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Section 1: 10-K (10-K)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-K
 
 
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to
Commission file number: 001-37779
 
 
 
FGL HOLDINGS
(Exact name of registrant as specified in its charter)
 
 
 

Cayman Islands
 
98-1354810
(State or other jurisdiction of
incorporation or organization)
Sterling House
16 Wesley Street
Hamilton HM CX, Bermuda
(I.R.S. Employer
Identification No.)
 
(Address of principal executive offices, including zip code)
 
 
 
 

(800) 445-6758
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class:
 
Name of each exchange on which registered:
Ordinary shares, par value $.0001 per share
 
New York Stock Exchange
Warrants to purchase ordinary shares
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨   or    No  x



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨   or    No  x 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    or    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes x    or    No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x
Accelerated Filer
¨

Non-accelerated Filer
¨

(Do not check if a smaller reporting company)
 
Smaller reporting Company
¨
Emerging growth company
¨
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨   or    No  x
The aggregate market value of the ordinary shares held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second quarter, computer by reference to the closing price reported on the NASDAQ Capital Market as of June 30, 2017 was $776.
As of March 14, 2018, there were 214,370,000 ordinary shares, $.0001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this document is incorporated by reference herein to specific portions of the registrant's definitive proxy statement to be delivered to shareholders in connection with the 2018 Annual Meeting of Shareholders.
 



FGL HOLDINGS
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
 
PART I
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
 
 
PART III
 
 
PART IV
 
 
 
 

3


Explanatory Note

FGL Holdings (the “Company”, formerly known as CF Corporation), a Cayman Islands exempted company, was originally incorporated in the Cayman Islands on February 26, 2016 as a Special Purpose Acquisition Company ("SPAC"), formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses. Prior to November 30, 2017, CF Corporation ("CF Corp.") was a shell company with no operations. On November 30, 2017, CF Corp. consummated the acquisition of Fidelity & Guaranty Life, a Delaware corporation (“FGL”), pursuant to the Agreement and Plan of Merger, dated as of May 24, 2017, as amended (the “Merger Agreement”). The transactions contemplated by the Merger Agreement are referred to herein as the “Business Combination.” In addition, on the closing date of the Business Combination, FGL US Holdings Inc., a Delaware corporation and indirect wholly owned subsidiary of CF Corp. (“FGLUS”), acquired all of the issued and outstanding shares of (i) Front Street Re (Cayman) Ltd., an exempted company incorporated in the Cayman Islands with limited liability (“FSRC”) and (ii) Front Street Re Ltd., an exempted company incorporated in Bermuda with limited liability (“FSR” and, together with FSRC, the “FSR Companies”), from Front Street Re (Delaware) Ltd., a Delaware corporation (“FSRD”) and a wholly owned indirect subsidiary of HRG Group Inc. (“HRG”). Prior to the Business Combination, approximately 80% of the outstanding shares of FGL’s common stock was owned indirectly by HRG.

In connection with the closing of the Business Combination, CF Corp. changed its name to “FGL Holdings”. Its trading symbols were historically quoted on the Nasdaq Capital Market (“Nasdaq”) under the symbols “CFCOU,” “CFCO” and “CFCOW,” respectively. On December 1, 2017, the Company’s ordinary shares and warrants began trading on the NYSE under the symbols “FG” and “FG WS,” respectively.

As a result of the Business Combination, for accounting purposes, FGL Holdings is the acquirer and FGL is the acquired party and accounting predecessor. Our financial statement presentation includes the financial statements of FGL and its subsidiaries as “Predecessor” for the periods prior to the completion of the Business Combination and FGL Holdings, including the consolidation of FGL and its subsidiaries, as “Successor” for periods from and after the Closing Date.

 
PART I

Unless the context otherwise indicates or requires, the terms “we”, “our”, “us”, and the “Company”, as used in this Form 10-K filing, refer for periods prior to the completion of the Business Combination to FGL and its subsidiaries and, for periods upon or after completion of the Business Combination, to FGL Holdings and its subsidiaries, including FGL and its subsidiaries. The term “FGLH” refers to FGL’s direct subsidiary Fidelity & Guaranty Life Holdings, Inc. FGL Holdings primarily operates through FGL and FGLH’s subsidiary, Fidelity & Guaranty Life Insurance Company (“FGLIC”), which is domiciled in Iowa. Our fiscal year changed from September 30 to December 31 of each year.

Dollar amounts in the accompanying sections are presented in millions, unless otherwise noted.

Special Note Regarding Forward-Looking Statements
This annual report includes forward-looking statements. 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

4

Table of Contents

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” (Part I, Item 1A of this Form 10-K). 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;
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 ordinary shares could impair our ability to raise necessary capital;
changes in our assumptions and estimates regarding the amortizing of our amortizing 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 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 subsidiaries issue to us);
the ability to maintain or obtain approval of Iowa Insurance Division ("IID") and other regulatory authorities as required for our operations and those of our insurance subsidiaries
the impact of the Department of Labor "fiduciary" rule, finalized in April 2016, on the Company, its 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;
potential adverse tax consequences if we are treated as a passive foreign investment company;
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;
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 the Company's 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 continued availability of capital required for our insurance subsidiaries to grow;
the performance of third parties including third party administrators, independent distributors, underwriters, actuarial consultants and outsourcing relationships;
the loss of key personnel;

5

Table of Contents

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”, of (Part I, Item 1A of this Form 10-K).
You should read this report completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this report and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.


6


Item 1. Business
Overview
FGL Holdings
FGL Holdings (the “Company”, formerly known as CF Corp.), a Cayman Islands exempted company, was originally incorporated in the Cayman Islands on February 26, 2016 as a Special Purpose Acquisition Company (SPAC), formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses. Prior to November 30, 2017, CF Corp. was a shell company with no operations. On November 30, 2017, CF Corp. consummated the acquisition of Fidelity & Guaranty Life, a Delaware corporation ("FGL") and its subsidiaries, pursuant to the Agreement and Plan of Merger, dated as of May 24, 2017, as amended (the “Merger Agreement”). The transactions contemplated by the Merger Agreement are referred to herein as the “Business Combination.” Prior to the Business Combination, approximately 80% of the outstanding shares of FGL’s common stock were owned indirectly by HRG Group, Inc.
In connection with the closing of the Business Combination, CF Corp. changed its name to “FGL Holdings” (the Company). Its trading symbols were historically quoted on the Nasdaq Capital Market (“Nasdaq”) under the symbols “CFCOU,” “CFCO” and “CFCOW,” respectively. On December 1, 2017, the Company’s ordinary shares and warrants began trading on the NYSE under the symbols “FG” and “FG WS,” respectively.
Upon the closing of the Business Combination, the Company paid $31.10, in cash, without interest, for each outstanding share of common stock of FGL (subject to certain exceptions), plus additional specified amounts in cash for outstanding equity incentives, for an aggregate purchase price of approximately $2 billion, plus the assumption of approximately $405 of existing FGL debt.
In addition, on the closing date of the Business Combination, FGL US Holdings Inc. (“FGLUS”), a Delaware corporation and indirect wholly owned subsidiary of the Company, acquired all of the issued and outstanding shares of (i) Front Street Re (Cayman) Ltd., an exempted company incorporated in the Cayman Islands with limited liability (“FSRC”) and (ii) Front Street Re Ltd., an exempted company incorporated in Bermuda with limited liability (“FSR” and, together with FSRC, the “FSR Companies”), from Front Street Re (Delaware) Ltd., a Delaware corporation (“FSRD”) and a wholly owned indirect subsidiary of HRG Group Inc. (“HRG”), for cash consideration of $65, subject to certain adjustments.
In anticipation of the merger of the Company and FGL, a new Bermuda based reinsurance entity, F&G Re Ltd. (“F&G Re”) was formed. F&G Re and Fidelity & Guaranty Life Insurance Company (“FGLIC”) entered into a modified coinsurance treaty after the merger that effectively ceded 60% of FGLIC's inforce and new business to F&G Re, effective December 1, 2017. To capitalize F&G Re, FGLIC issued an extraordinary dividend of $665 to its non-insurance holding company parent, FGLH, who in turn issued a dividend to FGLUS, and FGLUS then used the funds to repay a short term loan from CF Bermuda Holdings Limited, a Bermuda exempted limited liability company and a wholly owned direct subsidiary of the Company (“CF Bermuda”). CF Bermuda then contributed the funds to F&G Re as a capital contribution. The $665 was primarily funded by a transfer of investments. In addition to the extraordinary dividend, F&G Re received a $85 capital dividend from its parent, CF Bermuda.
Our Company
For more than 50 years, our Company has helped middle-income Americans prepare for retirement and for their loved ones' financial security. We partner with leading independent marketing organizations ("IMO") and their agents to serve the needs of the middle-income market and develop competitive products to align with their evolving needs. As of December 31, 2017 (Successor), we have 400,000 policyholders who count on the safety and protection features our fixed annuity and life insurance products provide.
Through the efforts of our 304 employees, most of whom are located in Baltimore, MD and Des Moines, IA and through a network of 200 independent IMOs that in turn represent 36,000 independent agents. we offer various types of fixed annuities and life insurance products. Our fixed annuities serve as a retirement and savings tool for which our customers rely on principal protection and predictable income streams. In addition, our indexed universal life ("IUL") insurance products provide our customers with a complementary product that allows them to build on their savings and provide a payment to their designated beneficiaries upon the policyholder’s death. Our most popular products are fixed indexed annuities (“FIAs”) that tie contractual returns to specific market indices, such as the Standard & Poor's Ratings Services ("S&P") 500 Index. Our customers value our FIAs, which provide a

7


portion of the gains of an underlying market index, while also providing principal protection. We believe this mix of “some upside but limited downside” fills the need for middle-income Americans who must save for retirement but who want to limit the risk of decline in their savings.
In the Successor period from December 1, 2017 to December 31, 2017, the Predecessor period from October 1, 2017 to November 30, 2017, and the Predecessor year ended September 30, 2017, FIAs generated approximately 75%, 71%, and 72% of our total sales, respectively. The remaining 25%, 29%, and 28% of sales, respectively, were primarily generated from fixed rate annuity sales during the periods. We invest the annuity premiums primarily in fixed income securities, options and futures that hedge our risk and replicate the market index returns to our policyholders. We invest predominantly in call options on the S&P 500 Index. The majority of our products contain provisions that permit us to adjust annually the formula by which we provide index credits in response to changing market conditions. In addition, our annuity contracts generally either cannot be surrendered or include surrender charges that discourage early redemptions.
Our Strategy
We seek to grow our business by pursuing a set of strategies aimed at delivering sustainable and profitable growth for shareholders; including:
Protect Sales in Our Existing Market. We believe the demand for retirement and principal protection products in the IMO market will continue even under the Department of Labor "fiduciary" rule standards. Our focus will be on reconfiguring products and capabilities and partnering with the IMOs to continue to compete successfully and serve this important market's needs.
Strengthen the Foundation. We will execute key initiatives that enhance our business capabilities and provide a platform for sustainable growth.
Enhance the FGLH Experience. Building off the foundational initiatives, we continue efforts to create a more engaging, customer-focused experience through enhanced digital capabilities and improving the ease of doing business with us for our IMO partners, agents and customers.
Leverage Product Capabilities for Additional Distribution. We capitalize on our manufacturing expertise and distribution partnerships to expand product reach.
Bottom-line, Profit-oriented Objectives. We focus on initiatives to deliver target profits and avoid markets and products when industry pricing makes it difficult to achieve targeted profit margins.

Competition
Our ability to compete is dependent upon many factors which include, among other things, our ability to develop competitive and profitable products, our ability to maintain stable relationships with our contracted IMOs, our ability to maintain low unit costs our ability to source and secure investments with attractive returns and risk profiles and our ability to maintain adequate financial strength ratings from rating agencies. Principal competitive factors for FIAs are initial crediting rates, reputation for renewal crediting action, product features, brand recognition, customer service, cost, distribution capabilities and financial strength ratings of the provider. Competition may affect, among other matters, both business growth and the pricing of our products and services. Principal competitive factors for IULs are based on service and distribution channel relationships, price, brand recognition, financial strength ratings of our insurance subsidiaries and financial stability.

For detailed information about revenues, operating income and total assets of our Company, see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements beginning on page F-1 in this report.
Products
Our experience designing and developing annuities and life insurance products 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 to devise the most suitable product solutions for the ever-changing market. We believe that, on a practical basis, we have a unique understanding of the safety, accumulation, protection, and income needs of middle-income Americans.

8


Annuity Products
Through our insurance subsidiaries, we issue a broad portfolio of deferred annuities (fixed indexed and fixed rate annuities) and immediate annuities. 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 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.
The contractholder 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 less any withdrawals taken to-date. Caps (a maximum rate that may be credited) generally range from 2% to 6% when measured annually and 1% to 3% when measured monthly, spreads (a credited rate determined by deducting a specific rate from the index return), generally range from 1% to 6% when measured annually, and participation rates (a credited rate equal to a percentage of index return) generally range from 30% to 150% 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 contractholder may lose principal if the index credits received do not exceed the amount of such fee.
Approximately 90%, 86%, and 88% of the FIA sales for the Successor period from December 1, 2017 to December 31, 2017, the Predecessor period from October 1, 2017 to November 30, 2017, and the Predecessor year ended September 30, 2017, respectively, involved “premium bonuses” or vesting bonuses. Premium bonuses increase the initial annuity deposit by a specified rate of 2% to 4%. The vesting bonuses, which range from 1% to 9%, 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 85%, 88%, and 86% of our FIA contracts were issued with a guaranteed minimum withdrawal benefit (“GMWB”) rider for the Successor period from December 1, 2017 to December 31, 2017, the Predecessor period from October 1, 2017 to November 30, 2017, and the Predecessor year ended September 30, 2017, respectively. 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 living 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 7%. 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%.

