitations and specific requirements that may be imposed. Thereafter the BMA keeps its analysis of relative risk within individual institutions under review on an ongoing basis, including through the scrutiny of audited financial statements, and, as appropriate, meeting with senior management during onsite visits.
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The Insurance Act imposes on Bermuda insurance companies solvency and liquidity standards, as well as auditing and reporting requirements. Certain significant aspects of the Bermuda insurance regulatory framework are set forth below.
Minimum Solvency Margin. The Insurance Act provides that the value of the assets of an insurer must exceed the value of its liabilities by an amount greater than its prescribed minimum solvency margin.
The minimum solvency margin that must be maintained by a Class E insurer is the greater of: (i) $8,000,000; (ii) 2% of first $500,000,000 of assets plus 1.5% of assets above $500,000,000; and (iii) 25% of that insurer’s enhanced capital requirement (“ECR”). An insurer may file an application under the Insurance Act to waive the aforementioned requirements.
ECR and Bermuda Solvency Capital Requirements (“BSCR”). Class E insurers are required to maintain available capital and surplus at a level equal to or in excess of the applicable ECR, which is established by reference to either the applicable BSCR model or an approved internal capital model. Furthermore, to enable the BMA to better assess the quality of the insurer’s capital resources, a Class E insurer is required to disclose the makeup of its capital in accordance with its 3-tiered capital system. An insurer may file an application under the Insurance Act to have the aforementioned ECR requirements waived.
Restrictions on Dividends and Distributions. In addition to the requirements under the Companies Act (as discussed below), the Insurance Act limits the maximum amount of annual dividends and distributions that may be paid or distributed by F&G Life Re without prior regulatory approval.
F&G Life Re is prohibited from declaring or paying a dividend if it fails to meet its minimum solvency margin, or ECR, or if the declaration or payment of such dividend would cause such breach. If F&G Life Re were to fail to meet its minimum solvency margin on the last day of any financial year, it would be prohibited from declaring or paying any dividends during the next financial year without the approval of the BMA.
In addition, as a Class E insurer, F&G Life Re must not declare or pay a dividend to any person other than a policyholder unless the value of the assets of such insurer, as certified by the insurer’s approved actuary, exceeds its liabilities (as so certified) by the greater of its margin of solvency or ECR. In the event a dividend complies with the above, F&G Life Re must ensure the amount of any such dividend does not exceed that excess.
Furthermore, as a Class E insurer, F&G Life Re must not declare or pay a dividend in any financial year which would exceed 25% of its total capital and statutory surplus, as set out in its previous year’s financial statements, unless at least seven days before payment of such dividend F&G Life Re files with the BMA an affidavit signed by at least two directors of F&G Life Re and its principal representative under the Insurance Act stating that, in the opinion of those signing, declaration of such dividend has not caused the insurer to fail to meet its relevant margins.
The Companies Act also limits F&G Life Re’s ability to pay dividends and make distributions to its shareholders. F&G Life Re is not permitted to declare or pay a dividend, or make a distribution out of its contributed surplus, if it is, or would after the payment be, unable to pay its liabilities as they become due or if the realizable value of its assets would be less than its liabilities.
Reduction of Capital. F&G Life Re may not reduce its total statutory capital by 15% or more, as set out in its previous year’s financial statements, unless it has received the prior approval of the BMA. Total statutory capital consists of the insurer’s paid in share capital, its contributed surplus (sometimes called additional paid in capital) and any other fixed capital designated by the BMA as statutory capital.
Cayman Islands Regulatory Overview
F&G Cayman Re is licensed as a class D insurer in the Cayman Islands by CIMA. As a regulated insurance company, F&G Cayman Re is subject to the supervision of CIMA and CIMA may at any time direct F&G Cayman Re, in relation to a policy, a line of business or the entire business, to cease or refrain from committing an act or pursing a course of conduct and to perform such acts as in the opinion of CIMA are necessary to remedy or ameliorate the situation.
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The laws and regulations of the Cayman Islands require that, among other things, F&G Cayman Re maintain minimum levels of statutory capital, surplus and liquidity, meet solvency standards, submit to periodic examinations of its financial condition and restrict payments of dividends and reductions of capital. Statutes, regulations and policies that F&G Cayman Re is subject to may also restrict the ability of F&G Cayman Re to write insurance and reinsurance policies, make certain investments and distribute funds. Any failure to meet the applicable requirements or minimum statutory capital requirements could subject it to further examination or corrective action by CIMA, including restrictions on dividend payments, limitations on our writing of additional business or engaging in finance activities, supervision or liquidation.
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Summary Historical Consolidated Financial Information
The following tables set forth our summary historical consolidated financial and operating data. The summary historical consolidated financial and operating data as of June 30, 2022 and for each of the six months ended June 30, 2022 and 2021 set forth below have been derived from our unaudited historical Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Information Statement. The summary historical consolidated financial data as it relates to the year ended December 31, 2021, the period from June 1 to December 31, 2020 (following the FNF Acquisition), and the predecessor results for the period from January 1, 2020 to May 31, 2020 and for the year ended December 31, 2019, as restated, have been derived from our audited historical Consolidated Financial Statements and notes thereto included elsewhere in this Information Statement. The comparability of certain results prior to the FNF Acquisition and following the FNF Acquisition were influenced by purchase accounting adjustments. Additionally, our historical results are not necessarily indicative of future operating results.
You should read this information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and notes thereto included in this Information Statement.
Non-GAAP Measures
In addition to our results presented in accordance with GAAP, our results of operations include certain Non-GAAP measures commonly used in our industry. These measures should be considered supplementary to our results in accordance with GAAP and should not be viewed as a substitute for the GAAP measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures” for a discussion regarding Non-GAAP measures, including related definitions and reconciliations to comparable GAAP measures (where applicable).
