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Section 1: 8-K (8-K)

Document




 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 8-K

 
CURRENT REPORT

Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported): November 15, 2017


FIDELITY & GUARANTY LIFE
(Exact name of registrant as specified in its charter)


 
 
 
 
 
 
Delaware
 
001-36227
 
46-3489149
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(IRS Employer
Identification No.)
 
 
 
 
 
Two Ruan Center
601 Locust Street, 14th Floor
Des Moines, IA
 
50309
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code: (800) 445-6758
Former name or former address, if changed since last report.


Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
     
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))







Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o


 
Item 2.02.
Results of Operations and Financial Condition.
 
The following information, including the Exhibits referenced in this Item 2.02, is being furnished pursuant to this Item 2.02 and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.
 
On November 15, 2017, Fidelity & Guaranty Life (the “Company”) issued a press release announcing its results of operations for the quarter ended September 30, 2017. A copy of the press release is furnished as Exhibit 99.1 to this Report. In addition, the Company is including as Exhibit 99.2 to this report the related quarterly financial supplement.


Item 9.01
Financial Statements and Exhibits.
 
(d) Exhibits
 
 
 
 
 
Exhibit
No.
  
 
Description
 
 
99.1
 
99.2
 
 





 

 
 

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
FIDELITY & GUARANTY LIFE
 
 
 
 
 
 
/s/ Eric L. Marhoun
 
 
Eric L. Marhoun
 
 
Executive Vice President, General Counsel and Secretary
 
 
 
 
Dated: November 15, 2017


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Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit


Fidelity & Guaranty Life Reports Fiscal Fourth Quarter 2017 Results
DES MOINES, Iowa: November 15, 2017 -- Fidelity & Guaranty Life (NYSE: FGL), a leading provider of annuities and life insurance, today announced financial results for the fiscal fourth quarter of 2017.
Reported net income was $61 million or $1.06 per diluted share for the fourth quarter, and $223 million or $3.83 per diluted share for the full year
Adjusted operating income was $63 million or $1.08 per diluted share for the fourth quarter, and $177 million or $3.03 per diluted share for the full year
Total annuity sales for the fiscal year increased 1% over prior year to $2.6 billion and included $1.9 billion fixed indexed annuity ("FIA") sales, up 2% over prior year
Average assets under management increased to $20.3 billion, up 8% over prior year
Net income for the fiscal fourth quarter of 2017 ended on September 30, 2017(1) was $61 million or $1.06 per diluted common share. Adjusted operating income for the fiscal fourth quarter of 2017 was $63 million, or $1.08 per diluted share, compared to adjusted operating income of $40 million, or $0.69 per diluted share, in the prior year period.
The table below reconciles reported after-tax net income to adjusted operating income ("AOI").
 
 
Three months ended September 30,
 
 
(In millions)
 
(Unaudited)
 
 
Reconciliation from Net Income to AOI(2):
 
2017
 
2016
 
Increase (decrease)
Net income
 
$
61

 
$
30

 
$
31

Effect of investment losses (gains), net of offsets
 
(5
)
 
5

 
(10
)
Effect of change in FIA embedded derivative discount rate, net of offsets
 
3

 
(7
)
 
10

Effect of change in fair value of reinsurance related embedded derivative, net of offsets
 
5

 
17

 
(12
)
Tax impact of adjusting items
 
(1
)
 
(5
)
 
4

Adjusted operating income
 
$
63

 
$
40

 
$
23

See footnotes at end of release.
The current quarter included net favorable items of $19 million or $0.32 per diluted share. The prior year quarter included net favorable items of $4 million or $0.07 per diluted share. The table below details notable items in both periods.
 
 
 
 
 
 
 
Current Year Fiscal Quarter
 
 
 
 
 
  Net favorable adjustments for lower deferred acquisition cost ("DAC") amortization from unlocking, annual assumption review and equity market fluctuations; AOI also included $10 million out of period actuarial adjustments
 
$21 million
 
 
 
  Lower effective tax rate
 
$2 million
 
 
 
  Unfavorable actual to expected mortality within single premium immediate annuity ("SPIA") product line
 
($2) million
 
 
 
  Higher expense related to merger transaction costs
 
($2) million
 
 
Prior Year Fiscal Quarter
 
 
 
 
 
  Net favorable adjustments related to lower DAC amortization, primarily due to equity market fluctuations, and bond prepayment income
 
$6 million
 
 
 
  Higher expenses related to long-term incentive compensation plans
 
($2) million
 
 
 
 
 
 
 
"We delivered yet another solid quarter and a strong finish to fiscal 2017 with meaningful increases in net income, adjusted operating income, net investment spread, and assets under management," said Chris Littlefield, President and CEO of FGL. "The core earnings power of our business continued to expand with AOI reaching $177 million for the full year, up 9% over last year. FIA sales in the current quarter were down due to the continued strong equity market performance as well as uncertainty regarding the Department of Labor rule which has slowed industry-wide sales this year, but FIA sales were up 2% for the full fiscal year,





right in line with our plan. Finally, the regulatory approval processes for the merger with CF Corporation are progressing well. Last week, we received approval from the New York Department of Financial Services and completed the public hearing with the Iowa Insurance Division.  We expect to be in a position to close the transaction before the end of the year subject to receipt of approval from Iowa."