9


As of December 31, 2017 (Successor), the distribution of the FIA account values by cap rate and by strategy was as follows:
 
 
Cap rate
Strategy
 
 0% to 3%
 
 3% to 5%
 
> 5%
 
Total
1 year gain trigger
 
$
476

 
$
182

 
$
40

 
$
698

1-2 year monthly average
 
672

 
765

 
124

 
1,561

1-3 year monthly point-to-point
 
4,838

 
55

 

 
4,893

1-3 year annual point-to-point
 
1,704

 
1,658

 
377

 
3,739

3 year step forward
 

 
28

 
129

 
157

Total
 
$
7,690


$
2,688


$
670


$
11,048

As of December 31, 2017 (Successor), the distribution of the FIA account values by cap rate and by index was as follows:
 
 
Cap rate
Index
 
 0% to 3%
 
 3% to 5%
 
> 5%
 
Total
S&P 500
 
$
7,688

 
$
2,400

 
$
668

 
$
10,756

Dow Jones
 

 
150

 
2

 
152

Nasdaq
 
2

 
138

 

 
140

Total
 
$
7,690

 
$
2,688

 
$
670

 
$
11,048

Fixed Rate Annuities. Fixed rate annuities 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. Multi-year guaranteed annuities 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. For the Successor period from December 1, 2017 to December 31, 2017, the Predecessor period from October 1, 2017 to November 30, 2017, and the Predecessor year ended September 30, 2017, we sold $47, $114, and $546, respectively, of fixed rate multi-year guaranteed annuities. As of December 31, 2017 (Successor), crediting rates on outstanding (i) single-year guaranteed annuities generally ranged from 2% to 6% and (ii) multi-year guaranteed annuities ranged from 1% to 6%. The average crediting rate on all outstanding fixed rate annuities at December 31, 2017 (Successor) was 3%.
As of December 31, 2017 (Successor), the distribution of the fixed rate annuity account values by crediting rate was as follows:
Crediting rate
 
 1% to 2%
 
 2% to 3%
 
 3% to 4%
 
 4% to 5%
 
 5% to 6%
 
Total
Account value
 
$
36

 
$
162

 
$
3,351

 
$
306

 
$
34

 
$
3,889


10


As of December 31, 2017 (Successor), the multi-year guaranteed annuities expiring guaranty account values, net of reinsurance, by year were as follows:
 
 
Multi-Year Rate Guaranteed Annuities
Year of expiry:
 
Account Value
2018
 
$
210

2019
 
805

2020
 
288

2021
 
600

2022
 
1,040

Thereafter
 
313

Total
 
$
3,256

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 10% of the prior year’s value, subject to certain limitations. 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 0% to 15% of the contract value for FIAs and 0% to 12% 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 is 8% for our FIAs and 6% for our fixed rate annuities as of December 31, 2017 (Successor).
The following table summarizes our deferred annuity account values and surrender charge protection as of December 31, 2017 (Successor):
 
 
Fixed and Fixed Index Annuities Account Value
 
Percent of Total
 
Weighted Average Surrender Charge
SURRENDER CHARGE EXPIRATION BY YEAR
 
 
 
 
 
 
Out of surrender charge
 
$
2,899

 
16%
 
0%

2018
 
1,250

 
7%
 
4%

2019 - 2020
 
1,913

 
11%
 
6%

2021 - 2022
 
3,127

 
17%
 
8%

2023 - 2024
 
1,845

 
10%
 
8%

Thereafter
 
7,007

 
39%
 
11%

Total
 
$
18,041

 
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 rights by purchasing a GMWB.
Immediate Annuities
We also sell 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.

11


The following table presents the deposits (also known as “sales”) on annuity policies issued by us for the periods as well as reserves required by U.S. generally accepted accounting principles (“U.S. GAAP Reserves”) as of the date indicated:
 
Period from December 1 to December 31, 2017
 
Period from October 1 to November 30, 2017 (Unaudited)
 
Period from October 1 to December 31, 2016 (Unaudited)
 
Successor
 
Predecessor
 
Predecessor
 
Deposits  on
Annuity
Policies
 
U.S.
GAAP
Reserves
 
Deposits  on
Annuity
Policies
 
U.S.
GAAP
Reserves
 
Deposits  on
Annuity
Policies
 
U.S.
GAAP
Reserves
Products
 
 
 
 
 
 
 
 
 
 
 
Fixed indexed annuities
$
178

 
$
15,178

 
$
288

 
$
14,464

 
$
556

 
$
13,317

Fixed rate annuities
45

 
4,022

 
116

 
3,993

 
99

 
3,627

Single premium immediate annuities

 
3,144

 
7

 
2,809

 
12

 
2,866

Total
$
223

 
$
22,344

 
$
411

 
$
21,266

 
$
667

 
$
19,810

 
Year ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2015
 
Predecessor
 
Predecessor
 
Predecessor
 
Deposits  on
Annuity
Policies
 
U.S.
GAAP
Reserves
 
Deposits  on
Annuity
Policies
 
U.S.
GAAP
Reserves
 
Deposits  on
Annuity
Policies
 
U.S.
GAAP
Reserves
Products
 
 
 
 
 
 
 
 
 
 
 
Fixed indexed annuities
$
1,893

 
$
14,237

 
$
1,861

 
$
13,148

 
$
2,185

 
$
12,094

Fixed rate annuities
557

 
3,910

 
539

 
3,566

 
211

 
3,249

Single premium immediate annuities
15

 
2,845

 
28

 
2,917

 
16

 
2,956

Total
$
2,465

 
$
20,992

 
$
2,428

 
$
19,631

 
$
2,412

 
$
18,299

Life Insurance
We currently offer IUL insurance policies and have previously sold IUL, universal life, term and whole life insurance products. Holders of universal life insurance policies 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.
Almost all of the life insurance policies in force, except for the return of premium benefits on term life insurance products, are subject to an arrangement with Wilton Reassurance Company (“Wilton Re”). See “Reinsurance-Wilton Re Transaction” within "Note 2. Significant Accounting Policies" to our audited consolidated financial statements.
As of December 31, 2017 (Successor), the distribution of the retained IUL account values by cap rate and by strategy was as follows:
 
 
Cap rate
Strategy
 
 2.5%-5.0%
 
 5.0-7.5%
 
 7.5%-10.0%
 
 10.0-12.5%
 
 12.5+
 
Total
1 year annual point-to-point, Gold Index
 
$

 
$

 
$

 
$

 
$
33

 
$
33

1 year monthly point-to-point, S&P Index
 
31

 

 

 

 

 
31

1 year annual point-to-point with 100% par rate, S&P Index
 
11

 
6

 
38

 
113

 
101

 
269

1 year annual point-to-point with 140% par rate, S&P Index
 
2

 
4

 
18

 

 

 
24

Total
 
$
44


$
10


$
56


$
113


$
134


$
357


12


Distribution
The sale of our products typically occurs as part of a four-party, three stage sales process between FGLIC, an IMO, the agent and the customer. FGLIC 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 find and present 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 200 IMOs, representing approximately 36,000 agents. We identify "Power Partners" as those we believe have the ability to generate significant production for the Company. We currently have 32 Power Partners, comprised of 21 annuity IMOs and 11 life insurance IMOs. During the Successor period from December 1, 2017 to December 31, 2017, the Predecessor period from October 1, 2017 to November 30, 2017, and the Predecessor year ended September 30, 2017, these Power Partners accounted for approximately 95% of our annual sales volume. We believe that our relationships with these IMOs are strong. The average tenure of the top ten Power Partners is approximately 15 years.
Our Power Partners play an important role in the development of our products by providing feedback integral to the development process and by securing “shelf space” for new products. Over the last ten years, the majority of our best-selling products have been developed with our Power Partners. We intend to continue to involve Power Partners in the development of our products in the future.
 
The top five states for the distribution of FGLIC’s products in the Successor period from December 1, 2017 to December 31, 2017, the Predecessor period from October 1, 2017 to November 30, 2017, and the Predecessor year ended September 30, 2017 were California, Florida, Michigan, Texas and New Jersey, which together accounted for 43% of FGLIC’s premiums.
Investments
We embrace a long-term conservative investment philosophy, investing nearly all the insurance premiums we receive in a wide range of fixed income interest-bearing securities.
Upon the closing of the Business Combination, FGLIC entered into an investment management agreement (the “ FGLIC Investment Management Agreement”) with Blackstone ISG-I Advisors L.L.C., a Delaware limited liability company (“BISGA”), and an indirect, wholly-owned subsidiary of The Blackstone Group L.P. (“Blackstone”). FGLIC appointed BISGA as investment manager ("Investment Manager") of FGLIC’s general account including the assets underlying the modified coinsurance agreement entered into with F&G Re (collectively, the “FGL Account”). BISGA has discretionary authority to manage the investment and reinvestment of the funds and assets of the FGL Account in accordance with the investment guidelines specified in the FGLIC Investment Management Agreement. Under the FGLIC Investment Management Agreement, it is expected that FGLIC will pay BISGA or its designee, from the assets of the FGL Account, the Management Fee which will equal 0.225% per annum during the first calendar year and 0.30% per annum thereafter. See "Note 14. Related Party Transactions" to the Company's consolidated financial statements for further details. Additionally, three subsidiaries of the Company in addition to FGLIC entered into  Investment Management Agreements with BISGA on substantially the same terms as the FGLIC Investment Management Agreement (the “Additional Investment Management Agreements” and collectively with the FGLIC Investment Management Agreement, the “Investment Management Agreements”).
BISGA manages the bulk of the investment portfolio. For certain asset classes, we utilize experienced third party companies. As of December 31, 2017 (Successor), 2% of our $22 billion fixed maturity investment portfolio was managed by FGL Holdings and 77% was managed by BISGA, with the remaining 21% balance managed by other third parties. Our investment strategy is designed to (i) achieve strong absolute returns, (ii) provide consistent yield and investment income, and (iii) preserve capital. 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.
Upon the closing of the Business Combination, BISGA appointed MVB Management, a newly-formed entity owned by affiliates of the Company’s Co-Executive Chairmen, as Sub-Adviser of the FGL Account pursuant to a sub-advisory agreement (the “Sub-Advisory Agreement”). Under the Sub-Advisory Agreement, the Sub-Adviser

13


will provide investment advisory services, portfolio review, and consultation with regard to the FGL Account (and the accounts of the other Company subsidiaries party to investment management agreements) and the asset classes and markets contemplated by the investment guidelines specified in the agreement, including such recommendations as the Investment Manager shall reasonably request. Payment or reimbursement of the subadvisory fee to the Sub-Adviser is solely the obligation of BISGA and is not an obligation of FGLIC or the Company. Subject to certain conditions, the Sub-Advisory Agreement cannot be terminated by BISGA unless FGLIC terminates the FGLIC Investment Management Agreement.
The types of assets in which we may invest are influenced by various state laws, which prescribe qualified investment assets applicable to insurance companies. Additionally, 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.
Our investment portfolio consists of high quality fixed maturities, including publicly issued and privately issued corporate bonds, municipal and other government bonds, asset-backed securities ("ABS"), residential mortgage-backed securities ("RMBS"), commercial mortgage-backed securities ("CMBS") and commercial mortgage loans ("CMLs"). We also maintain holdings in floating rate, and less rate-sensitive investments, including senior tranches of collateralized loan obligations (“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 through our funding arrangement with the Federal Home Loan Bank of Atlanta.
Portfolio Activity
Over the last year, we continued to work with our internal asset management team and third party asset managers to broaden the portfolio’s exposure to include United States dollar ("USD") denominated emerging market bonds, highly rated preferred stocks and hybrids, and structured securities including ABS.
As a result of these portfolio repositionings, we currently maintain:
a well matched asset/liability profile (asset duration, including cash and cash equivalents, of 6.72 years vs. liability duration of 6.76 years); and
a large exposure to less rate-sensitive assets (16% of invested assets).
For further discussion of portfolio activity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Investment Portfolio”.
Derivatives
Our FIA contracts permit the holder to elect to receive a return based on an interest rate or the performance of a market index, most typically based on the S&P 500 Index. We purchase derivatives consisting predominantly of call options and, to a lesser degree, futures contracts on the equity indices underlying the applicable policy. These derivatives are used to fund the index credits due to policyholders under the FIA contracts based upon policyholders' contract elections. The majority of all such call options are one-year options purchased to match the funding requirements underlying the FIA contracts. On the anniversary dates of the FIA contracts, the market index used to compute the annual index credit under the FIA contract is reset. At such time, we purchase new one-, two-, three-, or five-year call options to fund the next index credit. We manage the cost of these purchases through the terms of our FIA contracts, which permit us to change caps or participation rates, subject to certain guaranteed minimums that must be maintained. The change in the fair value of the call options and futures contracts is generally designed to offset the equity market related change in the fair value of the FIA contract’s related reserve liability. 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.
Outsourcing
We outsource the following functions to third-party service providers:
new business administration (date entry and policy issue only);
service of existing policies;

14


underwriting administration of life insurance applications;
call centers;
information technology development and maintenance;
investment accounting and custody; 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 investment, 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 outsource our new business and existing policy administration for annuity and life products to Transaction Applications Group, Inc. Under this arrangement, Transaction Applications Group, Inc. manages most of our call center and processing requirements. Our current agreement expires on December 31, 2021. Additionally, in August 2017, we partnered with Concentrix to administer a portion of our annuity new business processing and the servicing of these issued annuity contracts (administration and call center activities).
We have partnered with CRL-Plus (“CRL-Plus”) to implement our life insurance underwriting policies. Under the terms of the arrangement, CRL-Plus has assigned the Company a dedicated team of underwriters with appropriate professional designations and experience. Underwriting guidelines for each product are established by our Chief Underwriter in collaboration with our actuarial department. Our Chief Underwriter and actuarial department work closely with the applicable reinsurance company to establish or change guidelines. Adherence to underwriting guidelines is managed at a case level through monthly underwriting audits conducted by our Chief Underwriter as well as the CRL-Plus lead underwriter. Periodically, underwriting audits are conducted by our reinsurers. Our current agreement with CRL-Plus is reviewed annually. We believe that we have a good relationship with our principal outsource service providers.
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 filing, A.M. Best Company ("A.M. Best"), Fitch Ratings ("Fitch"), Moody’s Investors Service ("Moody's") and S&P Global Ratings ("S&P") had issued credit ratings, financial strength ratings and/or outlook statements regarding us, as listed below. Following the completion of the merger with CF Corp., Fitch, Moody's and S&P initiated credit of financial strength ratings on FGL Holdings, CF Bermuda and F&G Re. 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 which, 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.