Summary historical consolidated financial and operating data are as follows:
(Dollars in millions, except shares, in thousands, and per share data)
Six months ended June 30,Year ended December 31,Period from
June 1 to December 31,		Period from January 1 to May 31,Year ended December 31,
202220212021202020202019
PredecessorPredecessor
(As Restated)
Consolidated Statements of Earnings Data:
Total revenues $815 $1,341 $3,962 $1,233 $155 $1,894 
Total expenses 184 888 2,885 1,147 369 1,473 
Earnings (loss) from continuing operations before income taxes631 453 1,077 86 (214)421 
Net earnings (loss) from continuing operations466 360 857 161 (200)361 
Net earnings (loss) from discontinued operations, net of tax— 11 8 (25)(114)51 
Net earnings (loss)466 371 865 136 (314)412 
Preferred stock dividend (b)
— — — — 8 31 
Net earnings (loss) attributable to common shareholders466 371 865 136 (322)381 
Earnings per share (a)
Basic
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Net earnings (loss) from continuing operations $4.41 $3.43 $8.16 $1.54 $(0.98)$1.52 
Net earnings (loss) from discontinued operations — 0.10 0.08 (0.24)(0.53)0.24 
Net earnings (loss) per share, basic$4.41 $3.53 $8.24 $1.30 $(1.51)$1.76 
Diluted
Net earnings (loss) from continuing operations $4.41 $3.43 $8.16 $1.54 $(0.98)$1.52 
Net earnings (loss) from discontinued operations— 0.10 0.08 (0.24)(0.53)0.24 
Net earnings (loss) per share, diluted$4.41 $3.53 $8.24 $1.30 $(1.51)$1.76 
Weighted average shares outstanding F&G common stock, basic basis (a)
105,778 105,000 105,000 105,000 213,246 216,592 
Weighted average shares outstanding F&G common stock, diluted basis (a)
105,778 105,000 105,000 105,000 213,246 216,737 
Consolidated Statements of Earnings Non-GAAP Data:
Adjusted net earnings attributable to common shareholders$195 $249 $551 $233 $14 $264 
Adjusted net earnings attributable to common shareholders per share1.84 2.37 5.25 2.22 0.07 1.22 
__________________
(a)Weighted average shares outstanding for the six months ended June 30, 2021, the year ended December 31, 2021 and for the period June 1, 2020 to December 31, 2020, retrospectively, include the effects of the 105,000 for 1 stock split that occurred on June 24, 2022.
(b)Preferred stock was retired as part of the FNF Acquisition.

(Dollars in millions, except per share data)
June 30,December 31,December 31,
202220212020
Consolidated Balance Sheet Data:
Total assets$49,626 $48,730 $39,756 
Total liabilities 47,132 44,245 35,682 
Total equity2,494 4,485 4,074 
Accumulated other comprehensive (loss) income (“AOCI”)(2,130)734 1,197 
Debt-to-capital ratio (a)
18.1 %17.5 %11.9 %
Consolidated Balance Sheet Non-GAAP Data:
Total equity, excluding AOCI$4,624 $3,751 $2,877 
Debt-to-capital ratio excluding AOCI10.6 %20.2 %16.0 %
Book value per Share, including AOCI$19.95 $42.71 $38.80 
Book value per Share, excluding AOCI36.99 35.72 27.40 
Return on average equity24.4 %20.4 %7.1 %
Return on average equity excluding AOCI24.2 %25.9 %8.4 %
Adjusted return on average equity excluding AOCI10.1 %16.5 %14.5 %
__________________
(a)Debt-to-capital ratio is computed by dividing total aggregate principal amount of debt by total capitalization (total debt plus total equity).
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Summary historical consolidated financial and operating data (continued) are as follows:
(Dollars in millions)
Six months ended June 30,Year ended December 31,Period from
June 1 to December 31,		Period from January 1 to May 31,Year ended December 31,
202220212021202020202019
PredecessorPredecessor
(As Restated)
Select Metrics:
Assets under management$40,322 $31,760 $36,494 $28,553 $27,119 $26,420 
Average assets under management38,351 29,722 31,938 27,322 26,824 25,617 
Yield on AAUM4.57 %5.79 %5.80 %4.66 %3.60 %4.56 %
Adjusted return on assets1.02 %1.68 %1.73 %1.46 %0.13 %1.03 %
The following table summarizes sales by product type of the Company, which are not affected by the FNF Acquisition, and are comparable to prior period data:
(Dollars in millions)
Six months ended June 30,Year ended December 31,Year ended December 31,Year ended December 31,
20222021202120202019
Predecessor
Fixed indexed annuities (“FIA”)$2,076 $2,182 $4,310 $3,459 $2,820 
Fixed rate annuities (“MYGA”)1,560 979 1,738 776 776 
Total annuity3,636 3,161 6,048 4,235 3,596 
Indexed universal life (“IUL”)56 35 87 50 38 
Funding agreements (“FABN/FHLB”)1,443 1,125 2,310 200 297 
Pension risk transfer (“PRT”)527 — 1,147 — — 
Total Gross Sales
$5,662 $4,321 $9,592 $4,485 $3,931 
Sales attributable to flow reinsurance to third parties$(780)(489)(869)— — 
Total Net Sales$4,882 $3,832 $8,723 $4,485 $3,931 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations for the six months ended June 30, 2022 and June 30, 2021, the year ended December 31, 2021, the period from June 1, 2020 to December 31, 2020 (following the FNF Acquisition), and the “predecessor” results for the period from January 1, 2020 to May 31, 2020 and for the year ended 2019 (prior to the FNF Acquisition) should be read together with, and is qualified in its entirety by reference to, our Consolidated Financial Statements and related notes included elsewhere in this Information Statement, which have been prepared in accordance with GAAP. The following discussion may contain forward-looking statements based on assumptions we believe to be reasonable. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Information Statement, particularly in “Risk Factors” and “Note Regarding Forward-Looking Statements.”
Overview
For a description of our business see the discussion under “Business” in this Information Statement.
Business Trends and Conditions
The following factors represent some of the key trends and uncertainties that have influenced the development of the Company and its historical financial performance, and we believe these key trends and uncertainties will continue to influence the business and financial performance of the Company in the future.