Fiscal Year 2017 Summary
FGL reported net income of $223 million, or $3.83 per diluted share, for fiscal year 2017, compared to net income of $97 million, or $1.66 per diluted share, for fiscal year 2016. The Company reported adjusted operating income of $177 million, or $3.03 per diluted share, for fiscal year 2017, compared to adjusted operating income of $162 million, or $2.77 per diluted share, for fiscal year 2016. The prior fiscal year included $17 million benefit from lower DAC amortization primarily due to equity market fluctuations, $6 million bond prepayment income and $7 million SPIA and other favorable reserve adjustments, partially offset by $6 million higher expense related to the pending merger transaction and long-term incentive compensation plans. The current fiscal year includes $18 million net benefit for lower DAC amortization from unlocking, annual assumption review and equity market fluctuations, $5 million net favorable SPIA and other reserve adjustments, and $4 million bond prepayment income and lower tax expense, partially offset by $11 million higher expense related to the pending merger transaction and legacy incentive compensation plans.

Summary Financial Results (Unaudited)
 
 
Three months ended September 30,
 
Year ended September 30,
(In millions, except per share data)
 
2017
 
2016
 
2017
 
2016
Fixed indexed annuity sales (2)
 
$
424

 
$
482

 
$
1,868

 
$
1,832

Total annuity sales (2)
 
$
588

 
$
603

 
$
2,550

 
$
2,525

Average assets under management (2)
 
$
20,840

 
$
19,381

 
$
20,324

 
$
18,738

Net investment spread - FIA (2)
 
3.00
%
 
2.98
%
 
3.02
%
 
2.97
%
Net investment spread - All products (2)
 
2.44
%
 
2.27
%
 
2.42
%
 
2.27
%
Net income
 
$
61

 
$
30

 
$
223

 
$
97

Net income per diluted share
 
$
1.06

 
$
0.52

 
$
3.83

 
$
1.66

Adjusted operating income (“AOI”) (2)
 
$
63

 
$
40

 
$
177

 
$
162

AOI per diluted share (2)
 
$
1.08

 
$
0.69

 
$
3.03

 
$
2.77

Weighted average basic shares
 
58.3

 
58.3

 
58.3

 
58.3

Weighted average diluted shares
 
58.5

 
58.4

 
58.4

 
58.6

Total common shares outstanding
 
58.9

 
59.0

 
58.9

 
59.0

Book value per share
 
$
38.13

 
$
32.80

 
$
38.13

 
$
32.80

Book value per share, excluding AOCI (2)
 
$
28.92

 
$
25.36

 
$
28.92

 
$
25.36

See footnotes below.

Sales In Line With Expectations
For the fiscal fourth quarter, sales of our core fixed indexed annuity ("FIA") product were $424 million, a 12% decrease over the prior year quarter. On a sequential basis, FIA sales decreased 7% as compared to the fiscal third quarter of 2017. As expected, FIA sales levels were influenced from an overall industry decline in FIA sales over the past few quarters resulting from strong equity market performance as well as focus by carriers and independent marketing organizations ("IMO's") on the Department of Labor ("DOL") fiduciary rule implementation. FIA sales were $1.9 billion for the fiscal year, an increase of 2% over the prior year. FIA sales levels in recent quarters reflect strong and productive partnerships with our IMO's, and our continued discipline to achieve new business profitability and capital targets.





Sales of multi-year guarantee annuities ("MYGA") were $164 million in the current quarter as compared to $121 million in the same period last year. Total annuity sales were $588 million for the fourth quarter, a decrease of 2% compared to the fiscal fourth quarter of 2016. For the fiscal year, total annuity sales were $2.6 billion, a 1% increase over the prior year.
Indexed universal life ("IUL") sales in the quarter were $6 million compared to $17 million last year. The decline in IUL sales reflects our focus on quality of new business and pricing discipline to achieve profitability and capital targets. IUL sales were $46 million for the current fiscal year compared to $56 million in the prior year.
Investment Portfolio Performance
Overall, the investment portfolio is performing in line with expectations. Net investment income was $261 million for the quarter, an increase of 10% compared to $238 million for the same period last year. This growth was driven by increases in average assets under management ("AAUM"), which grew $1.6 billion or 8% over the prior year from sales and stable policy owner retention trends.
The average earned yield on the total portfolio in the quarter was 5.02%, up 12 basis points from 4.90% in the prior year quarter, driven by higher income on structured securities and a higher allocation to private credit strategies with a focus on current income over the past year. Asset purchases during the quarter were $0.7 billion at an average yield of 4.95% primarily reflecting purchases in investment grade corporate bonds and structured securities. The average NAIC rating for the portfolio remains approximately 1.5.
Net investment spread across all product lines increased 17 basis points to 244 basis points, compared to fiscal fourth quarter 2016. Net investment spread in the current quarter for fixed indexed annuities was consistent with recent performance at 300 basis points.

