Adoption of ASU 2018-12

3 Months Ended

Mar. 31, 2023

Adoption of ASU 2018-12

3. Adoption of ASU 2018-12

On January 1, 2023, we adopted FASB Accounting Standards Update (“ASU”) 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts and related amendments (“ASU 2018-12”) with a transition date of January 1, 2021. ASU 2018-12 updated accounting and reporting requirements for long-duration contracts and certain investment contracts issued by insurance entities. We adopted ASU 2018-12 under the modified retrospective approach, except for MRBs, which applied the full retrospective approach. Our consolidated financial statements are presented under the new guidance for reporting periods beginning January 1, 2021.

Under ASU 2018-12, we include actual historical cash flows along with best estimate future cash flows to derive the net premium ratio when calculating the LFPB associated with our traditional and limited-payment long-duration contracts. We review and update, if necessary, assumptions used to measure future cash flows included in the net premium ratio at least annually. Historical cash flows included in the net premium ratio are updated for actual experience quarterly and as assumptions are updated. Changes in the measurement of our LFPB result from updates to cash flow assumptions and actual experience, which impacts are reported within policyholder remeasurement gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). We use an upper-medium grade (low credit risk) fixed-income instrument yield (single-A) discount rate when calculating the LFPB. This discount rate is updated quarterly at each reporting date with the impact recognized in OCI. ASU 2018-12 also eliminated loss recognition testing, premium deficiency testing and the provision for adverse deviation for LFPB.

ASU 2018-12 introduced the category of MRBs, which are contracts or contract features that provide protection to the policyholder from other-than-nominal capital market risk and expose us to other-than-nominal capital market risk upon the occurrence of a specific event or circumstance, such as death, annuitization or periodic withdrawal. MRBs are required to be measured at fair value, with periodic changes in fair value reported within MRB gain (loss) on our Consolidated Statements of Comprehensive Income (Loss), except for periodic

changes to instrument-specific credit risk related to direct policies, which are recognized in OCI. Changes in the fair value of ceded MRB assets and liabilities are also reported within MRB gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

ASU 2018-12 simplified the amortization model for DAC and DAC-like intangible balances, including VOBA, DSI and DFEL. Historically these balances were amortized in proportion to premium or over expected gross profits. They are now amortized on a constant-level basis over the expected term of the contract. Loss recognition testing and impairment testing are no longer applicable for DAC.

ASU 2018-12 requires disaggregated rollforwards of the beginning of year to the end of the reporting period balances. We also disclose information about inputs, judgments, assumptions, methods, changes during the period and the effect of these changes on the measurement of applicable balances. In determining the appropriate level of aggregation, we considered our reportable segments, nature and risk characteristics of our products and level of aggregation we used in disclosures presented outside the financial statements.

The following table presents the cumulative effect adjustments (in millions), after-tax and shown as increase (decrease), to the components of stockholder’s equity due to the adoption of ASU 2018-12 as of January 1, 2021, by primary accounting topic:



							Total
	Retained						Stockholder’s
	Earnings			AOCI			Equity
Shadow impacts:
DAC, VOBA, DSI and DFEL	$	-		$	2,271		$	2,271
Additional liabilities for other
insurance benefits		-			1,197			1,197
LFPB and Other ⁽¹⁾		(121	)		(1,520	)		(1,641	)
MRBs ⁽²⁾		(1,699	)		2,874			1,175
Total	$	(1,820	)	$	4,822		$	3,002

⁽¹⁾Includes impacts to reserves and ceded reserves reported within future contract benefits and reinsurance recoverables, respectively on the Consolidated Balance Sheets, excluding shadow impacts on additional liabilities for other insurance benefits.

⁽²⁾Includes impacts related to MRB assets and MRB liabilities reported on the Consolidated Balance Sheets, and ceded MRBs reported within other assets on the Consolidated Balance Sheets.