15


The rating organizations may take various actions, positive or negative. Such actions are beyond the Company's control and the Company cannot predict what these actions may be and the timing thereof.
 
 
A.M. Best
 
Fitch
 
Moody's
 
S&P
Company
 
 
 
 
 
 
 
 
FGL Holdings
 
 
 
 
 
 
 
 
Issuer Credit / Default Rating
 
Not Rated
 
BB+
 
Ba3
 
BB+
Outlook
 

 
Stable
 
Stable
 
Positive
CF Bermuda Holdings Limited
 
 
 
 
 
 
 
 
Issuer Credit / Default Rating
 
Not Rated
 
BB+
 
Ba2
 
BB+
Outlook
 

 
Stable
 
Stable
 
Positive
F&G Re Ltd
 
 
 
 
 
 
 
 
Issuer Credit / Default Rating
 
Not Rated
 
BBB
 
Baa2
 
BBB+
Outlook
 

 
Stable
 
Stable
 
Stable
Fidelity &Guaranty Life Holdings, Inc.
 
 
 
 
 
 
 
 
Issuer Credit / Default Rating
 
bb+
 
BB+
 
Not Rated
 
BB+
Outlook
 
Positive
 
Stable
 
Not Rated
 
Positive
Senior Unsecured Notes
 
bb+
 
BB
 
Ba2
 
BB+
Outlook
 
Positive
 
Stable
 
Stable
 

Fidelity & Guaranty Life Insurance Company
 
 
 
 
 
 
 
 
Financial Strength Rating
 
B++
 
BBB
 
Baa2
 
BBB+
Outlook
 
Positive
 
Stable
 
Stable
 
Stable
Fidelity & Guaranty Life Insurance Company of New York
 
 
 
 
 
 
 
 
Financial Strength Rating
 
B++
 
BBB
 
Not Rated
 
BBB+
Outlook
 
Positive
 
Stable
 
Not Rated
 
Stable
*Reflects current ratings and outlooks as of date of filing
 
 
 
 
 
 
 
 
A.M. Best, Fitch, Moody’s and S&P 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 “Item 1A. Risk Factors”.
 
Potential Impact of a Ratings Downgrade
Under some International Swaps and Derivatives Association, Inc. ("ISDA") agreements, we have agreed to maintain certain financial strength ratings. A downgrade below these levels provides the counterparty under the agreement the right to terminate the open derivative contracts between the parties, at which time any amounts payable by us or the counterparty would be dependent on the market value of the underlying derivative contracts. Our current rating allows multiple counterparties the right to terminate ISDA agreements, at which time the counterparty would unwind existing positions for fair market value. No ISDA agreements have been terminated, although the counterparties have reserved the right to terminate the ISDA agreements at any time. As of December 31, 2017 (Successor), the amount due to the Company at risk for ISDA agreements which could be terminated based upon our current ratings was $492, which equals the fair value to us of the open over-the-counter call option positions. The fair value of the call options can never decrease below zero. See "Item 7A. Quantitative and Qualitative Disclosures about Market Risk-Credit Risk and Counterparty Risk”.
In certain transactions, we and the counterparty have entered into a collateral support agreement requiring either party to post collateral when the net exposures exceed predetermined thresholds. These thresholds vary by counterparty and credit rating, however are generally zero. As of December 31, 2017 (Successor), September 30, 2017 (Predecessor) and 2016 (Predecessor), $467, $381 and $128, respectively, of collateral was posted by our counterparties. Accordingly, the maximum amount of loss due to credit risk that we would incur if parties to the call options failed completely to perform according to the terms of the contracts was $25, $32 and $148 at December 31, 2017 (Successor), September 30, 2017 (Predecessor) and 2016 (Predecessor), respectively.

16


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 market value of our derivatives as of December 31, 2017 (Successor), September 30, 2017 (Predecessor) and 2016 (Predecessor), 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 the Company's borrowing costs.
Risk Management
Risk management is a critical part of our business. We seek to assess risk to our business through a formalized process involving (i) identifying short-term and long-term strategic and operational objectives, (ii) development of risk appetite statements that establish what the company is willing to accept in terms of risks to achieving its goals and objectives, (iii) identifying the levers that control the risk appetite of the company, (iv) establishing the overall limits of risk acceptable for a given risk driver, (v) establishing operational risk limits that are aligned with the tolerances, (vi) assigning risk limit quantification and mitigation responsibilities to individual team members within functional groups, (vii) analyzing the potential qualitative and quantitative impact of individual risks, including but not limited to stress and scenario testing covering over 8 economic and insurance related risks, (viii) mitigating risks by appropriate actions and (ix) identifying, documenting and communicating key business risks in a timely fashion.
The responsibility for monitoring, evaluating and responding to risk is assigned first 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.
In compliance with the Risk Management and Own Risk and Solvency Assessment Model Act (ORSA), FGLIC submitted an ORSA report to the state regulators in November 2017 to provide risk management transparency and insight in the financial strength and long-term sustainability of the Companies.
 Reinsurance
We both cede reinsurance and assume reinsurance from other insurance companies. We use reinsurance to diversify risks, to manage loss exposures, to enhance our capital position, and to manage new business volume.
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. In instances where we assume reinsurance from another insurance company, we accept, in exchange for a reinsurance premium, a portion of the liabilities of the other insurance company under the policies that the ceding company has issued to its policyholders.
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 at least quarterly. We are able to further manage risk via funds withheld arrangements.
See “Item 1A. Risk Factors” for further discussion of credit risk related to reinsurance agreements. A description of significant ceded reinsurance transactions appears below.
Wilton Re Transaction
On January 26, 2011, FGL entered into an agreement (the “Commitment Agreement”) with Wilton Re U.S. Holdings, Inc. (“Wilton”), pursuant to which Wilton agreed to cause Wilton Re, its wholly-owned subsidiary, to enter into certain coinsurance arrangements with FGLIC following the closing of the FGLH acquisition. Pursuant to the Commitment Agreement, Wilton Re has reinsured a 100% quota share of certain of FGLIC’s policies that

17


are subject to redundant reserves under Regulation XXX and Guideline AXXX, as well as another block of FGLIC’s in-force traditional, universal life and IUL insurance policies.
Hannover Reinsurance Transaction
Effective January 1, 2017, the Company entered into a reinsurance agreement with Hannover Re, a third party reinsurer,  to reinsure an inforce block of its FIA and fixed deferred annuity contracts with  Guaranteed Minimum Withdraw Benefit (“GMWB”) and Guaranteed Minimum Death Benefit (“GMDB”) secondary guarantees.  In accordance with the terms of this agreement, the Company cedes 70% net retention of secondary guarantee payments in excess of account value for GMWB and GMDB guarantees. Effective July 1, 2017, the Company extended this agreement to include new business issued during 2017.
Reserve Facilities and Intercompany Reinsurance
The CARVM Facility
Life insurance companies operating in the United States must calculate required reserves for life and annuity policies based on statutory principles. These methodologies are governed by “Regulation XXX” (applicable to term life insurance policies), “Guideline AXXX” (applicable to universal life insurance policies with secondary guarantees) and the Commissioners Annuity Reserve Valuation Method, known as “CARVM” (applicable to annuities). Under Regulation XXX, Guideline AXXX and CARVM, insurers are required to establish statutory reserves for such policies that exceed economic reserves. The industry has reduced or eliminated redundancies thereby increasing capital using a variety of techniques including reserve facilities.
On October 5, 2012, FGLIC entered into a yearly renewable term indemnity reinsurance agreement with Raven Reinsurance Company ("Raven Re"), a wholly-owned subsidiary of FGLIC (the “Raven Reinsurance Agreement”), pursuant to which FGLIC ceded a 100% quota share of its CARVM liability for annuity benefits where surrender charges are waived. To collateralize its obligations under the Raven Reinsurance Agreement, Raven Re entered into a reimbursement agreement with Nomura Bank International plc (“NBI”), an affiliate of Nomura Securities International, Inc., and FGL (the “Reimbursement Agreement”) whereby a subsidiary of NBI issued trust notes and NBI issued a $295 letter of credit that, in each case, were deposited into a reinsurance trust as collateral for Raven Re’s obligations under the Raven Reinsurance Agreement (the “NBI Facility”). Pursuant to the NBI Facility, FGLIC takes full credit on its statutory financial statements for the CARVM reserve ceded to Raven Re. The letter of credit facility automatically reduces each calendar quarter by $6. As of December 31, 2017 (Successor), there was $110 available under the letter of credit facility. 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 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 December 31, 2016 (Predecessor), Raven Re’s statutory capital and surplus was $24 in excess of the minimum level required under the Reimbursement Agreement.

Effective April, 1 2017, FGLIC and Raven Re amended the reinsurance treaty and related trust and letter of credit agreements to extend the term of the letter of credit which would have matured on September 30, 2017 (Predecessor). The amendments added additional in-force business to the reinsurance treaty (fixed indexed annuities without a guaranteed minimum withdrawal benefit rider and multi-year guarantee annuities (“MYGA”) issued between January 1, 2011 and December 31, 2016). No initial ceding commission was paid or received by FGLIC or Raven Re in connection with the cession of additional in-force business. No assets were transferred to or from FGLIC or Raven Re in connection with the cession of additional in-force business. The amendments extended the letter of credit for an additional five year period and reduced the face amount of the letter of credit at April 1, 2017 from $183 to $115. The facility may terminate earlier in accordance with the Reimbursement Agreement.
The Front Street Reinsurance Transactions
On December 31, 2012, following regulatory approval, FGLIC entered into a coinsurance agreement (the “Cayman Reinsurance Agreement”) with FSRC, at the time, an indirectly wholly-owned subsidiary of the Company. Pursuant to the Cayman Reinsurance Agreement, FSRC reinsured a 10% quota share percentage of certain FGLIC annuity liabilities of approximately $1 billion and the funds withheld assets are $1 billion. Under the terms of the agreement, FSRC paid an initial ceding allowance of $15 which was determined to be fair and reasonable according to an independent third-party actuarial firm. The coinsurance agreement is on a funds withheld basis, meaning that

18


funds are withheld by FGLIC from the coinsurance premium owed to FSRC as collateral for FSRC’s payment obligations. Accordingly, the collateral assets remain under the ultimate ownership of FGLIC. See “Note 13. Reinsurance” to our audited consolidated financial statements. As of December 31, 2017 (Successor), ceded reserves are $1,035.
Effective September 17, 2014, FGLIC entered into a second reinsurance treaty with FSRC whereby FGLIC ceded 30% of any new business of its MYGA block of business on a funds withheld basis. This treaty was subsequently terminated as to new business effective April 30, 2015, but will remain in effect for policies ceded to FSRC with an effective date between September 17, 2014 and April 30, 2015.
As of December 31, 2017 (Successor), the reserves ceded as part of the reinsurance transactions are eliminated in the Consolidated Financial Statements. See “Note 14. Related Party Transactions” to our audited Consolidated Financial Statements.
F&G Re Transaction
F&G Re is our licensed reinsurer registered in Bermuda and subject to the Bermuda Insurance Act and the rules and regulations promulgated thereunder. F&G Re and FGLIC entered into a modified coinsurance treaty that effectively ceded 60% of FGLIC's inforce to F&G Re and provides the ability to cede new business to F&G Re. To capitalize F&G Re, FGLIC issued an extraordinary dividend of $665 to its non-insurance holding company parent, FGLH, who in turn issued a dividend to FGLUS, and FGLUS then used the funds to repay a short term loan from CF Bermuda. CF Bermuda then contributed the funds to F&G Re as a capital contribution. The $665 was primarily funded by a transfer of investments. See “Note 14. Related Party Transactions” to the Company's audited Consolidated Financial Statements. In addition to the extraordinary dividend, F&G Re received a $85 capital dividend from its parent, CF Bermuda.
No policies issued by the Company have been reinsured with any foreign company, which is controlled, either directly or indirectly, by a party not primarily engaged in the business of insurance.
The Company has not entered into any reinsurance agreements in which the reinsurer may unilaterally cancel any reinsurance for reasons other than non-payment of premiums or other similar credit issues.
See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk and Counterparty Risk”.
Regulation
Overview
FGLIC, FGLICNY 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. FGLIC does business throughout the United States, except for New York. FGLICNY only does business in New York. Raven Re is a special purpose captive reinsurance company that only provides reinsurance to FGLIC under the CARVM Treaty. Following its redomestication from Maryland to Iowa, FGLIC’s principal insurance regulatory authority is the IID. State insurance departments throughout the United States also monitor FGLIC’s insurance operations as a licensed insurer. The New York State Department of Financial Services (“NYDFS”) regulates the operations of FGLICNY, which is domiciled and licensed in New York. The purpose of these regulations is primarily to protect policyholders and beneficiaries and not general creditors and shareholders of those insurers. Many of the laws and regulations to which FGLIC and FGLICNY 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 FGLIC and FGLICNY must be approved by the insurance regulators in each state in which they are sold. Those products are also substantially affected by federal and state tax laws. 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. A shift away from life insurance and annuity products could reduce FGLIC’s and FGLICNY’s income from the sale of such products, as well as the assets upon which FGLIC and FGLICNY earn investment income. In addition, insurance products may also be subject to the Employee Retirement Income Security Act of 1974 ("ERISA").