COVID-19 Pandemic
While still evolving, the COVID-19 pandemic has caused significant economic and financial turmoil in the U.S. and around the world. At this time, it is still not possible to estimate the longer term effects the COVID-19 pandemic could have on our Consolidated Financial Statements. Increased economic uncertainty and increased unemployment that could potentially result from the spread of COVID-19 and its variants may result in our policyholders seeking sources of liquidity and withdrawing at rates greater than was previously expected. Additionally, adverse events or conditions resulting from COVID-19 could also have a negative effect on our sales of new policies and could result in more volatility from the impact of mortality experience. As of June 30, 2022, we have not seen a sustained elevated level of adverse policyholder experience from the impact of COVID-19 on the overall business. The full extent to which the COVID-19 pandemic impacts our financial condition, results of operations, liquidity or prospects will depend on future developments which cannot be predicted at this time.
Market Conditions
Market volatility has affected, and may continue to affect, our business and financial performance in varying ways. Volatility can pressure sales and reduce demand as consumers hesitate to make financial decisions. To enhance the attractiveness and profitability of our products and services, we continually monitor the behavior of our customers, as evidenced by annuitization rates and lapse rates, which vary in response to changes in market conditions. See “Risk Factors” in this Information Statement for further discussion of risk factors that could affect market conditions.
Interest Rate Environment
Some of our products include guaranteed minimum crediting rates, most notably our fixed rate annuities. As of June 30, 2022 and December 31, 2021, our reserves, net of reinsurance, and average crediting rate on our fixed rate annuities were $5.0 billion and 3%, respectively. We are required to pay the guaranteed minimum crediting rates even if earnings on our investment portfolio decline, which would negatively impact earnings. In addition, we expect more policyholders to hold policies with comparatively high guaranteed rates for a longer period in a low interest rate environment. Conversely, a rise in average yield on our investment portfolio would increase earnings if the average interest rate we pay on our products does not rise correspondingly. Similarly, we expect that
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policyholders would be less likely to hold policies with existing guarantees as interest rates rise and the relative value of other new business offerings are increased, which would negatively impact our earnings and cash flows.
See “Quantitative and Qualitative Disclosure about Market Risk” and “Risk Factors” for a more detailed discussion of interest rate risk.
Aging of the U.S. Population
We believe that the aging of the U.S. population will increase the demand for our FIA and IUL products. As the “baby boomer” generation prepares for retirement, we believe that demand for retirement savings, growth, and income products will grow. Over 10,000 people will turn 65 each day in the United States over the next 15 years, and according to the U.S. Census Bureau, the proportion of the U.S. population over the age of 65 is expected to grow from 17% in 2021 to 21% in 2035. The impact of this growth may be offset to some extent by asset outflows as an increasing percentage of the population begins withdrawing assets to convert their savings into income.
Industry Factors and Trends Affecting Our Results of Operations
We operate in the sector of the insurance industry that focuses on the needs of middle-income Americans. The underserved middle-income market represents a major growth opportunity for us. As a tool for addressing the unmet need for retirement planning, we believe that many middle-income Americans have grown to appreciate the financial certainty that we believe annuities such as our FIA products afford. Accordingly, the FIA market grew from nearly $12 billion of sales in 2002 to $66 billion of sales in 2021. Additionally, this market demand has positively impacted the IUL market as it has expanded from $100 million of annual premiums in 2002 to $2 billion of annual premiums in 2021.
Critical Accounting Policies and Estimates
The accounting estimates described below are those we consider critical in preparing our Consolidated Financial Statements. Management is required to make estimates and assumptions that can affect the reported amounts of assets and liabilities and disclosures with respect to contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. See Note A — Business and Summary of Significant Accounting Policies to our Consolidated Financial Statements included in this Information Statement for additional description of the significant accounting policies that have been followed in preparing our Consolidated Financial Statements.
Reserves for Future Policy Benefits and Product Guarantees and Certain Information on Contractholder Funds
The determination of future policy benefit reserves is dependent on actuarial assumptions. The principal assumptions used to establish liabilities for future policy benefits are based on our experience. These assumptions are established at issue of the contract and include mortality, morbidity, contract full and partial surrenders, investment returns, annuitization rates and expenses. The assumptions used require considerable judgment. We review overall policyholder experience at least annually and update these assumptions when deemed necessary based on additional information that becomes available. For traditional life and immediate annuity products, assumptions used in the reserve calculation can only be changed if the reserve is deemed to be insufficient. For all other insurance products, changes in assumptions will be used to calculate reserves. These changes in assumptions will also incorporate changes in risk free rates and option market values. Changes in, or deviations from, the assumptions previously used can significantly affect our reserve levels and related results of operations.
Mortality is the incidence of death amongst policyholders triggering the payment of underlying insurance coverage by the insurer. In addition, mortality also refers to the ceasing of payments on life-contingent annuities due to the death of the annuitant. We utilize a combination of actual and industry experience when setting our mortality assumptions.
A surrender rate is the percentage of account value surrendered by the policyholder. A lapse rate is the percentage of account value canceled by us due to nonpayment of premiums. We make estimates of expected full
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and partial surrenders of our fixed annuity products. Our surrender rate experience in the six months ended June 30, 2022, the year ended December 31, 2021, the period from June 1, 2020 to December 31, 2020, the predecessor period from January 1, 2020 to May 31, 2020 and the predecessor year ended December 31, 2019 on the fixed annuity products averaged 3%, 7%, 4%, 3% and 4%, respectively, which is within our assumed ranges. Management’s best estimate of surrender behavior incorporates actual experience over the entire period, as we believe that, over the duration of the policies, we will experience the full range of policyholder behavior and market conditions. If actual surrender rates are significantly different from those assumed, such differences could have a significant effect on our reserve levels and related results of operations.
The assumptions used to establish the liabilities for our product guarantees require considerable judgment and are established as management’s best estimate of future outcomes. We periodically review these assumptions and, if necessary, update them based on additional information that becomes available. Changes in or deviations from the assumptions used can significantly affect our reserve levels and related results of operations.