The following table summarizes the effect of the adoption of ASU 2018-12 as of January 1, 2021, (in millions) on the Consolidated Balance Sheets:



							Total
	Retained						Stockholder’s
	Earnings			AOCI			Equity
DAC, VOBA and DSI	$	-		$	6,079		$	6,079
Reinsurance recoverables		607			2,556			3,163
Other assets ⁽¹⁾		5,795			-			5,795
Future contract benefits		(760	)		(2,966	)		(3,726	)
MRBs, net		(7,956	)		3,656			(4,300	)
DFEL		-			(3,190	)		(3,190	)
Other liabilities ⁽²⁾		494			(1,313	)		(819	)
Total	$	(1,820	)	$	4,822		$	3,002

⁽¹⁾Consists primarily of ceded MRB adjustments.

⁽²⁾Consists of state and federal tax adjustments.

‎

The following table summarizes the changes in DAC, VOBA and DSI, pre-tax, (in millions) due to the adoption of ASU 2018-12 and reconciles this balance to the Consolidated Balance Sheets:



			Impact from
	Balance		Removal of		Balance
	Pre-Adoption		Shadow		Post-Adoption
	December 31,		Balances		January 1,
	2020		from AOCI		2021
DAC
Traditional Life	$	1,041	$	-	$	1,041
UL and Other		297		5,031		5,328
Variable Annuities		3,675		52		3,727
Fixed Annuities		264		215		479
Group Protection		187		-		187
Retirement Plan Services		126		112		238
Total DAC		5,590		5,410		11,000

VOBA
Traditional Life		67		-		67
UL and Other		167		630		797
Fixed Annuities		-		23		23
Total VOBA		234		653		887

DSI ⁽¹⁾
UL and Other		35		-		35
Variable Annuities		194		2		196
Fixed Annuities		17		13		30
Retirement Plan Services		13		1		14
Total DSI		259		16		275
Total DAC, VOBA and DSI	$	6,083	$	6,079	$	12,162

⁽¹⁾Pre-adoption DSI balance was previously reported in other assets on the Consolidated Balance Sheets.

The following table summarizes the changes in DFEL, pre-tax, (in millions) due to the adoption of ASU 2018-12 and reconciles this balance to the Consolidated Balance Sheets:



			Impact from
	Balance		Removal of		Balance
	Pre-Adoption		Shadow		Post-Adoption
	December 31,		Balances		January 1,
	2020		from AOCI		2021
DFEL ⁽¹⁾
UL and Other	$	77	$	3,185	$	3,262
Variable Annuities		319		5		324
Total DFEL	$	396	$	3,190	$	3,586

⁽¹⁾Pre-adoption DFEL balance was previously reported in other contract holder funds on the Consolidated Balance Sheets.

‎

The following table summarizes the changes in future contract benefits, pre-tax, (in millions) due to the adoption of ASU 2018-12 and reconciles this balance to the Consolidated Balance Sheets:



			Impact from			Single-A
	Balance		Removal of			Discount		Cumulative			Balance
	Pre-Adoption		Shadow			Rate		Effect to			Post-Adoption
	December 31,		Balances			Measurement		Retained			January 1,
	2020 ⁽¹⁾		from AOCI			in AOCI		Earnings			2021
LFPB
Traditional Life	$	3,062	$	-		$	852	$	(2	)	$	3,912
Payout Annuities		2,313		(105	)		415		44			2,667
Liability for Future Claims
Group Protection		5,422		-			517		-			5,939
Additional Liabilities for Other
Insurance Benefits
UL and Other		13,687		(1,515	)		-		92			12,264
Other Operations ⁽²⁾		10,309		(80	)		2,882		626			13,737
Other ⁽³⁾		3,525		-			-		-			3,525
Total future contract benefits	$	38,318	$	(1,700	)	$	4,666	$	760		$	42,044

⁽¹⁾Balance pre-adoption excludes features that meet the definition of an MRB upon transition, including features that were previously accounted for as an additional liability. Also, balance pre-adoption reflects certain reclassifications of non-life contingent account balances from future contract benefits to policyholder account balances within the Consolidated Balance Sheets.

⁽²⁾Represents future contract benefits reported in Other Operations primarily attributable to the indemnity reinsurance agreements with Protective ($6.3 billion and $7.4 billion as of December 31, 2020, and January 1, 2021, respectively) and Swiss Re ($1.8 billion and $3.3 billion as of December 31, 2020, and January 1, 2021, respectively). Includes LFPB and additional liabilities balances.

⁽³⁾Represents other miscellaneous reserves outside the scope of ASU 2018-12.