Capital Management Trends
GAAP book value per share at September 30, 2017 was $38.13 on a reported basis; book value per share excluding accumulated other comprehensive income (“AOCI”) was $28.92, an increase of 14% year over year.
As announced on November 9, 2017, the FGL Board of Directors has declared a quarterly dividend of $0.065 per share. The dividend is payable on December 11, 2017 to shareholders of record as of the close of business on November 27, 2017.
On November 14, 2017, Fidelity & Guaranty Life Holdings, Inc. ("FGLH"), a subsidiary of FGL, received majority consent from holders of its 6.375% senior notes due 2021 to adopt certain amendments to their governing indenture. These amendments principally impact provisions of the indenture that would have been affected by the merger with CF Corp. and do not affect the principal, term or borrowing rate of the notes outstanding. The indenture will be modified and FGLH will pay the consent consideration once all the conditions with respect to the consummation of the merger have been satisfied.







FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
 
September 30,
2017
 
September 30,
2016
ASSETS
 
 
 
Investments:
 
 
 
Fixed maturity securities, available-for-sale, at fair value (amortized cost: September 30, 2017 - $20,063; September 30, 2016 - $18,521)
$
21,154

 
$
19,411

Equity securities, available-for-sale, at fair value (amortized cost: September 30, 2017 - $733; September 30, 2016 - $640)
773

 
683

Derivative investments
413

 
276

Commercial mortgage loans
547

 
595

Other invested assets
185

 
60

Total investments
23,072

 
21,025

Related party loans
71

 
71

Cash and cash equivalents
885

 
864

Accrued investment income
231

 
214

Reinsurance recoverable
3,375

 
3,464

Intangibles, net
1,129

 
1,026

Deferred tax assets, net

 

Other assets
202

 
371

Total assets
$
28,965

 
$
27,035

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
Contractholder funds
$
20,792

 
$
19,251

Future policy benefits
3,412

 
3,467

Funds withheld for reinsurance liabilities
1,083

 
1,172

Liability for policy and contract claims
67

 
55

Debt
300

 
300

Revolving credit facility
105

 
100

Deferred tax liability, net
62

 
10

Other liabilities
897

 
746

Total liabilities
26,718

 
25,101

 
 
 
 
Commitments and contingencies

 

 
 
 
 
 Shareholders' equity:
 
 
 
Preferred stock ($.01 par value, 50,000,000 shares authorized, no shares issued at September 30, 2017 and September 30, 2016)
$

 
$

Common stock ($.01 par value, 500,000,000 shares authorized, 58,933,415 issued and outstanding at September 30, 2017; 58,956,127 shares issued and outstanding at September 30, 2016)
1

 
1

Additional paid-in capital
716

 
714

Retained earnings
1,000

 
792

Accumulated other comprehensive income
543

 
439

Treasury stock, at cost (568,847 shares at September 30, 2017; 537,613 shares at September 30, 2016)
(13
)
 
(12
)
Total shareholders' equity
2,247

 
1,934

Total liabilities and shareholders' equity
$
28,965

 
$
27,035






FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
 
Three months ended
 
Year Ended
 
September 30, 2017
(Unaudited)
 
September 30, 2016
(Unaudited)
 
September 30, 2017
(Unaudited)
 
September 30, 2016
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Premiums
$
16

 
$
18

 
$
42

 
$
70

Net investment income
261

 
238

 
1,005

 
923

Net investment gains (losses)
117

 
26

 
316

 
19

Insurance and investment product fees and other
41

 
34

 
167

 
127

Total revenues
435

 
316

 
1,530

 
1,139

Benefits and expenses:
 
 
 
 
 
 
 
Benefits and other changes in policy reserves
320

 
206

 
843

 
791

Acquisition and operating expenses, net of deferrals
36

 
36

 
137

 
119

Amortization of intangibles
(14
)
 
20

 
193

 
54

        Total benefits and expenses
342

 
262

 
1,173

 
964

Operating income
93

 
54

 
357

 
175

Interest expense
(6
)
 
(5
)
 
(24
)
 
(22
)
Income before income taxes
87

 
49

 
333

 
153

Income tax expense
(26
)
 
(19
)
 
(110
)
 
(56
)
        Net income
$
61

 
$
30

 
$
223

 
$
97

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.06

 
$
0.52

 
$
3.83

 
$
1.67

Diluted
$
1.06

 
$
0.52

 
$
3.83

 
$
1.66

Weighted average common shares used in computing net income per common share:
 
 
 
 
 
 
 
Basic
58.3

 
58.3

 
58.3

 
58.3

Diluted
58.5

 
58.4

 
58.4

 
58.6

 
 
 
 
 
 
 
 
Cash dividend per common share
$
0.065

 
$
0.065

 
$
0.260

 
$
0.260









RECONCILIATION OF BOOK VALUE PER SHARE EXCLUDING AOCI

(In millions, except per share data)
September 30, 2017
(Unaudited)
 
September 30, 2016
(Unaudited)
Reconciliation to total shareholder's equity:
 
 
 
Total shareholder's equity
$
2,247

 
$
1,934

     Less: AOCI
543

 
439

Total shareholder's equity excluding AOCI
$
1,704

 
$
1,495

 
 
 
 
Total shares outstanding
58.9

 
59.0

Weighted average shares outstanding - basic
58.3

 
58.3

Weighted average shares outstanding - diluted
58.4

 
58.6

 
 
 
 
Book value per share
$
38.13

 
$
32.80

Book value per share, excluding AOCI(2)
$
28.92

 
$
25.36

 
 
 
 
 
Footnotes:
(1)
Fidelity & Guaranty Life’s fiscal year ends on September 30.
(2)
Non-GAAP financial measure. See the Non-GAAP Measures section below for additional information.