19


State insurance authorities have broad administrative powers over FGLIC and FGLICNY 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;
determining whether a reasonable basis exists as to the suitability of the annuity purchase recommendations producers make;
regulating unfair trade and claims practices;
establishing reserve requirements and solvency standards;
regulating the amount of dividends that may be paid in any year;
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 FGLIC, FGLICNY 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. FGLIC, FGLICNY and Raven Re prepare statutory financial statements in accordance with accounting practices and procedures prescribed or permitted by these departments.
The National Association of Insurance Commissioners ("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 FGLIC’s or FGLICNY’s detriment, or changes to the overall legal or market environment, even absent any change of interpretation by a particular regulator, may cause FGLIC and FGLICNY to change their views regarding the actions they need to take from a legal risk management perspective, which could necessitate changes to FGLIC’s or FGLICNY’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.
The Maryland Insurance Administration (“MIA”) completed a routine financial examination of FGLIC for the three-year period ended December 31, 2012, and found no material deficiencies and proposed no adjustments to the financial statements as filed. FGLIC has been informed that the IID will conduct a routine exam in 2018 for the 5 year period ending 2017. The NYDFS completed a routine financial examination of FGL NY for the three-year period ended December 31, 2009, and found no material deficiencies and proposed no adjustments to the financial statements as filed. The NYDFS is in the process of completing a routine financial examination of FGLICNY for the three-year periods ended December 31, 2012. The Vermont Department of Financial Regulation has completed a routine financial examination of Raven Re for the period from April 7, 2011 (commencement of

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business) through December 31, 2012. It found no material deficiencies and proposed no adjustments to the financial statements as filed.
Dividend and Other Distribution Payment Limitations
The Iowa insurance law and the New York insurance law regulate the amount of dividends that may be paid in any year by FGLIC and FGLICNY, respectively. Each year, FGLIC and FGLICNY may pay a certain limited amount of ordinary dividends or other distributions without being required to obtain the prior consent of the Iowa Insurance Commissioner (“Iowa Commissioner”) or the NYDFS, respectively. However, to pay any dividends or distributions (including the payment of any dividends or distributions for which prior consent is not required), FGLIC and FGLICNY must provide advance written notice to the Iowa Commissioner or the NYDFS, respectively.
Pursuant to an order issued by the Iowa Commissioner on November 28, 2017 in connection with the approval of the Merger Agreement, FGLIC shall not pay any dividend or other distribution to shareholders prior to November 28, 2021 without the prior approval of the Iowa Commissioner. Additionally, F&G Re will not, for a period of three (3) years from November 28, 2017, declare, set aside or distribute any dividends or distributions other than solely (a) dividends or distributions that would be permitted in accordance with Section 521A.5(3) of the Iowa Code if F&G Re were a life insurance company domesticated in Iowa, upon prior written notice to the Iowa Commissioner, but limited only to the amount necessary to service interest payments on outstanding indebtedness and other obligations of CF Bermuda and FGLH, and (b) dividends or distributions upon written notice to, and with the prior written approval of, the Iowa Commissioner.
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 FGLIC’s statutory surplus as regards policyholders as of December 31 of the preceding year; or (ii) the net gain from operations of FGLIC (excluding realized capital gains) for the 12-month period ending December 31 of the preceding year.
Dividends in excess of FGLIC’s ordinary dividend capacity are referred to as extraordinary and require prior approval of the Iowa Commissioner. In deciding whether to approve a request to pay an extraordinary dividend, Iowa insurance law requires the Iowa Commissioner to consider the effect of the dividend payment on FGLIC’s surplus and financial condition generally and whether the payment of the dividend will cause FGLIC to fail to meet its required RBC ratio. Dividends may only be paid out of statutory earned surplus.
In recent calendar years, the Company's insurance subsidiaries have had the dividend capacity and paid dividends to us as set forth in this table:

 
2017
 
2016
 
2015
 
2014
 
2013
FGLIC ordinary dividend capacity
 
$
132

 
$
124

 
$
121

 
$
124

 
$
106

FGLIC ordinary dividends paid
 
25

 

 

 

 
40

F&G Re dividend capacity
 
201

 

 

 

 

FSRC dividend capacity
 
66

 

 

 

 

Any payment of dividends by FGLIC is subject to the regulatory restrictions described above and the approval of such payment by the board of directors of FGLIC, which must consider various factors, including general economic and business conditions, tax considerations, FGLIC’s strategic plans, financial results and condition, FGLIC’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 FGLIC considers relevant. For example, payments of dividends could reduce FGLIC’s RBC and financial condition and lead to a reduction in FGLIC’s financial strength rating. See “Item 1A. Risk Factors-Risks Relating to Our Business-A financial strength ratings downgrade, potential downgrade, or any other negative action by a rating agency could make our products less attractive and increase our cost of capital, and thereby adversely affect our financial condition and results of operations”.
FGLICNY has historically not paid dividends. In 2012, FGLICNY paid a $4 dividend to FGLIC after a determination that, as a result of capital contributions by FGLIC, FGLICNY was overcapitalized.
See "Item 1. Business-Bermuda Regulatory Framework-Restrictions on Dividends and Distributions" and "Item 1. Business-Cayman Islands Regulation" for further discussion on Bermuda and Cayman Island, respectively, dividend limitations that impact F&G Re and FSRC.

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 Surplus and Capital
FGLIC and FGLICNY 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 continuing 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 will 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 FGLIC and FGLICNY 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 our financial strength ratings. Our historical RBC ratios for FGLIC are presented in the table below. See “Item 1A. Risk Factors-Risks Relating to Our Business-A financial strength ratings downgrade, potential downgrade, or any other negative action by a rating agency could make our product offerings less attractive and increase our cost of capital, and thereby adversely affect our financial condition and results of operations”.
 
 
RBC  Ratio  
As of:
 
 

December 31, 2017
 
499
%
December 31, 2016
 
412
%
December 31, 2015
 
401
%
December 31, 2014
 
388
%
December 31, 2013
 
423
%
December 31, 2012
 
406
%
See "Item 1. Business-Bermuda Regulatory Framework-ECR and Bermuda Solvency Capital Requirements" for discussing on Bermuda regulatory requirements that impact F&G 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, 2017 (Successor), FGLIC had two ratios outside the usual range.  FGLICNY and Raven Re each had four ratios outside the usual range.  The IRIS ratio for change in reserving for both FGLIC and FGLICNY was outside the usual range.  The IRIS ratio for change in premium for both FGLICNY

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and Raven Re was outside the usual range.  In addition, Raven Re’s IRIS ratio for adequacy of investment income also fell outside the usual range.
In all instances in prior years, regulators have been satisfied upon follow-up that no regulatory action was required. FGLIC, FGLICNY and Raven Re are not currently subject to regulatory restrictions based on these ratios.
Insurance Reserves
State insurance laws require insurers to analyze the adequacy of reserves. The respective appointed actuaries for FGLIC, FGLICNY and Raven Re must each submit an opinion on an annual basis that their respective reserves, when considered in light of the respective assets FGLIC, FGLICNY and Raven Re hold with respect to those reserves, make adequate provision for the contractual obligations and related expenses of FGLIC, FGLICNY and Raven Re. FGLIC, FGLICNY 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 which 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 reserves which support the liabilities to be owed by the reinsurer, with the ceding insurer retaining title to and exclusive control over such reserves. In addition, on January 1, 2014, the NAIC Model Credit for Reinsurance Act became effective in Iowa, which adds the concept of “certified reinsurer”, whereby a ceding insurer may take financial statement credit for reinsurance provided by an unaccredited and unlicensed reinsurer which has been certified by the Iowa Commissioner. The Iowa Commissioner certifies reinsurers based on several factors, including their financial strength ratings, and imposes collateral requirements based on such factors. FGLIC and FGLICNY are subject to such credit for reinsurance rules in Iowa and New York, respectively, insofar as they enter into any reinsurance contracts with reinsurers which are neither licensed nor accredited in Iowa and New York, respectively.
Insurance Holding Company Regulation
As the parent company of FGLIC and the indirect parent company of FGLICNY, we and entities affiliated for purposes of insurance regulation are 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 FGL Holdings, CF Bermuda, F&G Re, FGLH, FGLIC or FGLICNY 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. Accordingly, any person who acquires 10% or more of our voting securities or that of FGL Holdings, CF Bermuda, F&G Re, FGLH, FGLIC or FGLICNY without the prior approval of the insurance regulators of Iowa and New York will be in violation of

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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, FGLIC and FGLICNY 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, FGLIC and FGLICNY 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. FGLIC is currently the subject of four ongoing market conduct examinations in various states. Market conduct examinations can result in monetary fines or remediation and generally require FGLIC to devote significant resources to the management of such examinations. FGLIC 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.
Regulation of Investments
FGLIC and FGLICNY 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 FGLIC and FGLICNY as of December 31, 2017 (Successor) complied in all material respects with such regulations.
Bermuda Regulation
F&G Re is a Bermuda exempted company incorporated under the Companies Act 1981, as amended (the “Companies Act”) and is registered as a Class C insurer under the Insurance Act 1978, as amended, and its related regulations (the “Insurance Act”). FSR is a Bermuda exempted company incorporated under the Companies Act and is registered as a Class C insurer under the Insurance Act. Each of F&G Re and FSR are 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. The Insurance Act also grants to the BMA powers to supervise, investigate and intervene in the affairs of insurance companies.
The BMA has enacted various legislative and regulatory amendments to the Insurance Act to aid in Bermuda’s achievement of regulatory equivalence with that of the European Commission’s Solvency II framework in relation to commercial insurance entities. 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. The Insurance Amendment Act 2015 (No. 2) (“Act No. 2”) and the Insurance Amendment Act 2015 (No. 3) (“Act

24


No. 3”) were proposed during 2015 as part of the BMA’s objective of receiving Solvency II equivalency. Act No. 2 and Act No. 3 were approved by the Bermuda Parliament with the majority of the changes becoming operative on January 1, 2016. Act No. 2 and Act No. 3 materially amend the Insurance Act including to: (i) require certain classes of insurers (including each of F&G Re and FSR) to maintain their head offices in Bermuda; (ii) require insurers to notify the BMA of any reduction or disposal of shares taking a shareholder controller below 10%, 20%, 33% or 50%; (iii) permit certain classes of insurers to submit condensed audited GAAP financial statements; and (iv) establish the minimum criteria of matters of material significance whereby the approved auditor is required to provide written notice to the BMA of those matters that would impact the BMA’s discharge of its functions under the Insurance Act. The Act No. 3 also materially amends the items and the content of the documents to be submitted as part of the required statutory financial returns for Class C insurers carrying on long-term business, pursuant to the Insurance Accounts Rules 2016. The Insurance (Prudential Standards) (Class C, Class D and Class E Solvency Requirement) Amendment Rules 2015 effective as of January 1, 2016 expands the prudential standards of the Insurance Act to generally include the requirement of insurers to meet regulatory capital and reporting requirements on a statutory economic capital and surplus basis. Further amendments to the Insurance Act provide that all insurers are now 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 now required to deliver a declaration to the BMA confirming whether or not they meet the minimum criteria for registration. The Insurance (Public Disclosure) Rules 2015 requires all Class C insurers to produce and publish a Financial Condition Report on their website, or provide a copy to the public on request if they do not have a website, as part of its annual Bermuda Capital and Solvency requirement. The Financial Condition Report provides particulars on the business performance, governance structure, risk profile, solvency valuation, and capital management of the insurer.
The Bermuda Insurance Code of Conduct (the “Bermuda Insurance Code”), which is a codification of best practices for insurers provided by the BMA, was also amended in 2015 and all insurers had to be in compliance by December 31, 2015. Substantive revisions to the Bermuda Insurance Code included a new requirement for the board of an insurer to ensure that its insurance manager is both fit and able to carry out its duties to ensure that the insurer operates in a prudent manner and a clarification that only limited purpose insurers will be allowed to outsource the CEO and senior executive roles to an insurance manager.
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.
Bermuda Regulatory Framework
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.
Principal Representative, Head and Principal Office. Every registered insurer or reinsurer is required to maintain a principal office in Bermuda and to appoint and maintain a principal representative in Bermuda, subject to certain prescribed requirements under the Insurance Act. Further, any registered insurer that is a Class C insurer or above is required to maintain a head office in Bermuda and direct and manage its insurance business from Bermuda. The 2015 amendments to the Insurance Act provided that in considering whether an insurer satisfies the requirements of having its head office in Bermuda, the BMA may consider (a) where the underwriting, risk management and operational decision making occurs; (b) whether the presence of senior executives who are responsible for, and involved in, the decision making are located in Bermuda; and (c) where meetings of the board of directors occur. The BMA will also consider (a) the location where management meets to effect policy decisions; (b) the residence of the officers, insurance managers or employees; and (c) the residence of one or more directors in Bermuda. Additionally, the BMA may look to the location of the insurance manager for determining whether a head office is in Bermuda.
For the purpose of the Insurance Act, each of F&G Re’s and FSR’s principal office is their respective executive offices at Sterling House, 16 Wesley Street, Hamilton HM CX, Bermuda. F&G Re has appointed and approved