At issue, and at each subsequent valuation, we determine the present value of the cost of the GMWB rider benefits and certain GMDB riders in excess of benefits that are funded by the account value. We also calculate the present value of total expected policy assessments, including investment margins, if applicable. We accumulate a reserve equal to the portion of these assessments that would be required to fund the future benefits less benefits paid to date. In making these projections, a number of assumptions are made and we update these assumptions as experience emerges, and determined necessary. We began issuing our GMWB products in 2008, and future experience could lead to significant changes in our assumptions. If emerging experience deviates from our assumptions on GMWB utilizations, such deviations could have a significant effect on our reserve levels and related results of operations.
Our aggregate reserves for contractholder funds, future policy benefits and product guarantees on a direct and net basis as of June 30, 2022 and December 31, 2021, are summarized as follows:
As of June 30, 2022
(Dollars in millions)DirectReinsurance RecoverableNet
Fixed indexed annuities$23,168 $— $23,168 
Fixed rate annuities7,570 (2,307)$5,263 
Immediate annuities4,080 (135)$3,945 
Universal life2,013 (951)$1,062 
Traditional life1,792 (822)$970 
Funding agreement backed notes (“FABN”)2,608 — $2,608 
Pension risk transfer (“PRT”)1,653 — $1,653 
Total$42,884 $(4,215)$38,669 
As of December 31, 2021
(Dollars in millions)DirectReinsurance RecoverableNet
Fixed indexed annuities$23,370 $— $23,370 
Fixed rate annuities6,369 (1,689)4,680 
Immediate annuities3,657 (133)3,524 
Universal life1,981 (983)998 
Traditional life1,823 (805)1,018 
Funding agreement backed notes1,904 — 1,904 
Pension risk transfer 1,153 — 1,153 
Total$40,257 $(3,610)$36,647 
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FIA and IUL products contain an embedded derivative; a feature that permits the holder to elect an interest rate return or an equity-index linked component, where interest credited to the contract is linked to the performance of various equity indices. The FIA/IUL embedded derivatives are valued at fair value and included in the liability for Contractholder funds in our Consolidated Balance Sheets with changes in fair value included as a component of Benefits and other changes in policy reserves in our Consolidated Statements of Earnings.
Valuation of Fixed Maturity, Preferred and Equity Securities, and Derivatives and Reinsurance Recoverable
Our fixed maturity securities have been designated as available-for-sale and are carried at fair value, net of allowance for expected credit losses, with unrealized gains and losses included in AOCI, net of associated adjustments for VOBA, DAC, DSI, unearned revenue (“UREV”), Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts,” (“SOP 03-1”) reserves, and deferred income taxes. Our equity securities are carried at fair value with unrealized gains and losses included in net income (loss). Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income on a trade date basis.
Management’s assessment of all available data when determining fair value of the available-for-sale (“AFS”) securities is necessary to appropriately apply fair value accounting. Management utilizes information from independent pricing services, who 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. We generally obtain one value from our primary external pricing service. In situations where a price is not available from the independent pricing service, we may obtain broker quotes or prices from additional parties recognized to be market participants. We believe the broker quotes are prices at which trades could be executed based on historical trades executed at broker-quoted or slightly higher prices. When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies, including discounted cash flows, matrix pricing, or other similar techniques.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, comparisons to valuations from other independent pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. See Note D — Fair Value of Financial Instruments and Note E — Investments to our Consolidated Financial Statements and Note B — Fair Value of Financial Instruments and Note C — Investments to our unaudited Condensed Consolidated Financial Statements included in this Information Statement.
The fair value of derivative assets and liabilities is based upon valuation pricing models and represents what we would expect to receive or pay at the balance sheet date if we canceled the options, entered into offsetting positions, or exercised the options. Fair values for these instruments are determined internally using a conventional model and market observable inputs, including interest rates, yield curve volatilities and other factors. Credit risk related to the counterparty is considered when estimating the fair values of these derivatives. However, we are largely protected by collateral arrangements with counterparties when individual counterparty exposures exceed certain thresholds. The fair value of futures contracts (specifically for FIA contracts) at the balance sheet date represents the cumulative unsettled variation margin (open trade equity net of cash settlements). The fair values of the embedded derivatives in our FIA and IUL contracts are derived using market value of options, use of current and budgeted option cost, swap rates, mortality rates, surrender rates, partial withdrawals, and non-performance spread and are classified as Level 3. The discount rate used to determine the fair value of our FIA/IUL embedded derivative liabilities includes an adjustment to reflect the risk that these obligations will not be fulfilled (“non-performance risk”). For the six months ended June 30, 2022 and the period ended December 31, 2021, our non-performance risk adjustment was based on the expected loss due to default in debt obligations for similarly rated financial companies. See Note D — Fair Value of Financial Instruments and Note F — Derivative Financial Instruments to our Consolidated Financial Statements and Note B — Fair Value of Financial Instruments and Note D — Derivative Financial Instruments to our unaudited Condensed Consolidated Financial Statements included in this Information Statement.
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As discussed in Note L — Reinsurance of our Consolidated Financial Statements included in this Information Statement, F&G entered into a reinsurance agreement with Kubera effective December 31, 2018, to cede certain MYGAs and deferred annuity GAAP and statutory reserves on a coinsurance funds withheld basis, net of applicable existing reinsurance. Effective October 31, 2021, this agreement was novated from Kubera to Somerset. Additionally, F&G entered into a reinsurance agreement with Aspida Re effective January 1, 2021, to cede a quota share of certain deferred annuity business on a funds withheld basis. Fair value movements in the funds withheld balances associated with these arrangements create an obligation for F&G to pay Somerset and Aspida Re at a later date, which results in embedded derivatives. These embedded derivatives are considered total return swaps with contractual returns that are attributable to the assets and liabilities associated with the reinsurance arrangements. The fair value of the total return swaps are based on the change in fair value of the underlying assets held in the funds withheld portfolio. Investment results for the assets that support the coinsurance with funds withheld reinsurance arrangement, including gains and losses from sales, are passed directly to the reinsurer pursuant to contractual terms of the reinsurance arrangement. The reinsurance related embedded derivatives are reported in Accounts payable and accrued liabilities on the Consolidated Balance Sheets and unaudited Condensed Consolidated Balance Sheets and the related gains or losses are reported in Recognized gains and losses, net on the Consolidated Statements of Earnings and unaudited Condensed Consolidated Statements of Earnings.