Agreement and Plan of Merger with CF Corporation ("CF Corp.")
On May 24, 2017, FGL and CF Corp. entered into a definitive merger agreement (the "Merger Agreement") pursuant to which CF Corp. will acquire all outstanding shares of FGL (the "Merger") for $31.10 per share in cash, without interest, plus the assumption of $405 million of existing debt. The joint press release can be found on FGL's investor relations website
at www.fglife.com.
The transaction is expected to close in the calendar fourth quarter of 2017. The Merger is subject to closing conditions, including the approval of the shareholders of CF Corp., the receipt of regulatory approvals from the Iowa Insurance Division, the New York Department of Financial Services, and the Vermont Department of Financial Regulation, and the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). On June 16, 2017, the Federal Trade Commission granted early termination of the waiting period under the HSR Act. CF Corp. shareholders voted to approve the merger on August 8, 2017. Requisite regulatory approval has been obtained from the Vermont Department of Financial Regulation and the New York Department of Financial Services. A public hearing on the proposed merger was held on November 7, 2017 by the Iowa Insurance Division.

Non-GAAP Measures
Management believes that certain non-GAAP financial measures may be useful in certain instances to provide additional meaningful comparisons between current results and results in prior operating periods. Reconciliations of such measures to the most comparable GAAP measures are included herein.
AOI is calculated by adjusting net income to eliminate (i) the impact of net investment gains including other-than-temporary impairment ("OTTI") losses recognized in operations, but excluding gains and losses on derivatives hedging our indexed annuity policies, (ii) the effect of changes in the interest rates used to discount the FIA embedded derivative liability, (iii) the effect of change in fair value of the reinsurance related embedded derivative, and iv) the effect of class action litigation reserves, if any. All adjustments to AOI are net of the corresponding VOBA and DAC impact. The income tax impact related to these adjustments is measured using an effective tax rate of 35%, as appropriate.
While these adjustments are an integral part of the overall performance of FGL, market conditions impacting these items can overshadow the underlying performance of the business. Accordingly, we believe using a measure which excludes their impact is effective in analyzing the trends of our operations. 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.
Net investment spread is the excess of net investment income earned over the sum of interest credited to policyholders and the cost of hedging our risk on FIA policies.





Average assets under management ("AAUM") is the sum of (i) total invested assets at amortized cost, excluding derivatives, (ii) related party loans and investments and (iii) cash and cash equivalents at the end of each month in the period divided by the number of months in the period.
Book value per share excluding AOCI is calculated as total stockholders' equity excluding AOCI divided by the total number of shares of common stock outstanding.
Sales are not derived from any specific GAAP income statement accounts or line items and should not be viewed as a substitute for any financial measure determined in accordance with GAAP. For GAAP purposes annuity sales are recorded as deposit liabilities (i.e. contract holder funds). Management believes that presentation of sales as measured for management purposes enhances the understanding of our business and helps depict longer term trends that may not be apparent in the results of operations due to the timing of sales and revenue recognition.
While management believes that non-GAAP measurements are useful supplemental information, such adjusted results are not intended to replace GAAP financial results and should be read in conjunction with those GAAP results.
Conference Call and Earnings Release
In light of the announced merger with CF Corp., FGL has elected to discontinue conference calls to discuss quarterly and annual results, pending the closing of the transaction. FGL will continue to issue its earnings press releases and quarterly financial supplement.

About Fidelity & Guaranty Life
Fidelity & Guaranty Life, an insurance holding company, helps middle-income Americans prepare for retirement. Through its subsidiaries, the company offers fixed annuity and life insurance products distributed by independent agents through an established network of independent marketing organizations. Fidelity & Guaranty Life, headquartered in Des Moines, Iowa, trades on the New York Stock Exchange under the ticker symbol FGL. For more information, please visit www.fglife.com.
Forward Looking Statements
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995: This document contains, and certain oral statements made by our representatives from time to time may contain, forward-looking statements, including as to FGL's evaluation of strategic alternatives and regarding our subsidiaries' ability to pay dividends. Such statements are subject to risks and uncertainties that could cause actual results, events and developments to differ materially from those set forth in, or implied by, such statements. These statements are based on the beliefs and assumptions of FGL's management and the management of FGL's subsidiaries (including target businesses). Generally, forward-looking statements include information concerning possible or assumed future distributions from subsidiaries, other actions, events, results, strategies and expectations and are generally identifiable by use of the words "believes," "expects," "intends," "anticipates," "plans," "seeks," "estimates," "projects," "may," "will," "could," "might," or "continues" or similar expressions. Factors that could cause actual results, events and developments to differ include, without limitation:  the accuracy of FGL's assumptions and estimates; FGL's and its insurance subsidiaries' ability to maintain or improve financial strength ratings; FGL's ability to manage its business in a highly regulated industry; regulatory changes or actions; the impact of FGL's reinsurers failing to meet their assumed obligations; restrictions on FGL's ability to use captive reinsurers; the impact of interest rate fluctuations; changes in the federal income tax laws and regulations; litigation (including class action litigation), enforcement investigations or regulatory scrutiny; the performance of third parties; the loss of key personnel; telecommunication, information technology and other operational systems failures; the continued availability of capital; new accounting rules or changes to existing accounting rules; general economic conditions; FGL's ability to protect its intellectual property; the ability to maintain or obtain approval of the Iowa Insurance Department and other regulatory authorities as required for FGL's operations; possible risks and uncertainties arising from FGL's evaluation of strategic alternatives; and other factors discussed in FGL's filings with the SEC including its Form 10-K for the year ended September 30, 2016, and its Form 10-Q for the quarters ended December 31, 2016, March 31, 2017 and June 30, 2017, which can be found at the SEC's website www.sec.gov.
All forward-looking statements described herein are qualified by these cautionary statements and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized. FGL does not undertake any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operation results, except as required by law.