25


Marsh Management Services (Bermuda) Ltd. as its principal representative. FSR has appointed and approved Will Rinehimer as its principal representative. The principal representative has statutory reporting duties under the Insurance Act for certain reportable events, such as threatened insolvency or non-compliance with the Insurance Act or with a condition or restriction imposed on an insurer.
Approved Actuary. Generally, a Class C insurer is required to submit annually an opinion of its approved actuary with its financial statements and return in respect of the insurer’s economic balance sheet technical provisions and a certificate as to the amount of the insurer’s liabilities outstanding on account of its long-term business. However, an insurer may file an application under the Insurance Act to waive the aforementioned requirements.
Annual Statutory Financial Statements and Return; Independent Approved Auditor. The Insurance Act generally requires all insurers to: (i) prepare annual statutory financial statements and returns; (ii) submit a declaration certifying compliance with the minimum criteria applicable to it including the minimum margin of solvency, enhanced capital requirements and any restrictions or conditions imposed on its license; and (iii) appoint an independent auditor who will annually audit and report on such financial statements and returns.
The independent auditor of the insurer must be approved by the BMA and may be the same person or firm that audits the insurer’s financial statements and reports for presentation to its shareholders. If the insurer fails to appoint an approved auditor or at any time fails to fill a vacancy for such auditor, the BMA may appoint an approved auditor for the insurer and shall fix the remuneration to be paid to the approved auditor. The approved auditor is required to issue written notice to the BMA of matters of material significance for the discharge of the BMA’s functions as established under the Insurance Act. An insurer may file an application under the Insurance Act to have the requirement to file audited statutory financial statements annually with the BMA waived. Each of F&G Re’s and FSR’s independent auditor has been approved by the BMA.
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 C insurer is the greater of: (i) $500,000; (ii) 1.5% of assets; 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 C 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 C 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 Re and FSR without prior regulatory approval.
Each of F&G Re and FSR 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. Additionally, annual distributions that would result in a reduction of the insurer’s prior year-end balance of statutory capital and surplus by more than 25% also requires the prior approval of the BMA.
If F&G Re or FSR 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 Class C insurers, each of F&G Re and FSR must: (i) not make any payment from its long-term business fund for any purpose other than a purpose of the insurer’s long-term business, except in so far as such payment can be made out of any surplus certified by the insurer’s approved actuary to be available for distribution otherwise than to policyholders; and (ii) not declare or pay a dividend to any person other than a policyholder unless the value of the assets of its long-term business fund, as certified by the insurer’s approved

26


actuary, exceeds the extent (as to certified) of the liabilities of the insurer’s long-term business. In the event a dividend complies with the above, each of F&G Re and FSR must ensure the amount of any such dividend does not exceed the aggregate of (i) that excess and (ii) any other funds properly available for the payment of dividend, being funds arising out of business of the insurer other than long-term business.
The Companies Act also limits F&G Re’s and FSR’s ability to pay dividends and make distributions to its shareholders. Each of F&G Re and FSR 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.   Each of F&G Re and FSR 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 Regulation
FSRC is licensed as a class B insurer only in the Cayman Islands by the Cayman Islands Monetary Authority (“CIMA”) and it does not intend to obtain a license in any other jurisdiction. The suspension or revocation of FSRC’s license to do business as a reinsurance company in the Cayman Islands for any reason would mean that it would not be able to enter into any new reinsurance contracts until the suspension ended or it became licensed in another jurisdiction. Any such suspension or revocation of its license would negatively impact its reputation in the reinsurance marketplace and could have a material adverse effect on its results of operations.
As a regulated insurance company, FSRC is subject to the supervision of CIMA and CIMA may at any time direct FSRC, 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.
The laws and regulations of the Cayman Islands require that, among other things, FSRC 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 FSRC is subject to may also restrict the ability of FSRC 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.
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 e-mail 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.
FIAs
In recent years, the U.S. Securities and Exchange Commission ("SEC") and state securities regulators have questioned whether FIAs, such as those sold by us, should be treated as securities under the federal and state securities laws rather than as insurance products exempted from such laws. Treatment of these products as securities

27


would require additional registration and licensing of these products and the agents selling them, as well as cause us to seek additional marketing relationships for these products, any of which may impose significant restrictions on our ability to conduct operations as currently operated. 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 expect that the types of FIAs FGLIC and FGLICNY 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.
The Dodd-Frank Act
The Dodd-Frank Act makes sweeping changes to the regulation of financial services entities, products and markets. Certain provisions of the Dodd-Frank Act are or may become applicable to us, our competitors or those entities with which we do business, including, but not limited to:
the establishment of federal regulatory authority over derivatives;
the establishment of consolidated federal regulation and resolution authority over systemically important financial services firms;
the establishment of the Federal Insurance Office;
changes to the regulation of broker dealers and investment advisors;
changes to the regulation of reinsurance;
changes to regulations affecting the rights of shareholders;
the imposition of additional regulation over credit rating agencies;
 
the imposition of concentration limits on financial institutions that restrict the amount of credit that may be extended to a single person or entity; and
the clearing of derivative contracts.
Numerous provisions of the Dodd-Frank Act require the adoption of implementing rules or regulations, some of which have been implemented. In addition, the Dodd-Frank Act mandates multiple studies, which could result in additional legislation or regulation applicable to the insurance industry, us, our competitors or those entities with which we do business. Legislative or regulatory requirements imposed by or promulgated in connection with the Dodd-Frank Act may impact us in many ways, including, but not limited to:
placing us at a competitive disadvantage relative to our competition or other financial services entities;
changing the competitive landscape of the financial services sector or the insurance industry;
making it more expensive for us to conduct our business;
requiring the reallocation of significant company resources to government affairs;
increasing our legal and compliance related activities and the costs associated therewith; or
otherwise having a material adverse effect on the overall business climate as well as our financial condition and results of operations.
Until various studies are completed and final regulations are promulgated pursuant to the Dodd-Frank Act, the full impact of the Dodd-Frank Act on investments, investment activities and insurance and annuity products of FGLIC and FGLICNY remains unclear.
ERISA
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 holds fiduciaries liable if they fail to satisfy fiduciary standards of conduct.
In April 2016, the Department of Labor (“DOL”) issued the “fiduciary” rule which could have a material impact on the Company, its products, distribution, and business model. The rule provides that persons who render investment advice for a fee or other compensation with respect to an employer plan or individual retirement account

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(“IRA”) are fiduciaries of that plan or IRA. The rule expands the definition of fiduciary under ERISA to apply to insurance agents who advise and sell products to IRA owners. As a result, commissioned insurance agents selling the Company’s IRA products must qualify for a prohibited transaction exemption, either the newly introduced Best Interest Contract Exemption (BICE) or amended PTE 84-24. When fully implemented, BICE would apply to fixed indexed annuities and amended PTE 84-24 would apply to fixed rate annuities. The rule and exemptions have been the subject of much controversy and various actions have been taken by DOL to delay and reconsider aspects of the rule and exemptions. The rule took effect June 2016 and was scheduled to become applicable in April 2017 but the “applicability date" was delayed by DOL for 60 days from April 10, 2017 to June 9, 2017. DOL also acted to delay many aspects of the prohibited transaction exemption requirements during a transition period from June 9, 2017 to January 1, 2018 provided the agent (and if applicable, financial institution) comply with “impartial conduct standards.” The impartial conduct standards essentially require the sale to be in the “best interest” of the client, misleading statements not be made, and compensation be reasonable. More recently, DOL has extended the transition period to July 1, 2019. Industry continues its efforts to overturn the rule in court actions and Congress continues to consider related legislation but the success or failure of these efforts cannot be predicted. Assuming the rule is not overturned and the requirements of the exemptions were to be implemented fully, the impact on the financial services industry generally and on the Company and its business in particular is difficult to assess. We believe however it could have an adverse effect on sales of annuity products to IRA owners particularly in the independent agent distribution channel. A significant portion of our annuity sales are to IRAs. Compliance with the prohibited transaction exemptions when fully phased in would likely require additional supervision of agents, cause changes to compensation practices and product offerings, and increase litigation risk, all of which could adversely impact our business, results of operations and/or financial condition. FGLIC will continue to monitor developments closely and believes it is prepared to execute implementation plans as necessary to meet the rule and exemption requirements on the requisite applicability dates.
Employees
As of December 31, 2017 (Successor), the Company had 304 employees. We believe that we have a good relationship with our employees.
FGL Holdings Available Information
The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are made available, free of charge, on or through the “Investor Relations” portion of our Internet website http://www.fglife.bm. The public may read and copy any materials that the Company has filed with the SEC at the SEC's Public Reference Room located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 800-SEC-0330. Reports filed with or furnished to the SEC will also be available as soon as reasonably practicable after they are filed with or furnished to the SEC and are available over the Internet at the SEC's website at http: // www.sec.gov .
FSR Companies
FSRC is an exempted company incorporated under the laws of the Cayman Islands and subsidiary of FGL Holdings. FSR, a Bermuda company, was formed in March 2010 to act as a long-term reinsurer. FSRC was formed in the Cayman Islands and on October 24, 2012, received from the Cayman Islands Monetary Authority a license to carry on business as an Unrestricted Class “B” Insurer that permits FSRC to conduct offshore direct and reinsurance business. FSR and FSRC are parties to reinsurance transactions.
Strategy
The FSR Companies were formed with the intention of building a flexible and diversified portfolio of life and annuity reinsurance treaties. FSRC may also conduct hedging and other investment activities. FSR has not entered into any reinsurance agreements as of December 31, 2017.
Competition
The reinsurance industry is highly competitive. The FSR Companies compete with major reinsurers, most of which are well established and have significant operating histories, strong financial strength ratings and long-

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standing client relationships. The FSR Companies’ competitors include Athene Life Re Ltd., Global Atlantic Financial Group Limited, Guggenheim Life and Annuity Company, Reinsurance Group of America, Incorporated, Legal & General Reinsurance Company Ltd., and Resolution Life Holdings, Inc., as well as smaller companies and other niche reinsurers. The FSR Companies operate in a highly competitive industry, which could limit its abilities to gain or maintain its respective position in the industry and could materially adversely affect its business, financial condition and results of operations.
Employees
As of December 31, 2017, the FSR Companies had one employee, which was not represented by a labor union or covered by a collective bargaining agreement. The FSR Companies believes that its overall relationship with its employee is good.


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Item 1A. Risk Factors

In addition to the other information set forth in this Annual Report on Form 10-K, you should carefully consider the following factors which could have a material adverse effect on our business, financial condition, results of operations or stock price. The risks below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also adversely affect our business, financial condition.
Risks relating to economic conditions, market conditions and investments
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 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, including investments in mortgage-backed securities, could be adversely affected as a result of deteriorating financial and business conditions affecting the issuers of the securities in our investment portfolio.
Concentration in certain states for the distribution of our products may subject us to losses attributable to economic downturns or catastrophes in those states.
Our top five states for the distribution of our products are California, Texas, Florida, New Jersey and Michigan. Any adverse economic developments or catastrophes in these states could have an adverse impact on our business.
Interest rate fluctuations could adversely affect our business, financial condition, liquidity, results of operations and cash flows
Interest rate risk is a significant market risk as our business involves issuing interest rate sensitive obligations backed primarily by investments in fixed income assets. 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 contractholders) 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 privately placed senior notes (“the Private Senior Notes”) which could have a material adverse effect on our business, financial condition and results of operations. The Private Senior Notes represented approximately 1% of the value of our invested assets as of

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December 31, 2017. If we require significant amounts of cash on short notice, 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. We have developed and maintain asset liability management (“ALM”) programs and procedures 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 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.
Fixed maturities that are classified as available-for-sale (‘‘AFS’’) are reported on the consolidated statements of financial position at fair value. Rising interest rates would cause a decrease in the value of financial assets held at fair value on our consolidated balance sheets. Unrealized gains or losses on AFS securities are recognized as a component of accumulated other comprehensive income (‘‘AOCI’’) and are, therefore, excluded from net income. The accumulated change in fair value of the AFS securities is recognized in net income when the gain or loss is realized upon the sale of the asset or in the event that the decline in fair value is determined to be other than temporary (referred to as an other-than-temporary impairment).
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 spread income is an important component in amortization of deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”) under U.S. GAAP. Significant reductions in spread income may cause us to accelerate DAC and VOBA 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.
Equity market volatility could negatively impact our business.
The estimated cost of providing GMWB 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. The rate of amortization of DAC and VOBA relating to FIA products could also increase if equity market performance is worse than assumed and have a materially adverse impact on our results of operations and financial condition.
Our investments are subject to market and credit risks. These risks 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 issuers of the fixed-income securities 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 and commercial 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 and financial condition.
We are subject to the credit risk of our counterparties, including companies with whom we have reinsurance agreements or we have purchased call options.
Our insurance subsidiaries cede material amounts of insurance and transfer related assets and certain

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liabilities to other insurance companies through reinsurance. Accordingly, we bear credit risk with respect to our reinsurers. The failure, 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 and results of operations. We regularly monitor the credit rating and performance of Wilton Re as they represent our largest reinsurance counterparty exposure. See “Business- Reinsurance-Wilton Re Transaction”.
We are also exposed to credit loss in the event of non-performance by our counterparties on call options. We seek to reduce the risk associated with such agreements by purchasing such options from large, well-established financial institutions. There can be no assurance we will not suffer losses in the event of counterparty non-performance. See "Note 5. Derivative Financial Instruments" to our audited Consolidated Financial Statements for the balances of collateral posted by our counterparties and further discussion of credit risk.
The market price of our ordinary shares may be volatile and could decline impairing our ability to raise capital.
The market price of our ordinary shares may fluctuate significantly in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this Form 10-K, various factors that could affect our stock price are:
domestic and international political and economic factors unrelated to our performance;
actual or anticipated fluctuations in our quarterly operating results;
changes in or failure to meet publicly disclosed expectations as to our future financial performance;
changes in securities analysts’ estimates of our financial performance, incomplete research and reports by industry analysts, or misleading or unfavorable research about our business;
action by institutional shareholders or other large shareholders, including sales of large blocks of ordinary shares;
speculation in the press or investment community;
changes in investor perception of us and our industry;
changes in market valuations or earnings of similar companies;
announcements by us or our competitors of significant products, contracts, acquisitions or strategic partnerships;
changes in our capital structure, such as future sales of our ordinary shares or other securities;
future offerings of debt or equity securities that rank senior to our ordinary shares;
changes in applicable laws, rules or regulations, regulatory actions affecting us and other dynamics; and
additions or departures of key personnel.
Risks relating to estimates, assumptions and valuations
The pattern of amortizing our DAC, Deferred Sales Inducements (“DSI”), and VOBA 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 DAC, DSI and VOBA 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 DAC, DSI and VOBA which would reduce profitability for such lines of business in the current period.
For additional information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations- Critical Accounting Policies and Estimates”.
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 or financial condition.
Fixed maturities, equity securities and derivatives represent the majority of total cash and invested assets reported at fair value on our consolidated balance sheets. 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