The following table summarizes the changes in reinsurance recoverables, pre-tax, (in millions) due to the adoption of ASU 2018-12 and reconciles this balance to the Consolidated Balance Sheets:



			Single-A
	Balance		Discount		Cumulative			Balance
	Pre-Adoption		Rate		Effect to			Post-Adoption
	December 31,		Measurement		Retained			January 1,
	2020 ⁽¹⁾		in AOCI		Earnings			2021
Reinsured LFPB
Traditional Life	$	372	$	88	$	-		$	460
Payout Annuities		5		-		-			5
Reinsured Liability for Future
Claims
Group Protection		148		14		-			162
Reinsured Additional Liabilities
for Other Insurance Benefits
UL and Other		922		-		(3	)		919
Reinsured Other Operations ⁽²⁾		14,757		2,454		610			17,821
Reinsured Other ⁽³⁾		1,346		-		-			1,346
Total reinsurance recoverables	$	17,550	$	2,556	$	607		$	20,713

⁽¹⁾Balance pre-adoption excludes features that meet the definition of a ceded MRB upon transition, including features that were previously accounted for as reinsured additional liabilities.

⁽²⁾Represents reinsurance recoverables reported in Other Operations primarily attributable to the indemnity reinsurance agreements with Protective ($12.0 billion and $13.2 billion as of December 31, 2020, and January 1, 2021, respectively) and Swiss Re ($1.7 billion and $3.2 billion as of December 31, 2020, and January 1, 2021, respectively). Includes reinsured LFPB and reinsured additional liabilities balances.

⁽³⁾Represents other miscellaneous reinsurance recoverables outside the scope of ASU 2018-12.

‎

The following table summarizes the changes in the net liability position of MRBs, pre-tax, (in millions) due to the adoption of ASU 2018-12 and reconciles this balance to the Consolidated Balance Sheets:




	Balance		Cumulative			Cumulative			Balance
	Pre-Adoption		Effect of			Effect to			Post-Adoption
	December 31,		Credit Risk			Retained			January 1,
	2020⁽¹⁾		to AOCI			Earnings			2021
MRBs, Net
Variable Annuities	$	831	$	(3,592	)	$	7,968		$	5,207
Fixed Annuities		192		(52	)		(22	)		118
Retirement Plan Services		11		(12	)		10			9
Total MRBs, net	$	1,034	$	(3,656	)	$	7,956		$	5,334

⁽¹⁾Balance pre-adoption includes all features that meet the definition of an MRB upon transition, including features that were previously accounted for as additional liabilities or embedded derivatives.

The following table summarizes the changes in the net asset position of ceded MRBs, pre-tax, (in millions) due to the adoption of ASU 2018-12, reported in other assets on the Consolidated Balance Sheets:




	Balance		Cumulative		Balance
	Pre-Adoption		Effect to		Post-Adoption
	December 31,		Retained		January 1,
	2020⁽¹⁾		Earnings		2021
Ceded MRBs, Net
Variable Annuities	$	828	$	5,700	$	6,528
Retirement Plan Services		1		10		11
Total ceded MRBs, net	$	829	$	5,710	$	6,539

⁽¹⁾Balance pre-adoption includes all features that meet the definition of a ceded MRB upon transition, including features that were previously accounted for as reinsured additional liabilities or embedded derivatives.

The following summarizes the effect of the adoption of ASU 2018-12 (in millions) on certain financial statement line items within the previously reported Consolidated Balance Sheets:



	As of December 31, 2022
				Adoption
	As			of New
	Previously			Accounting			As
	Reported ⁽¹⁾			Standard			Adjusted
Deferred acquisition costs, value of business acquired and
deferred sales inducements ⁽²⁾	$	13,873		$	(1,610	)	$	12,263
Reinsurance recoverables, net of allowance for credit losses		23,910			(2,646	)		21,264
Market risk benefit assets		-			2,807			2,807
Other assets ⁽²⁾		21,080			(1,154	)		19,926
Total assets		338,266			(2,603	)		335,663
Future contract benefits ⁽²⁾		41,203			(2,901	)		38,302
Market risk benefit liabilities		-			2,078			2,078
Deferred front-end loads ⁽²⁾		5,695			(650	)		5,045
Other liabilities ⁽²⁾		16,125			(1,468	)		14,657
Total liabilities		330,000			(2,941	)		327,059
Retained earnings		2,436			(1,022	)		1,414
Accumulated other comprehensive income (loss)		(7,073	)		1,360			(5,713	)
Total stockholder’s equity		8,266			338			8,604

⁽¹⁾The amounts as previously reported were derived from our Annual Report on Form 10-K/A for the year ended December 31, 2022, filed on March 30, 2023, as disclosed in Note 1.