Investor Contact:
Diana Hickert-Hill
Fidelity & Guaranty Life
[email protected]
410-487-0992


Media Contact:
Sard Verbinnen & Co
Jamie Tully or David Millar, 212-687-8080

Source: Fidelity & Guaranty Life


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Section 3: EX-99.2 (EXHIBIT 99.2)

Exhibit
Exhibit 99.2


391119097_logo2a02a08.jpg




Investor Supplement
Fourth Fiscal Quarter 2017
(Fiscal Year Ended September 30)

The financial statements and financial exhibits included herein are unaudited. These financial statements and exhibits should be read in conjunction with the Company's periodic reports on Form 10-K, Form 10-Q and Form 8-K.

Non-GAAP Financial Measures

This document contains non-GAAP financial measures to analyze the Company's operating performance for the periods presented. Because the Company's calculation of these measures may differ from similar measures used by other companies, investors should be careful when comparing the Company's non-GAAP financial measures to those of other companies.





FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
Financial Supplement
September 30, 2017
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
Financial Supplement - September 30, 2017
(unaudited)


FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
Consolidated Financial Highlights
 
Three Months Ended
 
Twelve Months Ended
 
September 30,
2017
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
 
(Dollars in millions, except per share data)
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums
$
16

 
$
12

 
$
3

 
$
11

 
$
18

 
$
42

 
$
70

Net investment income
261

 
257

 
247

 
240

 
238

 
1,005

 
923

Net investment gains (losses)
117

 
67

 
81

 
51

 
26

 
316

 
19

Insurance and investment product fees and other
41

 
44

 
44

 
38

 
34

 
167

 
127

Total revenues
435

 
380

 
375

 
340

 
316

 
1,530

 
1,139

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
61

 
$
32

 
$
22

 
$
108

 
$
30

 
$
223

 
$
97

Adjusted Operating Income ("AOI")
$
63

 
$
37

 
$
36

 
$
41

 
$
40

 
$
177

 
$
162

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per Unrestricted Common Shares Amounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
1.06

 
$
0.54

 
$
0.38

 
$
1.85

 
$
0.52

 
$
3.83

 
$
1.67

AOI
$
1.08

 
$
0.63

 
$
0.62

 
$
0.70

 
$
0.69

 
$
3.03

 
$
2.78

Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
1.06

 
$
0.54

 
$
0.38

 
$
1.85

 
$
0.52

 
$
3.83

 
$
1.66

AOI
$
1.08

 
$
0.63

 
$
0.62

 
$
0.70

 
$
0.69

 
$
3.03

 
$
2.77

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends Paid to Shareholders Per Share
$
0.065

 
$
0.065

 
$
0.065

 
$
0.065

 
$
0.065

 
$
0.260

 
$
0.260

 
 
 
 
 
 
 
 
 
 
 
 
 
 
At Period End
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
885

 
$
799

 
$
887

 
$
632

 
$
864

 
$
885

 
$
864

Total investments
$
23,072

 
$
22,627

 
$
21,813

 
$
21,076

 
$
21,025

 
$
23,072

 
$
21,025

Total assets
$
28,965

 
$
28,402

 
$
27,897

 
$
26,952

 
$
27,035

 
$
28,965

 
$
27,035

Contractholder funds
$
20,792

 
$
20,342

 
$
20,052

 
$
19,486

 
$
19,251

 
$
20,792

 
$
19,251

Future policy benefits
$
3,412

 
$
3,423

 
$
3,435

 
$
3,453

 
$
3,467

 
$
3,412

 
$
3,467

Debt (including revolving credit facility)
$
405

 
$
405

 
$
405

 
$
400

 
$
400

 
$
405

 
$
400

Total equity
$
2,247

 
$
2,113

 
$
1,908

 
$
1,752

 
$
1,934

 
$
2,247

 
$
1,934

Total equity excluding AOCI
$
1,704

 
$
1,646

 
$
1,617

 
$
1,599

 
$
1,495

 
$
1,704

 
$
1,495

Common shares issued and outstanding
58.93

 
58.99

 
58.99

 
58.98

 
58.96

 
58.93

 
58.96

 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP Book value per share
$
38.13

 
$
35.82

 
$
32.34

 
$
29.70

 
$
32.80

 
$
38.13

 
$
32.80

GAAP Book Value per Share excluding AOCI
$
28.92

 
$
27.90

 
$
27.41

 
$
27.11

 
$
25.36

 
28.92

 
25.36

Debt to total Capitalization excluding AOCI
19.2
%
 
19.7
%
 
20.0
%
 
20.0
%
 
21.1
%
 
19.2
%
 
21.1
%
Return on average shareholders' equity excluding AOCI
14.6
%
 
7.8
%
 
5.5
%
 
27.9
%
 
8.1
%
 
13.8
%
 
6.6
%
Statutory Book value per share(1)
$
25.91

 
$
25.18

 
$
26.06

 
$
22.43

 
$
22.39

 
25.91

 
22.39

Statutory Book value per share excluding IMR and AVR(1)
$
34.99

 
$
34.30

 
$
35.28

 
$
32.18

 
$
32.20

 
34.99

 
32.20

(1) The statutory book value per share and the statutory book value per share excluding interest maintenance reserve ("IMR") and asset valuation reserve ("AVR") are estimates due to the timing of the filing of statutory statements and are prepared consistent with the presentation of the statutory financial statements in the combined annual statement.