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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 other than temporary impairment ("OTTI") 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, 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. 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.
See "Note 4 Investments" to our audited Consolidated Financial Statements for additional information about our investment portfolio.
Change in our evaluation of the recoverability of our deferred tax assets could 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. See the “Federal Regulation” section of the risk factor “Our business is highly regulated and subject to numerous legal restrictions and regulations” for further discussion on tax impact.
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 operation and financial condition.
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 and annuity 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 determine precisely the amounts we will ultimately pay to settle these liabilities. As a result, we may experience volatility in our profitability and our reserves from period to period. To the extent that actual experience is less favorable than our underlying assumptions, we could be required to increase our liabilities, which may reduce our profitability and impact our financial strength.
We have minimal experience to date on policyholder behavior for our GMWB products which we began issuing in 2008. 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.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates”.
Legal, regulatory and tax risks
Our business is highly regulated and subject to numerous legal restrictions and regulations.
State insurance regulators, the NAIC and federal regulators continually reexamine existing laws and

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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 claims 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. See section titled “Regulation” in Item 1 for further discussion of the impact of regulations on our business.
State Regulation
Our business is subject to government regulation in each of the states in which we conduct business and is concerned primarily with the protection of policyholders and other customers rather than shareholders. 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.
We have received inquiries from a number of state regulatory authorities regarding our use of the U.S. Social Security Administration’s Death Master File (“Death Master File”) and compliance with state claims practices regulations and unclaimed property or escheatment laws. We have established procedures to periodically compare our in-force life insurance and annuity policies against the Death Master File or similar databases; investigate any identified potential matches to confirm the death of the insured; and determine whether benefits are due and attempt to locate the beneficiaries of any benefits due or, if no beneficiary can be located, escheat the benefit to the state as unclaimed property. We believe we have established sufficient reserves with respect to these matters; however, it is possible that third parties could dispute these amounts and additional payments or additional unreported claims or liabilities could be identified which could be significant and could have a material adverse effect on our results of operations.
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 such as the case with broadening the scope of carriers that must contribute towards Long Term Care insolvencies.
NAIC
Although our business is subject to regulation in each state in which we conduct business, 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 cyber security regulations, best interest standards, RBC and life insurance reserves.
On June 10, 2016, the NAIC formally approved principle-based reserving for life insurance products with secondary guarantees, with an effective date of January 1, 2017. A three year transition period is available which delays application of the new guidance until January 1, 2020. Additionally, various statutory accounting guidance is being evaluated, including investment value of insurance subsidiaries.
Our insurance subsidiaries are subject to minimum capitalization requirements based on RBC formulas for

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life insurance companies that establish capital requirements relating to insurance, business, asset, interest rate and certain other risks. Changes to statutory reserve or risk-based capital requirements may increase the amount of reserves or capital our insurance companies are required to hold and may impact our ability to pay dividends. In addition, changes in statutory reserve or risk-based capital 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 the risk factor entitled “A financial strength ratings downgrade, potential downgrade, or any other negative action by a rating agency, could make our product offerings less attractive and increase our cost of capital, and thereby adversely affect our financial condition and results of operations” for a discussion of risks relating to our financial strength ratings.

DOL “Fiduciary” Rule
A significant portion of our annuity sales are to IRAs. The DOL “fiduciary” rule applies to insurance agents who advise and sell products to IRA owners. As a result, commissioned insurance agents selling the Company’s IRA products must qualify for a prohibited transaction exemption, either the newly introduced BICE or amended PTE 84-24. Assuming the rule is not overturned and the requirements of the exemptions were to be implemented fully, the impact on the financial services industry generally and on the Company’s business is difficult to assess. We believe however it could have an adverse effect on sales of annuity products to IRA owners particularly in the independent agent distribution channel. Compliance with the prohibited transaction exemptions when fully phased in would likely require additional supervision of agents, cause changes to compensation practices and product offerings, and increase litigation risk, all of which could adversely impact our business, results of operations and/or financial condition. FGLIC will continue to closely monitor developments including NAIC and state specific regulations and believes it is prepared to execute implementation plans as necessary to meet the rule and exemption requirements on the requisite applicability dates.
See “Regulation” section of Item 1. Business for further discussion on the DOL “fiduciary” rule.
Bermuda and Cayman Islands Regulation
Our business is subject to regulation in Bermuda and the Cayman Islands, including the BMA and the Cayman Islands Monetary Authority. 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.
In particular, our reinsurance subsidiary F&G Re is registered in Bermuda under the Bermuda Insurance Act and 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 EU on a “level playing field.” In connection with its initial efforts to achieve equivalency under the European Union’s Directive (2009/138/EC) (“Solvency II”), the BMA implemented and imposed additional requirements on the companies it regulates. The European Commission (the “EC”) granted Bermuda’s commercial insurers full equivalence in all areas of Solvency II for an indefinite period of time effective March 24, 2016, and applies from January 1, 2016.
Additionally, changes to applicable Bermuda laws and regulations regarding dividends or distributions from our subsidiaries to us could adversely affect us. All Bermuda companies must comply with the provisions of the Companies Act regulating the payment of dividends and distributions from contributed surplus. Under Bermuda’s Companies Act 1981, a Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if the company has reasonable grounds for believing that it is or will after the payment be unable to pay its liabilities as they become due or the realizable value of the company’s assets would thereby be less than its liabilities. As F&G Re is a licensed reinsurer and regulated by the BMA, it is additionally required to comply with the provisions of the Bermuda Insurance Act regarding payments of dividends and distributions. Under the Bermuda Insurance Act, an insurer is prohibited from declaring or paying a dividend if in breach of its Enhanced Capital Requirement (“ECR”) or Minimum Margin of Solvency (“MMS”) or if the declaration or payment of such dividend would cause such a breach. Where an insurer fails to meet its solvency margin on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year without the approval of the BMA.
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

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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 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 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. 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. 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 adversely affect us and/or our shareholders.
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 are incorporated in the Cayman Islands and maintain subsidiaries or offices in the United States, Bermuda and the Cayman Islands. Taxing authorities, such as the IRS, actively audit and otherwise challenge these types of arrangements. We are subject to reviews and audits by the IRS and other taxing authorities from time to time, and the IRS or other taxing authority may challenge our structure. 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 structure or the cost involved in responding to any such audit or challenge. If we are unsuccessful, we 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.
U.S. Tax Cuts and Jobs Act (“TCJA”)
The United States recently enacted a budget reconciliation act amending the Internal Revenue Code of 1986 (the “Code,” and such act the “TCJA”). The TCJA contains provisions affecting the tax treatment of non-U.S. companies that can materially affect us. The TCJA includes provisions that reduce the U.S. corporate tax rate, impose a base erosion minimum tax on income of a U.S. corporation determined without regard to certain otherwise deductible payments made to certain foreign affiliates (including premium or other consideration paid or accrued to a related foreign reinsurance company for reinsurance), and significantly accelerate taxable income and therefore cash tax expense by the imposition of other changes affecting life insurance companies, among others. While we are continuing to study the impact of the TCJA, it may reduce the benefits we anticipate from lower effective tax rates as a non-U.S. company, add significant expense and have a material adverse effect on our results of operations.
The TCJA also includes provisions that could materially affect our shareholders as a result of provisions that broaden the definition of United States shareholder for purposes of the controlled foreign corporation (“CFC”) rules and make it more difficult for a foreign insurance company to not be treated as a passive foreign investment company (“PFIC”). Independent of the TJCA, interpretations of U.S. federal income tax law, including those regarding whether a company is engaged in a trade or business (or has a permanent establishment) within the United States or is a PFIC, or whether U.S. persons are required to include in their gross income “subpart F income” or related person insurance income (“RPII”) of a CFC, are subject to change, possibly on a retroactive basis. Regulations regarding the application of the PFIC rules to insurance companies and regarding RPII are only in proposed form. New regulations or pronouncements interpreting or clarifying the existing proposed regulations could be forthcoming. In addition to the TCJA, other legislative proposals or administrative or judicial developments

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could also result in an increase in the amount of U.S. tax payable by us or by an investor in our securities or reduce the attractiveness of our products. If any such developments occur, our business, financial condition and results of operation could be materially and adversely affected and could have a material and adverse effect on your investment in our securities.
The Base Erosion and Anti-Abuse Tax may significantly increase our tax liability
The TCJA introduced a new tax called the Base Erosion and Anti-Abuse Tax (BEAT). The BEAT is a minimum tax and is calculated as a percentage (5% in 2018, 10% in 2019-2025, and 12.5% in 2026 and thereafter) of the “modified taxable income” of an “applicable taxpayer.” Modified taxable income is calculated by adding back to a taxpayer’s regular taxable income the amount of certain “base erosion tax benefits” with respect to certain payments made to foreign affiliates of the taxpayer, as well as the “base erosion percentage” of any net operating loss deductions. The BEAT applies for a taxable year only to the extent it exceeds a taxpayer’s regular corporate income tax liability for such year (determined without regard to certain tax credits).
The Modco reinsurance agreement between FGLIC and F&G RE requires FGLIC to pay or accrue substantial amounts to F&G Re that would be characterized as “base erosion payments” with respect to which there are “base erosion tax benefits.” Accordingly, the BEAT could significantly increase the tax liability of F&G Re and have a material adverse effect on our results of operations.
Moreover, F&G Re pays or accrues substantial amounts to FGLIC under the Modco reinsurance agreement for increases in policy reserves and to reimburse FGLIC for payments of benefits to our policyholders. It is not clear whether such amounts should be netted against the amounts FGLIC pays or accrues to F&G Re under our reinsurance agreements for purposes of calculating their “base erosion payments” and “base erosion tax benefits.” No assurance can be given that any such amounts will be netted. If the amounts cannot be netted and we do not take our planned or other actions to mitigate or eliminate the BEAT, the tax liability of FGLIC will increase and our results of operations will be materially and adversely affected.
The application of the BEAT to the Modco reinsurance arrangement could be affected by further legislative action (including possibly a “technical corrections” bill), administrative guidance or court decisions. Any such legislative action, administrative guidance or court decisions is unlikely to be available at the time that we are required to determine the amount of federal income tax incurred by FGLIC for the first quarter of 2018, and they could have retroactive effect. Tax authorities may later disagree with our BEAT calculations, or the interpretations on which those calculations are based, and assess additional taxes, interest and penalties, and the uncertainty regarding the correct interpretation of the BEAT may make such disagreements more likely. We will determine the appropriateness of our tax provision in accordance with GAAP. However, there can be no assurance that this provision will accurately reflect the amount of federal income tax that FGLIC ultimately pay, as that amount could differ materially from our estimate. 
Our efforts to mitigate the cost of the BEAT may be unnecessary, ineffective or counterproductive
In light of the possibility of material additional tax cost to FGLIC and the lack of clear guidance regarding the appropriate method by which to compute the BEAT, we are undertaking certain actions and exploring various alternatives intended to mitigate the potential effect of the BEAT on our results of operations in the event it is determined that none of the amounts paid or accrued by F&G Re to FGLIC are taken into account in the calculation of “base erosion payments” or “base erosion tax benefit.” Such actions may have adverse consequences to our business, and there can be no assurances that our efforts to eliminate or mitigate the BEAT will be successful. In addition, it is likely that we will be required to take action before the uncertainty regarding the BEAT is resolved, and accordingly any action we take could, in hindsight, be unnecessary, ineffective or counterproductive.
Bermuda Tax Exemption
We are subject to the risk that Bermuda tax laws may change and that we may become subject to new Bermuda taxes following the expiration of a current exemption after 2035. The Bermuda Minister of Finance (the “Minister”), under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, has given our Bermuda subsidiaries an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to our Bermuda subsidiaries or any of our Bermuda subsidiaries’ operations, shares, debentures or other obligations until March 31, 2035, except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by our Bermuda