We categorize our fixed maturity securities, preferred securities, equity securities and derivatives into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. The following table presents the fair value of fixed maturity securities and equity securities by pricing source, hierarchy level and net asset value (“NAV”) as of June 30, 2022, December 31, 2021 and 2020.
As of June 30, 2022
(Dollars in millions)Quoted Prices 
in Active 
Markets for
Identical Assets
(Level 1) 		Significant
Observable Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3) 		NAVTotal
Fixed maturity securities available-for-sale and equity securities:
Prices via third-party pricing services$735 $22,449 $979 $— $24,163 
Priced via independent broker quotations— — 5,149 — 5,149 
Priced via other methods— — — 44 44 
Total$735 $22,449 $6,128 $44 $29,356 
% of Total3 %76 %21 %— %100 %
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As of December 31, 2021
(Dollars in millions)Quoted Prices 
in Active 
Markets for
Identical Assets
(Level 1) 		Significant
Observable Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3) 		NAVTotal
Fixed maturity securities available-for-sale and equity securities:
Prices via third-party pricing services$684 $25,224 $928 $— $26,836 
Priced via independent broker quotations— — 4,248 — 4,248 
Priced via other methods— — 1 48 49 
Total$684 $25,224 $5,177 $48 $31,133 
% of Total2 %81 %17 %— %100 %
As of December 31, 2020
(Dollars in millions)Quoted Prices 
in Active 
Markets for
Identical Assets
(Level 1) 		Significant
Observable Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3) 		NAVTotal
Fixed maturity securities available-for-sale and equity securities:
Prices via third-party pricing services$607 $22,741 $1,133 $— $24,481 
Priced via independent broker quotations— — 2,064 — 2,064 
Priced via other methods— — 1 — 1 
Total$607 $22,741 $3,198 $— $26,546 
% of Total2 %86 %12 %— %100 %
Goodwill
As of June 30, 2022, December 31, 2021 and December 31, 2020, goodwill was $1,756 million. The goodwill relates to goodwill recorded in connection with the FNF Acquisition. Refer to Note K — Goodwill to our Consolidated Financial Statements included in this Information Statement for a summary of additional information on our goodwill balance.
In evaluating the recoverability of goodwill, we perform a qualitative analysis at the reporting unit level to determine whether it is more likely than not that the fair value of our recorded goodwill exceeds its carrying value. Based on the results of this analysis, an annual goodwill impairment test may be completed based on an analysis of the discounted future cash flows generated by the underlying assets. The process of determining whether or not goodwill is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Future cash flow estimates are based partly on projections of market conditions such as the volume and mix of refinance and purchase transactions and interest rates, which are beyond our control and are likely to fluctuate. While we believe that our estimates of future cash flows are reasonable, these estimates are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ from what is assumed in our impairment tests. Such analyses are particularly sensitive to changes in estimates of future cash flows and discount rates. Changes to these estimates might result in material changes in fair value and determination of the recoverability of goodwill, which may result in charges against earnings and a reduction in the carrying value of our goodwill in the future. We completed annual goodwill impairment analyses in the fourth quarter of each period presented using a September 30 measurement date. For the year ended December 31, 2021, the predecessor period from June 1, 2020 to December 31, 2020 and for the predecessor year ended December 31, 2019, we determined there were no events or circumstances that indicated that the carrying value exceeded the fair value.
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VOBA, DAC and DSI
Our intangible assets include an intangible asset reflecting the value of insurance and reinsurance contracts acquired (hereafter referred to as VOBA, DAC and DSI).
VOBA is an intangible asset that reflects the amount recorded as insurance contract liabilities less the estimated fair value of in-force contracts (“VIF”) in a life insurance company acquisition. It represents the portion of the purchase price that is allocated to the value of the rights to receive future cash flows from the business in force at the acquisition date. VOBA is a function of the VIF, current GAAP reserves, GAAP assets, and deferred tax liability. The VIF is determined by the present value of statutory distributable earnings less opening required capital, and is sensitive to assumptions including the discount rate, surrender rates, partial withdrawals, utilization rates, projected investment spreads, mortality, and expenses.
DAC consists principally of commissions. Additionally, acquisition costs that are incremental, direct costs of successful contract acquisition are capitalized as DAC. Indirect or unsuccessful acquisition costs, maintenance, product development and overhead expenses are charged to expense as incurred. DSI consists of contract enhancements such as premium and interest bonuses credited to policyholder account balances.
VOBA, DAC and DSI are subject to loss recognition testing on a quarterly basis or when an event occurs that may warrant loss recognition.
For annuity and IUL products, VOBA, DAC and DSI are generally being amortized in proportion to estimated gross profits from the excess of net investment income earned over the sum of interest credited to policyholders and the cost of hedging our risk on indexed product policies, surrender charges and other product fees, policy benefits, maintenance expenses, mortality, and recognized gains and losses on investments. Current and future period gross profits for FIA contracts also include the impact of amounts recorded for the change in fair value of derivatives and the change in fair value of embedded derivatives. At each valuation date, the most recent quarter’s estimated gross profits are updated with actual gross profits and the assumptions underlying future estimated gross profits are evaluated for continued reasonableness. If the update of assumptions causes estimated gross profits to increase, VOBA, DAC and DSI amortization will decrease, resulting in lower amortization expense in the period. The opposite result occurs when the assumption update causes estimated gross profits to decrease. Current period amortization is adjusted retrospectively through an unlocking process when estimates of current or future gross profits (including the impact of recognized investment gains and losses) to be realized from a group of products are revised. Our estimates of future gross profits are based on actuarial assumptions related to the underlying policies’ terms, lives of the policies, duration of contract, yield on investments supporting the liabilities, cost to fund policy obligations, and level of expenses necessary to maintain the polices over their entire lives.
Changes in assumptions can have a significant impact on VOBA, DAC and DSI, amortization rates and results of operations. Assumptions are management’s best estimate of future outcomes, and require considerable judgment. We periodically review assumptions against actual experience, and update our assumptions based on historical results and our best estimates of future experience when additional information becomes available.