3

FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
Financial Supplement - September 30, 2017
(unaudited)

FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
 
September 30,
2017
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
ASSETS
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
Fixed maturity securities, available-for-sale, at fair value (amortized cost: September 30, 2017 - $20,063; September 30, 2016 - $18,521)
$
21,154

 
$
20,766

 
$
20,052

 
$
19,437

 
$
19,411

Equity securities, available-for-sale, at fair value (amortized cost: September 30, 2017 - $733; September 30, 2016 - $640)
773

 
774

 
712

 
696

 
683

Derivative investments
413

 
361

 
351

 
314

 
276

Commercial mortgage loans
547

 
550

 
579

 
582

 
595

Other invested assets
185

 
176

 
119

 
47

 
60

Total investments
23,072

 
22,627

 
21,813

 
21,076

 
21,025

Related party loans
71

 
71

 
71

 
71

 
71

Cash and cash equivalents
885

 
799

 
887

 
632

 
864

Accrued investment income
231

 
204

 
225

 
201

 
214

Reinsurance recoverable
3,375

 
3,390

 
3,426

 
3,444

 
3,464

Intangibles, net
1,129

 
1,097

 
1,184

 
1,228

 
1,026

Deferred tax assets, net

 

 
87

 
68

 

Other assets
202

 
214

 
204

 
232

 
371

Total assets
$
28,965

 
$
28,402

 
$
27,897

 
$
26,952

 
$
27,035

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Contractholder funds
$
20,792

 
$
20,342

 
$
20,052

 
$
19,486

 
$
19,251

Future policy benefits
3,412

 
3,423

 
3,435

 
3,453

 
3,467

Funds withheld for reinsurance liabilities
1,083

 
1,106

 
1,134

 
1,142

 
1,172

Liability for policy and contract claims
67

 
57

 
60

 
53

 
55

Debt
300

 
300

 
300

 
300

 
300

Revolving credit facility
105

 
105

 
105

 
100

 
100

Deferred tax liability, net
62

 
11

 

 

 
10

Other liabilities
897

 
945

 
903

 
666

 
746

Total liabilities
26,718

 
26,289

 
25,989

 
25,200

 
25,101

 
 
 
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
 
 
 
 
Preferred stock ($.01 par value, 50,000,000 shares authorized, no shares issued at September 30, 2017 and September 30, 2016)

 

 

 

 

Common stock ($.01 par value, 500,000,000 shares authorized, 58,933,415 issued and outstanding at September 30, 2017; 58,956,127 shares issued and outstanding at September 30, 2016)
1

 
1

 
1

 
1

 
1

Additional paid-in capital
716

 
716

 
715

 
715

 
714

Retained earnings
1,000

 
942

 
914

 
896

 
792

Accumulated other comprehensive income
543

 
467

 
291

 
153

 
439

Treasury stock, at cost (568,847 shares at September 30, 2017; 537,613 shares at September 30, 2016)
(13
)
 
(13
)
 
(13
)
 
(13
)
 
(12
)
Total shareholders' equity
2,247

 
2,113

 
1,908

 
1,752

 
1,934

Total liabilities and shareholders' equity
$
28,965

 
$
28,402

 
$
27,897

 
$
26,952

 
$
27,035


4

FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
Financial Supplement - September 30, 2017
(unaudited)

Quarterly Summary - Most Recent 5 Quarters
 
Three Months Ended
 
Twelve Months Ended
 
September 30,
2017
 
June 30,
2017
 
March 31,
2017
 
December 31,
2016
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
 
(Dollars in millions, except per share data)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Traditional life insurance premiums
$
10

 
$
7

 
$

 
$
10

 
$
11

 
$
27

 
$
42

Life contingent immediate annuity
6

 
5

 
3

 
1

 
7

 
15

 
28

Net investment income
261

 
257

 
247

 
240

 
238

 
1,005

 
923

Net investment gains (losses)
117

 
67

 
81

 
51

 
26

 
316

 
19

Surrender charges
9

 
9

 
9

 
7

 
8

 
34

 
22

Cost of insurance fees and other income
32

 
35

 
35

 
31

 
26

 
133

 
105

Total revenues
435

 
380

 
375

 
340

 
316

 
1,530

 
1,139

Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Traditional life insurance policy benefits and change in future policy benefits
18

 
21

 
11

 
22

 
18

 
72

 
70

Life contingent immediate annuity benefits and changes in future policy benefits
26

 
20

 
18

 
18

 
25

 
82

 
109

Interest sensitive and index product benefits and changes in future policy benefits
276

 
194

 
239

 
(20
)
 