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subsidiaries in respect of real property owned or leased by our Bermuda subsidiaries in Bermuda. Given the limited duration of the Minister’s assurance, we cannot assure you that our Bermuda subsidiaries will not be subject to any Bermuda tax after March 31, 2035.
We may be subject to U.S. Federal income taxation
The Company is incorporated under the laws of the Cayman Islands, and CF Bermuda and F&G Re are incorporated under the laws of Bermuda. These companies currently intend to operate such that none will be treated as being engaged in a trade or business within the U.S. or subject to current U.S. federal income taxation on their net income. However, the determination of whether a foreign corporation is engaged in a trade or business within the United States is highly factual, subject to uncertainty, and must be made annually. There can be no assurance that the IRS will not successfully contend that these companies are engaged in a trade or business in the U.S. If they were considered to be engaged in a U.S. trade or business, they could be subject to U.S. federal income taxation on a net basis on their income that is effectively connected with such U.S. trade or business (including a branch profits tax on the portion of its earnings and profits that is attributable to such income). Any such U.S. federal income taxation could result in substantial tax liabilities and consequently could have a material, adverse effect on our financial condition and results of future operations.
U.S. persons who own our shares may be subject to U.S. federal income taxation at ordinary income rates on our undistributed earnings and profits.
Controlled foreign corporations in general. If the Company or any of its non-U.S. subsidiaries is a “controlled foreign corporation” (CFC) for the taxable year, each U.S. person treated as a “U.S. Shareholder” with respect to the Company or its non-U.S. subsidiaries that held our shares directly (or indirectly through non-U.S. entities) as of the last day in such taxable year generally is required to include in gross income as ordinary income its pro rata share of such company’s insurance and reinsurance income and certain other investment income, regardless of whether that income was actually distributed to such U.S. person (with certain adjustments).
In general, a non-U.S. corporation is a CFC if its “U.S. Shareholders,” in the aggregate, own (or are treated as owning) stock of the non-U.S. corporation possessing more than 50% of the voting power or value of such corporation’s stock. However, this threshold is lowered to more than 25% for purposes of taking into account the related person insurance income (RPII) of a non-U.S. corporation. Special rules apply for purposes of taking into account any RPII of a non-U.S. corporation, as described below.
U.S. Shareholder status. Prior to the enactment of the TCJA, a “U.S. Shareholder” was defined as any U.S. person that owned, directly or indirectly (or was treated as owning), stock of the non-U.S. corporation possessing 10% or more of the total voting power of such non-U.S. corporation’s stock. However, for taxable years of non-U.S. corporations beginning after December 31, 2017, the TCJA provides that a “U.S. Shareholder” of a non-U.S. corporation generally is any U.S. person that owns (or is treated as owning) stock of the non-U.S. corporation possessing 10% or more of the total voting power or 10% or more of the total value of such non-U.S. corporation’s stock.
In addition, the TCJA expanded the situations in which a U.S. person that does not directly own stock in a non-U.S. corporation will be treated as owning such stock via the application of attribution rules. Specifically, the TCJA eliminated the prohibition on “downward attribution,” one effect of which is that stock of a non-U.S. subsidiary of a foreign parent may be attributed down to a U.S. subsidiary of such parent. Such attribution thus could cause the U.S. subsidiary to become a “U.S. Shareholder” of the non-U.S. subsidiary and thereby cause the latter to become a CFC.
CFC status. Our Charter generally limits the voting power attributable to our shares so that no “United States person” (as defined in Section 957 of the Code) holds, directly, indirectly or constructively (within the meaning of Section 958 of the Code), more than 9.5% of the total voting power of our shares. This limitation would not apply to reduce the voting power of shares held by members of (a) the Blackstone Group (as defined in our Charter) without the consent of a majority of the Blackstone Group shareholders (as determined based on their ownership of the common shares) or (b) the FNF Group (as defined in our Charter) without the consent of the applicable member of the FNF Group. This voting power limitation was intended to reduce the likelihood that the Company and its non-U.S. subsidiaries will be treated as CFCs in any taxable year (subject to the impact of the TCJA).
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likelihood that the Company and its non-U.S. subsidiaries will not be treated as CFCs. Thus, there can be no assurance that the Company will not become a CFC. In addition, as a result of the allowance of “downward attribution,” as noted above, the non-U.S. subsidiaries of the Company currently are CFCs. U.S. persons should consult with their tax advisors regarding the possible application of the CFC rules to their investment in the Company.
Effect of CFC status on our shareholders. Since the Company’s non-U.S. subsidiaries are CFCs, a U.S. person that is a U.S. Shareholder with respect to them as of the last day in such taxable year generally is required to include in gross income as ordinary income its pro rata share of such company’s insurance and reinsurance income and certain other investment income, regardless of whether that income was actually distributed to such U.S. person (with certain adjustments). This same treatment would apply with respect to the Company, if it also becomes a CFC and a U.S. person is similarly treated as a U.S. Shareholder with respect to it.
In addition, if a U.S. Shareholder disposes of shares in a non-U.S. company that was a CFC during the five-year period ending on the date of disposition, any gain from the disposition will generally be treated as a dividend to the extent of the U.S. person’s share of the corporation’s undistributed earnings and profits that were accumulated during the period or periods that the U.S. person owned the shares while the corporation was a CFC (with certain adjustments). Also, a U.S. person may be required to comply with specified reporting requirements, regardless of the number of shares owned. See “Proposal No. 1 - The Business Combination Proposal - Certain United States Federal Income Tax Considerations - Taxation of U.S. Holders - CFC Provisions” in the Proxy Statement, which is incorporated herein by reference, for additional information.
U.S. persons who own our shares may be subject to U.S. federal income taxation at ordinary income rates on a disproportionate share of our undistributed earnings and profits attributable to RPII.
In general. If F&G Re is treated as recognizing RPII in a taxable year and is treated as a CFC for purposes of the RPII rules for such taxable year, each U.S. person that owns our shares directly or indirectly through non-U.S. entities as of the last day in such taxable year must generally include in gross income its pro rata share of the RPII, determined as if the RPII were distributed proportionately only to all such U.S. persons, regardless of whether that income is distributed (with certain adjustments). F&G Re generally will be treated as a CFC for purposes of the RPII rules if U.S. persons in the aggregate own (or are treated as owning) 25% or more of the total voting power or value of the Company or stock for an uninterrupted period of 30 days or more during the taxable year (the TCJA eliminates the 30 day period after 2017). F&G Re expects to be treated as a CFC for this purpose based on the ownership of its shares.
RPII generally is any income of a non-U.S. corporation attributable to insuring or reinsuring risks of a U.S. person that owns (or is treated as owning) stock of such non-U.S. corporation, or risks of a person that is “related” to such a U.S. person. For this purpose, (1) a person is “related” to another person if such person “controls,” or is “controlled” by, such other person, or if both are “controlled” by the same persons and (2) “control” of a corporation means ownership (or deemed ownership) of stock possessing more than 50% of the total voting power or value of such corporation’s stock and “control” of a partnership, trust or estate for U.S. federal income tax purposes means ownership (or deemed ownership) of more than 50% by value of the beneficial interests in such partnership, trust or estate.
Our Charter provides that no shareholder or holder (or, to its actual knowledge, any direct or indirect beneficial owner thereof) of our issued and outstanding shares, including any securities exchangeable for our share capital and all options, warrants, and contractual and other rights to purchase our share capital (“Derivative Securities”), that is a “United States person” (as defined in Section 957 of the Code) shall knowingly permit itself to hold (directly, indirectly or constructively within the meaning of Section 958 of the Code) 50% or more of the total voting power or of the total value of our issued and outstanding shares, including our Derivative Securities, in order to reduce the likelihood of us recognizing RPII. This limitation would not apply to a shareholder or holder of Derivative Securities that is a member of the Blackstone Group or FNF Group. In the event that any holder of our shares or Derivative Securities to whom this limitation applies contravenes such limitation, our board of directors may require such holder to sell or allow us to repurchase some or all of such holder’s shares or Derivative Securities at fair market value, as the board of directors and such holder agree in good faith, or to take any reasonable action that the board of directors deems appropriate. If a member of the Blackstone Group or FNF Group were to own (directly, indirectly or constructively) more than 50% of the total voting power or total value of our issued and outstanding shares, our subsidiaries may be treated as “related” to a member of the Blackstone Group or FNF Group, as applicable (or one of their affiliates) for these purposes. In such case, substantially all of our Bermuda

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reinsurance subsidiary’s income might constitute RPII, triggering the adverse RPII consequences to all U.S. persons that hold our ordinary shares directly or indirectly through non-U.S. entities, as described below.
RPII Exceptions - The RPII rules will not apply with respect to Bermuda Re for a taxable year if (1) at all times during its taxable year less than 20% of the total combined voting power of all classes of any such non-U.S. insurance subsidiary’s voting stock and less than 20% of the total value of all of its stock is owned (directly or indirectly) by persons who are (directly or indirectly) insured under any policy of insurance or reinsurance issued by such insurance subsidiary, respectively, or who are related persons to any such person or (2) its RPII (determined on a gross basis) is less than 20% of its insurance income (as so determined) for the taxable year, determined with certain adjustments. It is expected that one or both of these exceptions will apply to Bermuda Re, but because CF Corp. cannot be certain of its future ownership or its ability to obtain information about its shareholders to manage such ownership to ensure that it qualifies for one or both of these exceptions, there can be no assurance in this regard. As a general matter, we do not believe that Bermuda Re will earn more than a de minimis amount of RPII from insuring risks of RPII Shareholders. As a general matter, we do not believe that Bermuda Re will earn more than a de minimis amount of RPII from insuring risks of RPII Shareholders.
U.S. persons who dispose of our shares may be required to treat any gain as ordinary income for U.S. federal income tax purposes and comply with other specified reporting requirements.
If a U.S. person disposes of shares in a non-U.S. corporation that is an insurance company that had RPII and the 25% threshold described above is met at any time when the U.S. person owned any shares in the corporation during the five-year period ending on the date of disposition, any gain from the disposition will generally be treated as a dividend to the extent of the U.S. person’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the U.S. person owned the shares (possibly whether or not those earnings and profits are attributable to RPII). In addition, the shareholder will be required to comply with specified reporting requirements, regardless of the amount of shares owned. We believe that these rules should not apply to a disposition of our shares because FGL Holdings is not itself directly engaged in the insurance business. We cannot assure you, however, that the IRS will not successfully assert that these rules apply to a disposition of our ordinary shares. See “Proposal No. 1 - The Business Combination Proposal - Certain United States Federal Income Tax Considerations - Taxation of U.S. Holders - CFC Provisions - Disposition of Ordinary Shares” in the Proxy Statement, which is incorporated herein by reference.
We may be a PFIC, which could result in adverse United States federal income tax consequences for our shareholders.
If we are a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of our shares or warrants, the U.S. Holder may be subject to adverse U.S. federal income tax consequences and may be subject to additional reporting requirements.
We believe that we were a PFIC for the taxable year ending December 31, 2016. While not free from doubt, we do not believe that we were a PFIC for the taxable year ending December 31, 2017, and do not currently believe that we will be classified as a PFIC for the 2018 taxable year. Our actual PFIC status for our current taxable year or any subsequent taxable year, however, will not be determinable until after the end of such taxable year. In addition, the determination as to whether we are a PFIC for any taxable year is based on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. Further, after 2017, the TCJA provides that a foreign insurance company, such as F&G Re, is only treated as engaged in the active conduct of an insurance business for PFIC purposes if its applicable insurance liabilities constitute more than 25 percent of its total assets. Accordingly, there can be no assurance with respect to our status as a PFIC for our current taxable year ending December 31, 2017 or any future taxable year. If we determine we are a PFIC for any taxable year, we will endeavor to provide to a U.S. Holder such information as the Internal Revenue Service (“IRS”) may require, including a PFIC annual information statement, in order to enable the U.S. Holder to make and maintain a qualified electing fund election, but there is no assurance that we will timely provide such required information. There is also no assurance that we will have timely knowledge of our status as a PFIC in the future or of the required information to be provided. We urge U.S. investors to consult their own tax advisors regarding the possible application of the PFIC rules, including the impact of the changes to the PFIC rules contained in the TCJA.
Accounting rules, changes to accounting rules, or the grant of permitted accounting practices to competitors could negatively impact us.    

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We are required to comply with U.S. GAAP. A number of organizations are instrumental in the development and interpretation of U.S. GAAP, such as the SEC, the Financial Accounting Standards Board (“FASB”) and the American Institute of Certified Public Accountants. U.S. GAAP is subject to constant review by these organizations and others in an effort to address emerging accounting issues and to interpret existing accounting guidance. See Note 2, Significant Accounting Policies and Practices for further discussion on the FASB’s key projects and their impact to our financial condition and profitability.
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 RBC ratios may increase or decrease depending on a variety of factors, most of which are outside of our control, including, but not limited to, the following:
the amount of statutory income or losses generated by our insurance subsidiaries (which itself is sensitive to equity market and credit market conditions);
the amount of additional capital our insurance subsidiaries must hold to support business growth;
changes in statutory accounting or reserve requirements applicable to our insurance subsidiaries;
our ability to access capital markets to provide reserve relief;
changes in equity market levels;
the value of certain fixed-income and equity securities in our investment portfolio;
changes in the credit ratings of investments held in our portfolio;
the value of certain derivative instruments;
changes in interest rates;
credit market volatility; and
changes to the RBC formulas and interpretation of the NAIC instructions with respect to RBC calculation methodologies.
Rating agencies may also implement changes to their internal models, which differ from the RBC capital model and could result in our insurance subsidiaries increasing or decreasing the amount of statutory capital they must hold in order to maintain their current ratings. In addition, rating agencies may downgrade the investments held in our portfolio, which could result in a reduction of our capital and surplus and our RBC ratio. To the extent that an insurance subsidiary’s RBC ratios are deemed to be insufficient, we may take actions either to increase the capitalization of the insurer or to reduce the capitalization requirements. If we are 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 its applicable RBC requirements or minimum capital and surplus requirements could subject it to further examination or corrective action imposed by insurance regulators, including limitations on its ability to write additional business, supervision by regulators or seizure or liquidation. Any corrective action imposed could have a material adverse effect on our business, results of operations and financial condition. A decline in RBC ratios also limits the ability of an insurance subsidiary to make dividends or distributions to us and could be a factor in causing rating agencies to downgrade the insurer’s financial strength ratings, which could have a material adverse effect on our business, results of operations and financial condition.
We may be the target of future litigation, law enforcement investigations or increased scrutiny which may affect our 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 12, Contingencies, Guarantees and Indemnifications.”
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

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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 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 its 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.