Estimated future gross profits are sensitive to changes in interest rates, which are the most significant component of gross profits. Assumptions related to interest rate spreads and credit losses also impact estimated gross profits for products with credited rates. These assumptions are based on the current investment portfolio yields and credit quality, estimated future crediting rates, capital markets, and estimates of future interest rates and defaults. Significant assumptions also include policyholder behavior assumptions, such as surrender, lapse, and annuitization rates. We use a combination of actual and industry experience when setting and updating our policyholder behavior assumptions.
We perform sensitivity analyses to assess the impact that certain assumptions have on VOBA, DAC and DSI. The following table presents the estimated instantaneous net impact to income before income taxes of various assumption changes on our VOBA, DAC and DSI. The effects, increase or (decrease), presented are not
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representative of the aggregate impacts that could result if a combination of such changes to interest rates and other assumptions occurred.
(Dollars in millions)As of June 30, 2022As of December 31, 2021
A change to the long-term interest rate assumption of -50 basis points$(109)$(91)
A change to the long-term interest rate assumption of +50 basis points90 75 
An assumed 10% increase in surrender rate(6)(4)
Assumptions regarding shifts in market factors may be overly simplistic and not indicative of actual market behavior in stress scenarios.
Lower assumed interest rates or higher assumed annuity surrender rates tend to decrease the balances of VOBA, DAC and DSI, thus decreasing income before income taxes. Higher assumed interest rates or lower assumed annuity surrender rates tend to increase the balances of VOBA, DAC and DSI, thus increasing income before income taxes.
Accounting for Income Taxes  
As part of the process of preparing the Consolidated Financial Statements, we are required to determine income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing recognition of items for income tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included within the Consolidated Balance Sheets. We must then assess the likelihood that deferred income tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must reflect this increase as expense within Income tax expense in the Consolidated Statement of Earnings. Determination of income tax expense requires estimates and can involve complex issues that may require an extended period to resolve. Further, the estimated level of annual pre-tax income can cause the overall effective income tax rate to vary from period to period. We believe that our tax positions comply with applicable tax law and that we adequately provide for any known tax contingencies. We believe the estimates and assumptions used to support our evaluation of tax benefit realization are reasonable. Final determination of prior-year tax liabilities, either by settlement with tax authorities or expiration of statutes of limitations, could be materially different than estimates reflected in assets and liabilities and historical income tax provisions. The outcome of these final determinations could have a material effect on our income tax provision, net income or cash flows in the period that determination is made.
Refer to Note Q — Income Taxes to our Consolidated Financial Statements included in this Information Statement for details.
Business Overview
We have five distribution channels across retail and institutional markets. Our three retail channels include agent-based IMOs, banks and broker dealers. We have deep, long-tenured relationships with our network of leading IMOs and their agents to serve the needs of the middle-income market and develop competitive annuity and life products to align with their evolving needs. Upon the FNF Acquisition and F&G’s subsequent rating upgrades in mid-2020, we launched into banks and broker dealers. Further, in 2021, we launched two institutional channels to originate FABN and PRT transactions. The FABN Program offers funding agreements to institutional clients by means of capital markets transactions through investment banks. The funding agreements issued under the FABN Program are in addition to those issued to the FHLB. The PRT solutions business was launched by building an experienced team and then working with brokers and institutional consultants for distribution. These markets leverage our existing team's spread-based capabilities as well as our strategic partnership with Blackstone.
In setting the features and pricing of our flagship FIA products relative to our targeted net margin, we take into account our expectations regarding (1) the difference between the net investment income we earn and the sum of the interest credited to policyholders and the cost of hedging our risk on the policies; (2) fees, including surrender
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charges and rider fees, partly offset by vesting bonuses that we pay our policyholders; and (3) a number of related expenses, including benefits and changes in reserves, acquisition costs, and general and administrative expenses.
On March 14, 2022, the FNF Board of Directors approved a dividend to its shareholders, on a pro rata basis, of 15% of the common stock of F&G (the “F&G Distribution”). FNF intends to retain majority control of F&G through an approximate 85% ownership stake. The proposed F&G Distribution is subject to various conditions including the final approval of the FNF Board of Directors, the effectiveness of appropriate filings with the SEC, and any applicable regulatory approvals. The record date and distribution settlement date will be determined by the FNF Board of Directors prior to the distribution. Upon completion of the F&G Distribution, FNF shareholders as of the record date are expected to own stock in both publicly traded companies. The proposed F&G Distribution is intended to be structured as a taxable dividend to FNF shareholders and is targeted to be completed early in the fourth quarter of 2022. However, there can be no assurance regarding the timeframe for completing the distribution or that the conditions of the F&G Distribution will be met. The separation will be effected pursuant to a separation and distribution agreement between FNF and F&G (the “Separation and Distribution Agreement”). For further information on the F&G Distribution, see “The Separation and Distribution” section elsewhere in this Information Statement.
Key Components of Our Historical Results of Operations
Through our insurance subsidiaries, we issue a broad portfolio of deferred annuities (FIA and fixed rate annuities), IUL insurance, immediate annuities, funding agreements and PRT solutions. A deferred annuity is a type of contract that accumulates value on a tax deferred basis and typically begins making specified periodic or lump sum payments a certain number of years after the contract has been issued. IUL insurance is a complementary type of contract that accumulates value in a cash value account and provides a payment to designated beneficiaries upon the policyholder’s death. An immediate annuity is a type of contract that begins making specified payments within one annuity period (e.g., one month or one year) and typically makes payments of principal and interest earnings over a period of time.
Under GAAP, premium collections for FIAs, fixed rate annuities, immediate annuities and PRT without life contingency, and deposits received for funding agreements are reported in the financial statements as deposit liabilities (i.e., contractholder funds) instead of as sales or revenues. Similarly, cash payments to customers are reported as decreases in the liability for contractholder funds and not as expenses. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender, cost of insurance and other charges deducted from contractholder funds, and net realized gains (losses) on investments. Components of expenses for products accounted for as deposit liabilities are interest-sensitive and index product benefits (primarily interest credited to account balances or the hedging cost of providing index credits to the policyholder), amortization of VOBA, DAC and DSI, other operating costs and expenses, and income taxes.