163

 
689

 
612

General expenses
30

 
35

 
30

 
25

 
30

 
120

 
107

Acquisition expenses
65

 
72

 
81

 
92

 
89

 
310

 
325

Deferred acquisition costs ("DAC")
(59
)
 
(67
)
 
(78
)
 
(89
)
 
(83
)
 
(293
)
 
(313
)
Amortization of intangibles
(14
)
 
51

 
33

 
123

 
20

 
193

 
54

        Total benefits and expenses
342

 
326

 
334

 
171

 
262

 
1,173

 
964

Operating income
93

 
54

 
41

 
169

 
54

 
357

 
175

Interest expense
(6
)
 
(6
)
 
(6
)
 
(6
)
 
(5
)
 
(24
)
 
(22
)
Income before income taxes
87

 
48

 
35

 
163

 
49

 
333

 
153

Income tax expense
(26
)
 
(16
)
 
(13
)
 
(55
)
 
(19
)
 
(110
)
 
(56
)
Net income
$
61

 
$
32

 
$
22

 
$
108

 
$
30

 
$
223

 
$
97

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.06

 
$
0.54

 
$
0.38

 
$
1.85

 
$
0.52

 
$
3.83

 
$
1.67

Diluted
$
1.06

 
$
0.54

 
$
0.38

 
$
1.85

 
$
0.52

 
$
3.83

 
$
1.66

Weighted average common shares used in computing net income per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
58.34

 
0.06

 
58.33

 
58.28

 
58.26

 
58.32

 
58.28

Diluted
$
58.48

 
0.06

 
58.38

 
58.37

 
58.35

 
58.42

 
58.58



5

FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
Financial Supplement - September 30, 2017
(unaudited)


Reconciliation from Net Income to Adjusted Operating Income ("AOI ")

 
 
Three Months Ended
 
Twelve Months Ended
 
 
September 30, 2017 (a)
 
June 30, 2017
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
 
(Dollars in millions, except per share data)
Net income
 
$
61

 
$
32

 
$
22

 
$
108

 
$
30

 
$
223

 
$
97

Adjustments to arrive at AOI:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of investment (gains) losses, net of offsets (b)
 
(5
)
 
4

 
15

 
(1
)
 
5

 
13

 
9

Effect of change in FIA embedded derivative discount rate, net of offsets (b)
 
3

 
(4
)
 
(2
)
 
(92
)
 
(7
)
 
(95
)
 
54

Effect of change in fair value of reinsurance related embedded derivative, net of offsets (b)
 
5

 
8

 
8

 
(10
)
 
17

 
11

 
37

Tax impact of adjusting items
 
(1
)
 
(3
)
 
(7
)
 
36

 
(5
)
 
25

 
(35
)
AOI
 
$
63

 
$
37

 
$
36

 
$
41

 
$
40

 
$
177

 
$
162

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per diluted common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1.06

 
$
0.54

 
$
0.38

 
$
1.85

 
$
0.52

 
$
3.83

 
$
1.66

Adjustments to arrive at AOI:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of investment (gains) losses, net of offsets (b)
 
(0.09
)
 
0.07

 
0.26

 
(0.02
)
 
0.09

 
0.22

 
0.16

Effect of change in FIA embedded derivative discount rate, net of offsets (b)
 
0.05

 
(0.07
)
 
(0.04
)
 
(1.58
)
 
(0.12
)
 
(1.64
)
 
0.92

Effect of change in fair value of reinsurance related embedded derivative, net of offsets (b)
 
0.09

 
0.14

 
0.14

 
(0.17
)
 
0.29

 
0.20

 
0.63

Tax impact of adjusting items
 
(0.02
)
 
(0.05
)
 
(0.12
)
 
0.62

 
(0.09
)
 
0.43

 
(0.60
)
AOI per diluted share
 
$
1.09

 
$
0.63

 
$
0.62

 
$
0.70

 
$
0.69

 
$
3.04

 
$
2.77


(a) Net income includes two out-of-period actuarial items ("option budget" and "risk free rate") of approximately $10 each, which are mostly offsetting with $0 impact to net income. The "option budget" item also impacted AOI while the "risk free rate" item is included in the AOI adjustments resulting in no net impact to AOI.
(b) Amounts are net of offsets related to value of business acquired ("VOBA") and deferred acquisition cost ("DAC") amortization.


6

FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
Financial Supplement - September 30, 2017
(unaudited)


NON-GAAP FINANCIAL MEASURES
AOI
AOI is a non-GAAP economic measure we use to evaluate financial performance each period. AOI is calculated by adjusting net income to eliminate (i) the impact of net investment gains including other than temporary impairment ("OTTI") losses recognized in operations, but excluding gains and losses on derivatives hedging our indexed annuity policies, (ii) the effect of changes in the interest rates used to discount the FIA embedded derivative liability, and (iii) the effect of change in fair value of the reinsurance related embedded derivative. All adjustments to AOI are net of the corresponding VOBA and DAC impact. The income tax impact related to these adjustments is measured using an effective tax rate of 35%, as appropriate. While these adjustments are an integral part of the overall performance of FGL, market conditions impacting these items can overshadow the underlying performance of the business. Accordingly, we believe using a measure which excludes their impact is effective in analyzing the trends of our operations. 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.