⁽²⁾Certain amounts have been reclassified to conform to the presentation adopted in the current period.

The following summarizes the effect of the adoption of ASU 2018-12 (in millions) on certain financial statement line items within the previously reported Consolidated Statements of Comprehensive Income (Loss):



	For the Three Months Ended
	March 31, 2022
				Adoption
	As			of New
	Previously			Accounting			As
	Reported ⁽¹⁾			Standard			Adjusted
Fee income	$	1,502		$	(109	)	$	1,393
Realized gain (loss)		257			103			360
Total revenues		4,681			(6	)		4,675
Benefits		2,199			(97	)		2,102
Interest credited		691			2			693
Market risk benefit (gain) loss		-			113			113
Policyholder liability remeasurement (gain) loss		-			41			41
Commissions and other expenses		1,191			22			1,213
Total expenses		4,141			81			4,222
Income (loss) before taxes		540			(87	)		453
Federal income tax expense (benefit)		82			(19	)		63
Net income (loss)		458			(68	)		390
Unrealized investment gain (loss)		(4,990	)		(2,310	)		(7,300	)
Market risk benefit non-performance risk gain (loss)		-			20			20
Policyholder liability discount rate remeasurement gain (loss)		-			759			759
Total other comprehensive income (loss), net of tax		(4,991	)		(1,531	)		(6,522	)
Comprehensive income (loss)		(4,533	)		(1,599	)		(6,132	)

⁽¹⁾The amounts as previously reported were primarily derived from our Annual Report on Form 10-K/A for the year ended December 31, 2022, filed on March 30, 2023, as disclosed in Note 24.



	For the Three Months Ended
	March 31, 2022
				Adoption
	As			of New
	Previously			Accounting			As
	Reported ⁽¹⁾			Standard			Adjusted
Retained earnings balance as of beginning-of-year	$	4,366		$	(632	)	$	3,734
Net income (loss)		458			(68	)		390
Retained earnings balance as of end-of-period		4,799			(700	)		4,099
Accumulated other comprehensive income (loss) balance
as of beginning-of-year		6,544			3,706			10,250
Other comprehensive income (loss), net of tax		(4,991	)		(1,531	)		(6,522	)
Accumulated other comprehensive income (loss) balance
as of end-of-period		1,553			2,175			3,728
Total stockholder’s equity as of end-of-period		18,300			1,475			19,775

⁽¹⁾The amounts as previously reported were derived from our Annual Report on Form 10-K/A for the year ended December 31, 2022, filed on March 30, 2023, as disclosed in Note 24.

‎

The following summarizes the effect of the adoption of ASU 2018-12 (in millions) on certain financial statement line items within the previously reported Consolidated Statements of Cash Flows:



	For the Three Months Ended
	March 31, 2022
				Adoption
	As			of New
	Previously			Accounting			As
	Reported ⁽¹⁾			Standard			Adjusted
Net income (loss)	$	458		$	(68	)	$	390
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Realized (gain) loss		(257	)		(103	)		(360	)
Market risk benefit (gain) loss		-			113			113
Change in:
Deferred acquisition costs, value of business acquired, deferred sales
inducements and deferred front-end loads		24			99			123
Insurance liabilities and reinsurance-related balances ⁽²⁾		23			8			31
Federal income tax accruals		82			(19	)		63
Other ⁽²⁾		(94	)		(30	)		(124	)

⁽¹⁾The amounts as previously reported were derived from our Annual Report on Form 10-K/A for the year ended December 31, 2022, filed on March 30, 2023, as disclosed in Note 24.

⁽²⁾Certain amounts have been reclassified to conform to the presentation adopted in the current period.