F&G hedges certain portions of its exposure to product related equity market risk by entering into derivative transactions. We purchase derivatives consisting predominantly of call options and, to a lesser degree, futures contracts (specifically for FIA contracts) on the equity indices underlying the applicable policy. These derivatives are used to offset the reserve impact of the index credits due to policyholders under the FIA and IUL contracts. The majority of all such call options are one-year options purchased to match the funding requirements underlying the FIA/IUL contracts. We attempt to manage the cost of these purchases through the terms of our FIA/IUL contracts, which permit us to change caps, spread, or participation rates on each policy's annual anniversary, subject to certain guaranteed minimums that must be maintained. The call options and futures contracts are marked to fair value with the change in fair value included as a component of net investment gains (losses). The change in fair value of the call options and futures contracts includes the gains and losses recognized at the expiration of the instruments’ terms or upon early termination and the changes in fair value of open positions.
Earnings from products accounted for as deposit liabilities are primarily generated from the excess of net investment income earned over the sum of interest credited to policyholders and the cost of hedging our risk on FIA/IUL policies. With respect to FIAs/IULs, the cost of hedging our risk includes the expenses incurred to fund the index credits. Proceeds received upon expiration or early termination of call options purchased to fund annual index
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credits are recorded as part of the change in fair value of derivatives, and are largely offset by an expense for index credits earned on annuity contractholder fund balances.
Our profitability depends in large part upon the amount of AUM (see “—Non-GAAP Financial Measures”), the excess of net investment income earned over the sum of interest credited to policyholders and the cost of hedging our risk on indexed product policies, earned on our average assets under management (“AAUM” — see “—Non-GAAP Financial Measures”), our ability to manage our operating expenses and the costs of acquiring new business (principally commissions to agents and bonuses credited to policyholders). As we grow AUM, earnings generally increase. AUM increases when cash inflows, which include sales, exceed cash outflows. Managing the excess of net investment income earned over the sum of interest credited to policyholders and the cost of hedging our risk on indexed product policies, involves the ability to maximize returns on our AUM and minimize risks such as interest rate changes and defaults or impairment of investments. It also includes our ability to manage interest rates credited to policyholders and costs of the options and futures purchased to fund the annual index credits on the FIA/IULs. We analyze returns on AAUM, VOBA, pre- and post-DAC and DSI as well as pre- and post-tax to measure our profitability in terms of growth and improved earnings.
In June 2021, we established a FABN Program, pursuant to which FGL Insurance may issue funding agreements to a special purpose statutory trust (the “Trust”) for spread lending purposes. The maximum aggregate principal amount permitted to be outstanding at any one time under the FABN Program is currently $5.0 billion. We also issue funding agreements through the FHLB.
In July 2021, we entered the PRT market, pursuant to which FGL Insurance and FGL NY Insurance may issue group annuity contracts to discharge pension plan liabilities from a pension plan sponsor. Life contingent PRT premiums are included in life insurance premiums and other fees below.
Non-GAAP Financial Measures
In addition to reporting financial results in accordance with GAAP, this document includes non-GAAP financial measures, which the Company believes are useful to help investors better understand its financial performance, competitive position and prospects for the future. Management believes these non-GAAP financial measures may be useful in certain instances to provide additional meaningful comparisons between current results and results in prior operating periods. Our non-GAAP measures may not be comparable to similarly titled measures of other organizations because other organizations may not calculate such non-GAAP measures in the same manner as we do. The presentation of this financial information is not intended to be considered in isolation of or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. By disclosing these non-GAAP financial measures, the Company believes it offers investors a greater understanding of, and an enhanced level of transparency into, the means by which the Company’s management operates the Company. Any non-GAAP measures should be considered in context with the GAAP financial presentation and should not be considered in isolation or as a substitute for GAAP net earnings, net earnings attributable to common shareholders, or any other measures derived in accordance with GAAP as measures of operating performance or liquidity. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are provided within.
Adjusted Net Earnings Attributable to Common Shareholders
Adjusted net earnings attributable to common shareholders (“Adjusted net earnings”) is a non-GAAP economic measure we use to evaluate financial performance each period. Adjusted net earnings is calculated by adjusting net earnings (loss) from continuing operations attributable to common shareholders to eliminate:
(i)Recognized (gains) and losses, net: the impact of net investment gains/losses, including changes in allowance for expected credit losses and other than temporary impairment (“OTTI”) losses, recognized in operations; and the effect of changes in fair value of the reinsurance related embedded derivative;
(ii)Indexed product related derivatives: the impacts related to changes in the fair value, including both realized and unrealized gains and losses, of index product related derivatives and embedded derivatives, net of hedging cost;
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(iii)Purchase price amortization: the impacts related to the amortization of certain intangibles (internally developed software, trademarks and value of distribution asset (“VODA”)) recognized as a result of acquisition activities;
(iv)Transaction costs: the impacts related to acquisition, integration and merger related items;
(v)Other “non-recurring,” “infrequent” or “unusual items”: Management excludes certain items determined to be “non-recurring,” “infrequent” or “unusual” from adjusted net earnings when incurred if it is determined these expenses are not a reflection of the core business and when the nature of the item is such that it is not reasonably likely to recur within two years and/or there was not a similar item in the preceding two years; and
(vi)Amortization of actuarial intangibles and SOP 03-1 reserve offset: The intangibles amortization and SOP 03-1 change offsets related to the above mentioned adjustments.
(vii)Income taxes: the income tax impact related to the above mentioned adjustments is measured using an effective tax rate, as appropriate by tax jurisdiction.
While these adjustments are an integral part of the overall performance of F&G, market conditions and/or the non-operating nature of these items can overshadow the underlying performance of the core business. Accordingly, management considers this to be a useful measure internally and to investors and analysts in analyzing the trends of our operations. Adjusted net earnings should not be used as a substitute for net earnings (loss). However, we believe the adjustments made to net earnings (loss) in order to derive adjusted net earnings provide an understanding of our overall results of operations.