Sales
Sales are not derived from any specific GAAP income statement accounts or line items and should not be viewed as a substitute for any financial measure determined in accordance with GAAP. For GAAP purposes annuity sales are recorded as deposit liabilities (i.e. contract holder funds). Management believes that presentation of sales as measured for management purposes enhances the understanding of our business and helps depict longer term trends that may not be apparent in the results of operations due to the timing of sales and revenue recognition.
While management believes that non-GAAP measurements are useful supplemental information, such adjusted results are not intended to replace GAAP financial results and should be read in conjunction with those GAAP results.


7

FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
Financial Supplement - September 30, 2017
(unaudited)


Summary of Adjustments to Arrive at AOI

 
 
Three Months Ended
 
Twelve Months Ended
 
 
September 30, 2017
 
June 30, 2017
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
 
(Dollars in millions)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment gains (a)
 
$
1

 
$
15

 
$
28

 
$
(12
)
 
$
29

 
$
32

 
$
63

Increase (decrease) in total revenues
 
1

 
15

 
28

 
(12
)
 
29

 
32

 
63

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and other changes in policy reserves (b)
 
12

 
(10
)
 
(1
)
 
(168
)
 
(16
)
 
(167
)
 
97

Amortization of intangibles (c)
 
(10
)
 
3

 
(6
)
 
77

 
2

 
64

 
(60
)
(Decrease) increase in total benefits and expenses
 
2

 
(7
)
 
(7
)
 
(91
)
 
(14
)
 
(103
)
 
37

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Increase (decrease) in pre-tax operating income
 
3

 
8

 
21

 
(103
)
 
15

 
(71
)
 
100

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Decrease) increase in income tax expense (benefit) (d)
 
(1
)
 
(3
)
 
(7
)
 
36

 
(5
)
 
25

 
(35
)
Increase (decrease) in net income
 
$
2

 
$
5

 
$
14

 
$
(67
)
 
$
10

 
$
(46
)
 
$
65


(a) Net investment gains: includes the effects of net investment gains and change in fair value of the reinsurance related embedded derivative.
(b) Benefits and other changes in policy reserves: includes the effects of the change in fair value of the FIA embedded derivative discount rate and the "risk free rate" item of $26.
(c) Amortization of intangibles includes the impact on DAC and VOBA of the adjustments in a-b above including an ($11) impact on amortization of the "risk free rate" item noted in (b).
(d) The tax expense (benefit) includes the tax impact of the adjustments in a-c above, including a ($5) tax impact of the "risk free rate" item and related amortization noted in (b) and (c).

8

FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
Financial Supplement - September 30, 2017
(unaudited)

Notable Items Included in Net Income and AOI

Each quarterly reporting period, we identify notable items that explain the trends in our Net Income and AOI.  These items are infrequent in nature or involve accounting volatility under general accepted accounting principles. The amounts below are included in disclosures within the Company's earnings releases to explain our Net Income and AOI results.  We believe that understanding these items provides further clarity to the financial performance of the business.   
 
 
Three Months Ended
 
Twelve Months Ended
 
 
September 30, 2017 (a)
 
June 30, 2017
 
March 31, 2017
 
December 31, 2016
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
 
(Dollars in millions)
Net income
 
$
61

 
$
32

 
$
22

 
$
108

 
$
30

 
$
223

 
$
97

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AOI
 
$
63

 
$
37

 
$
36

 
$
41

 
$
40

 
$
177

 
$
162

Notable Items Included within AOI [(unfavorable)/favorable]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy incentive compensation (b)
 

 
(1
)
 
(1
)
 

 
(2
)
 
(2
)
 
(2
)
Project expenses (c)
 
(2
)
 
(5
)
 
(2
)
 

 

 
(9
)
 
(4
)
Single premium immediate annuities ("SPIA") mortality & other reserve adjustments (d)
 
(2
)
 
2

 
3

 
2

 

 
5

 
7

Assumption review & DAC unlocking (e)
 
21

 

 
(3
)
 

 
5

 
18

 
17

Other, including bond prepayment income & tax valuation allowance (f)
 
2

 

 

 
2

 
1

 
4

 
6


(a) Net income includes two out-of-period actuarial items ("option budget" and "risk free rate") of approximately $10 each, which are mostly offsetting with $0 impact to net income. The "option budget" item also impacted AOI while the "risk free rate" item is included in the AOI adjustments resulting in no net impact to AOI.
(b) Change in certain long term incentive compensation costs, including the change in the liability for our FGLH stock compensation plan, which as a liability plan, is settled in cash and accounted for at fair value each reporting period.
(c) Expenses associated with corporate development activities, including mergers & acquisitions.
(d) The release of annuity reserves associated with mortality of annuitants, which varies due to timing, volume and severity of experience, and other reserve adjustments.
(e) Reflects unlocking from updating our DAC amortization models for actual experience and equity market fluctuations. Also, annually in the 4th fiscal quarter, we complete our Annual Assumption Review & DAC Unlocking process by adjusting our valuation assumptions to align with actual experience. Finally, for the three months ended September 30, 2017, includes $10 related to the "option budget" item.
(f) Bond prepayment income, changes in tax valuation, and other allowances related to reinsurance and agent debt, reinsurance settlements and other net favorable activity.

9

FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
Financial Supplement - September 30, 2017
(unaudited)

Capitalization/Book Value per Share