For example, we could have strong operating results in a given period, yet report net income that is materially less, if during such period the fair value of our derivative assets hedging the FIA and IUL index credit obligations decreased due to general equity market conditions but the embedded derivative liability related to the index credit obligation did not decrease in the same proportion as the derivative assets because of non-equity market factors such as interest rate and non-performance credit spread movements. Similarly, we could also have poor operating results in a given period yet show net earnings (loss) that is materially greater, if during such period the fair value of the derivative assets increases but the embedded derivative liability did not increase in the same proportion as the derivative assets. We hedge our index credits with a combination of static and dynamic strategies, which can result in earnings volatility, the effects of which are generally likely to reverse over time. Our management and board of directors review adjusted net earnings and net earnings (loss) as part of their examination of our overall financial results. However, these examples illustrate the significant impact derivative and embedded derivative movements can have on our net earnings (loss). Accordingly, our management performs a review and analysis of these items, as part of their review of our hedging results each period.
Amounts attributable to the fair value accounting for derivatives hedging the FIA and IUL index credits and the related embedded derivative liability fluctuate from period to period based upon changes in the fair values of call options purchased to fund the annual index credits, changes in the interest rates and non-performance credit spreads used to discount the embedded derivative liability, and the fair value assumptions reflected in the embedded derivative liability. The accounting standards for fair value measurement require the discount rates used in the calculation of the embedded derivative liability to be based on risk-free interest rates adjusted for our non-performance as of the reporting date. The impact of the change in fair values of FIA-related derivatives, embedded derivatives and hedging costs has been removed from net earnings (loss) in calculating adjusted net earnings.
Total Equity excluding AOCI
Total equity excluding AOCI is based on total equity excluding the effect of AOCI.Since AOCI fluctuates from quarter to quarter due to unrealized changes in the fair value of available for sale investments, management considers this non-GAAP financial measure to provide useful supplemental information internally and to investors and analysts assessing the level of earned equity on total equity.
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Debt-to-Capital ratio excluding AOCI
Debt-to-capital ratio excluding AOCI is computed by dividing total aggregate principal amount of debt by total capitalization (total debt plus total equity excluding AOCI). Management considers this non-GAAP financial measure to be useful internally and to investors and analysts when assessing its capital position.
Book Value per Share (including and excluding AOCI)
Book value per share including and excluding AOCI is calculated as total equity (or total equity excluding AOCI) divided by the total number of shares of common stock outstanding. Management considers this to be a useful measure internally and for investors and analysts to assess the capital position of the Company.
Return on Average Equity 1
Return on average equity is calculated by dividing net earnings (loss) attributable to common shareholders by total average equity. Average equity for the twelve months rolling period, is the simple average of 5 points throughout the period and for the quarterly period average equity is calculated using the beginning and ending equity for the period. For periods less than a full fiscal year, amounts disclosed in Summary Historical Consolidated Financial Information are annualized. As a result of the FNF Acquisition, the starting point for calculation of average equity was reset to June 1, 2020. The rolling average is calculated from the FNF Acquisition date forward to use available historical data points until 5 historical data points are available. Management considers the 5 point average to be a more precise measure of average equity over a one year period as it smooths any one period that might have a significant increase or decrease. Management considers this to be a useful measure internally and for investors and analysts to assess the level of return driven by the Company that is available to common shareholders.
Return on Average Equity excluding AOCI 1
Return on average equity excluding AOCI is calculated by dividing net earnings (loss) attributable to common shareholders by total average equity excluding AOCI. Average equity excluding AOCI for the twelve months rolling period, is the simple average of 5 points throughout the period and for the quarterly period average equity excluding AOCI is calculated using the beginning and ending equity, excluding AOCI, for the period. For periods less than a full fiscal year, amounts disclosed in Summary Historical Consolidated Financial Information are annualized. As a result of the acquisition, the starting point for calculation of average equity was reset to June 1, 2020. The rolling average is calculated from the acquisition date forward to use available historical data points until 5 historical data points are available. Since AOCI fluctuates from quarter to quarter due to unrealized changes in the fair value of available for sale investments, management considers the 5 point average to be a more precise measure of average equity over a one year period as it smooths any one period that might have a significant increase or decrease. Management considers this to be a useful measure internally and for investors and analysts to assess the level of return driven by the Company that is available to common shareholders.
Adjusted Return on Average Equity excluding AOCI 1
Adjusted return on equity excluding AOCI is calculated by dividing adjusted net earnings by total average equity excluding AOCI. Average equity excluding AOCI for the twelve months rolling period, is the simple average of 5 points throughout the period and for the quarterly period average equity is calculated using the beginning and ending equity, excluding AOCI, for the period. For periods less than a full fiscal year, amounts disclosed in the table are annualized. As a result of the FNF Acquisition, the starting point for calculation of average equity was reset to June 1, 2020. The rolling average is calculated from the FNF Acquisition date forward to use available historical data points until 5 historical data points are available. Management considers the 5 point average to be a more precise measure of average equity over a one year period as it smooths any one period that might have a significant
1 The calculation as of June 30, 2022, utilizes a 5 point simple average of the equity balances as of June 30, 2021, September 30, 2021, December 31, 2021, March 31, 2022 and June 30, 2022. The calculations for the years ended December 31, 2021 and December 31, 2019, utilize a 5 point simple average of the equity balances as of the prior December 31, and the respective year equity balances as of March 31, June 30, September 30 and December 31. The calculation as of May 31, 2020, utilizes a 5 point simple average of the equity balances as of June 30, 2019, September 30, 2019, December 31, 2019, March 31, 2020 and May 31, 2020. The calculation as of December 31, 2020, utilizes a 4 point simple average of the equity balances as of June 1, 2020, June 30, 2020, September 30, 2020, and December 31, 2020.
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increase or decrease. Since AOCI fluctuates from quarter to quarter due to unrealized changes in the fair value of available for sale investments, management considers this non-GAAP financial measure to provide useful supplemental information internally and to investors and analysts assessing the level of adjusted earned return on equity.
Assets Under Management
AUM is a non-GAAP measure that we use to assess the rate of return on assets available for reinvestment. AUM is calculated as the sum of:
(i)total invested assets at amortized cost, excluding derivatives, net of reinsurance qualifying for risk transfer in accordance with GAAP;
(ii)