Because we are incorporated under the laws of the Cayman Islands, shareholders may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. Federal courts may be limited.
We are an exempted company incorporated under the laws of the Cayman Islands. As a result, it may be difficult for investors to effect service of process within the United States upon our directors or executive officers, or enforce judgments obtained in the United States courts against our directors or officers.
Our corporate affairs are governed by our Charter, the Companies Law (2016 Revision) of the Cayman Islands, as amended (the “Companies Law”) (as the same may be supplemented or amended from time to time) and the common law of the Cayman Islands. We are also subject to the federal securities laws of the United States. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority, but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are different from what they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a different body of securities laws as compared to the United States, and certain states may have more fully developed and judicially interpreted bodies of corporate law. In addition, Cayman Islands companies may not have standing to initiate a shareholders derivative action in a Federal court of the United States.
We have been advised by our Cayman Islands legal counsel that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments of courts of the United States predicated upon the civil liability provisions of the federal securities laws of the United States or any state; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability provisions of the federal securities laws of the United States or any state, so far as the liabilities imposed by those provisions are penal in nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in

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the United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a United States company.
Anti-takeover provisions in our Charter discourage, delay or prevent a change in control of our company and may affect the trading price of our ordinary shares.
Our Charter includes a number of provisions that may discourage, delay or prevent a change in our management or control over us. For example, our Charter includes provisions (i) classifying the Company’s board of directors into three classes with each class to serve for three years with one class being elected annually, (ii) providing that directors may only be removed for cause, (iii) requiring shareholders to comply with advance notice procedures in order to bring business before an annual general meeting or to nominate candidates for election as directors, (iv) providing that only directors may call general meetings, (v) providing that resolutions may only be passed at a duly convened general meeting.
These provisions may prevent our shareholders from receiving the benefit from any premium to the market price of our ordinary shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our ordinary shares if the provisions are viewed as discouraging takeover attempts in the future.
Our Charter may also make it difficult for shareholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our shareholders.
Many states, including the jurisdictions where our principal insurance subsidiaries FGLIC and FGLIC NY are organized (Iowa and New York, respectively), have insurance laws and regulations that require advance approval by state agencies of any direct or indirect change in control of an insurance company that is domiciled in or, in some cases, has such substantial business that it is deemed to be commercially domiciled in that state. Therefore, any person seeking to acquire a controlling interest in us would face regulatory obstacles which may delay, deter or prevent an acquisition that shareholders might consider in their best interests.
The consent right of the original holders of our preferred shares over a change of control transaction may discourage, delay or prevent a change in control of our Company and may affect the trading price of our ordinary shares and the preferred shares.
The original holders of the preferred shares each have a consent right over any change of control transaction so long as they hold any preferred shares at the time of such change of control, unless prior to any such change of control transaction, such original holders have received a bona fide, binding offer to purchase all of such original holders’ preferred shares at a price equal to or greater than the then-current liquidation preference, plus any accumulated and unpaid dividends (whether or not declared), from a person not affiliated with any person or group participating in such change of control transaction.
This provision may prevent our shareholders from receiving the benefit from any premium to the market price of our ordinary shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our ordinary shares and our preferred shares if this provision is viewed as discouraging takeover attempts in the future.

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If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results.
We are required to comply with Section 404 of the Sarbanes Oxley Act, which requires, among other things, that companies maintain disclosure controls and procedures to ensure timely disclosure of material information, and that management review the effectiveness of those controls on a quarterly basis. Effective internal controls are necessary for us to provide reliable financial reports and to help prevent fraud, and our management and other personnel devote a substantial amount of time to these compliance requirements. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. Section 404 of the Sarbanes-Oxley Act also requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K. As discussed in “Item 9A-Controls and Procedures,” the design of internal control over financial reporting for the Company following the Business Combination has required, and will require, significant time and resources from management and other personnel. Therefore, management was unable, without incurring unreasonable effort and expense, to conduct an assessment of our internal control over financial reporting, and accordingly, in compliance with SEC guidance we have not included a management report on internal control over financial reporting in this Annual Report on Form 10-K. If we fail to maintain the adequacy of our internal controls, we cannot assure you that we will be able to conclude in the future that we have effective internal control over financial reporting and/or we may encounter difficulties in implementing or improving our internal controls, which could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to maintain effective internal controls, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and may also result in delayed filings with the SEC.
Risks relating to our business
The agreements and instruments governing our debt contain significant operating and financial restrictions, which may prevent us from capitalizing on business opportunities.
The indenture (“the indenture”) governing the 6.375% senior notes due 2021 (the “Senior Notes”) issued by FGLH and the three-year $200 unsecured revolving credit facility (the “Credit Agreement”); each contains various restrictive covenants which limit, among other things, the Company’s ability to:
incur additional indebtedness;
pay dividends or certain other distributions on its capital stock other than as allowed under the indenture and the Credit Agreement;
make certain investments, prepayment of junior indebtedness or other restricted payments;
engage in transactions with stockholders or affiliates;
sell certain assets or merge with or into other companies;
change our accounting policies;
guarantee indebtedness; and
create liens or incur liens on the assets of FGLH and its subsidiaries.
In addition, if FGL or FGLH undergoes a “change of control” as defined in the indenture, each holder of Senior Notes will have the right to require us to repurchase their Senior Notes at a price equal to 101% of the principal amount and any accrued but unpaid interest.
As a result of these restrictions and their effect on us, we may be limited in how we conduct our business and we may be unable to raise additional debt financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we or our subsidiaries may incur could include more restrictive covenants. For detailed information about restrictions governing our debt, see Part II, Item 7. "Debt" in this report.
 A financial strength ratings downgrade, potential downgrade, or any other negative action by a rating agency, could make our product offerings less attractive and increase our cost of capital, and thereby adversely affect our financial condition and results of operations.
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 contractholder obligations. These ratings are important to maintaining public confidence in our products, our ability to market our products and our competitive position. Any downgrade or other negative

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action by a rating agency could have a materially adverse effect on us in many ways, including the following:
adversely affecting relationships with distributors, 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 insurance products and services in order to remain competitive;
adversely affecting our ability to obtain reinsurance at a reasonable price, on reasonable terms or at all; and
requiring us to collateralize reserves, balances or obligations under reinsurance and derivatives agreements.
See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk-Credit Risk and Counterparty Risk”.
Our insurance subsidiaries’ ability to grow depends in large part upon the continued availability of capital.
Our insurance subsidiaries’ long-term strategic capital requirements will depend on many factors, including their accumulated statutory earnings and the relationship between their statutory capital and surplus and various elements of required capital. To support long-term capital requirements, we and our insurance subsidiaries may need to increase or maintain statutory capital and surplus through financings, which could include debt, equity, financing arrangements or other surplus relief transactions. Adverse market conditions have affected and continue to affect the availability and cost of capital from external sources. We are not obligated, may choose not, or may not be able to provide financing or make capital contributions to our insurance subsidiaries. Consequently, financings, if available at all, may be available only on terms that are not favorable to us or our insurance subsidiaries. If our insurance subsidiaries cannot maintain adequate capital, they may be required to limit growth in sales of new policies, and such action could materially adversely affect our business, operations and financial condition.
Our business could be interrupted or compromised if we experience difficulties arising from outsourcing relationships.
We outsource the following functions to third-party service providers, and expect to continue to do so in the future:
new business administration
hosting of financial systems
servicing of existing policies
information technology development and maintenance
call centers
underwriting administration of life insurance applications
asset management
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 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 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

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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 of 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.
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 harm our business.
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 U.S. GAAP and statutory financial statements. We have policies, procedures, automation, and back-up plans designed to prevent or limit the effect of failure. All of these risks are also applicable where we rely on outside vendors, to provide services to us and our customers. The failure of any one of these systems for any reason could disrupt our operations, result in loss of customer business and adversely impact our business.
 
We retain confidential information in our information technology systems and those of our business partners, and we rely on industry standard commercial technologies and network security measures to maintain the security of those systems and prevent disruptions from unauthorized tampering with our computer systems. Any compromise of the security of our information technology systems that results in inappropriate access, use or disclosure of personally identifiable customer information could damage our reputation in the marketplace, deter purchases of our products, subject us to heightened regulatory scrutiny or significant civil and criminal liability and require us to incur significant technical, legal and other expenses.
Our risk management policies and procedures could leave us exposed to unidentified or unanticipated risk, which could negatively affect our business or result in losses.
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. Many of our methods of managing risk and exposures are based upon observed historical data, current market behavior, and certain assumptions made by management. The 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 adversely affect our business, financial condition or operating results. See “Risk Management” section of Item 1. Business for further discussion of the Company’s risk assessment.
We are exposed to the risks of natural and man-made catastrophes, pandemics and malicious and terrorist acts that could materially adversely affect our business, financial condition and results of operations.

Natural and man-made catastrophes, pandemics 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 lapses and surrenders of existing policies, as well as sales of new policies. While we have taken steps to identify and mitigate these risks, such risks cannot be 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, operations and financial condition. The possible macroeconomic effects of such events could also adversely affect our asset portfolio.
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.

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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 us. Competition could result in, among other things, lower sales or higher lapses of existing products.
Our annuity products compete with fixed indexed, fixed rate 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, and our maintenance of adequate financial strength ratings from rating agencies. Our ability to compete is also dependent upon, among other things, our ability to attract and retain distribution channels to market our products, the competition for which is vigorous.
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 are a holding company with limited operations of our own. As a consequence, our ability to pay dividends on our stock will depend on the ability of our subsidiaries to pay dividends to us, which may be restricted by law.
We are a holding company with limited business operations of our own. Our primary subsidiaries are insurance subsidiaries that own substantially all of our assets and conduct substantially all of our operations. The Iowa insurance law and the New York insurance law regulate the amount of dividends that may be paid in any year by FGLIC and FGLIC NY, respectively. Accordingly, our payment of dividends is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to meet our obligations and pay dividends. Each subsidiary is a distinct legal entity and legal and contractual restrictions may also limit our ability to obtain cash from our subsidiaries.
It is possible that in the future our insurance subsidiaries may be unable to pay dividends or distributions to us in an amount sufficient to meet our obligations or to pay dividends due to a lack of sufficient statutory net gain from operations, a diminishing statutory policyholders surplus, changes to the Iowa or New York insurance laws or regulations or for some other reason. In addition, Cayman Islands law may impose requirements that may restrict our ability to pay dividends to holders of our ordinary shares. Further, the covenants in the agreement governing the existing indebtedness of FGLH significantly restrict its ability to pay dividends, which further limits our ability to obtain cash or other assets from our subsidiaries. If our subsidiaries cannot pay sufficient dividends or distributions to us in the future, we would be unable to meet our obligations or to pay dividends. This would negatively affect our business and financial condition as well as the trading price of our ordinary shares. See “Business-Regulation-Dividend and Other Distribution Payment Limitations” in Part I Item 1 of this annual report.

The founders and Blackstone affiliates own a significant portion of our issued and outstanding voting shares and have nomination rights with respect to our board of directors and have agreed to vote together for nominees selected pursuant to the Nominating and Voting Agreement.

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The founders beneficially own approximately 12.9% of our ordinary shares, and Blackstone affiliates (including GSO) beneficially own approximately 20.2% of our ordinary shares, in each case excluding warrants held by such parties that are currently exercisable. As long as the founders and Blackstone affiliates own or control a significant percentage of our outstanding voting power, they will have the ability to strongly influence all corporate actions requiring shareholder approval, including the election and removal of directors and the size of our board of directors, any amendment of our Charter, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets.
In addition, we have entered into a nominating and voting agreement (the “Nominating and Voting Agreement”) with Mr. Foley, Mr. Chu and Blackstone Tactical Opportunities Fund II L.P. (“BTO”) (collectively, the “Nominating Parties”), pursuant to which, if the Nominating Parties and their respective affiliates own, in the aggregate, directly or indirectly, at least 20% of our issued and outstanding ordinary shares, the Nominating Parties will have the right to designate one director nominee for election at each general meeting of the Company. If the Nominating Parties and their respective affiliates own, in the aggregate, directly or indirectly, at least 12% but less than 20% of the issued and outstanding ordinary shares (the “Two Director Range”), the Nominating Parties will have the right to designate one director nominee for each of the two director classes (the “Two Director Classes”) to be voted on at the two general meetings of the Company immediately after the aggregate ownership of ordinary shares comes within the Two Director Range and for each subsequent meeting at which one of the Two Director Classes is to be voted on by the shareholders, provided that such aggregate ownership remains within the Two Director Range at the time of each such nomination.
If the Nominating Parties and their respective affiliates own, in the aggregate, directly or indirectly, at least 5% but less than 12% of the issued and outstanding ordinary shares (the “One Director Range”), the Nominating Parties will have the right to designate one director nominee for the class of directors (the “One Director Class”) to be voted on at the general meeting of the Company immediately after the aggregate ownership of ordinary shares comes within the One Director Range and for each subsequent meeting at which the One Director Class is to be voted on by the shareholders, provided that such aggregate ownership remains within the One Director Range at the time of each such nomination.
Director nominees selected under the Nominating and Voting Agreement will be selected by the vote of any two of Mr. Foley, Mr. Chu and BTO. In addition, pursuant to the Nominating and Voting Agreement, each of Mr. Foley, Mr. Chu and BTO agreed to vote their respective ordinary shares for each director so nominated.
The interests of the founders and Blackstone affiliates may not align with the interests of our other shareholders. The founders and Blackstone are in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. The founders and Blackstone may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.
Warrants, including those issued in connection with the business combination, exercised for our ordinary share would increase the number of shares eligible for future resale in the public market and result in dilution to our shareholders.
We issued warrants to purchase 34,500,000 ordinary shares as part of our IPO, and we issued an aggregate of 17,300,000 private placement warrants to CF Capital Growth, LLC ("Sponsor"), each exercisable to purchase one whole ordinary share at $11.50 per whole share. In connection with the business combination, we also issued an aggregate of 19,083,335 forward purchase warrants to the anchor investors. To the extent such warrants are exercised, additional ordinary shares will be issued, which will result in dilution to the then existing holders of our ordinary shares and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our ordinary shares. In addition, such dilution could, among other things, limit the ability of our current shareholders to influence management through the election of directors.
We may amend the terms of the warrants in a manner that may be adverse to holders with the approval by the holders of at least 65% of the then outstanding public warrants. As a result, the exercise price of the warrants could be increased, the exercise period could be shortened and the number of ordinary shares purchasable upon exercise of a warrant could be decreased, all without the approval of the holders of the warrants.

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Our warrants were issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of at least 65% of the then outstanding public warrants to make any change that adversely affects the interests of the registered holders. Accordingly, we may amend the terms of the public warrants in a manner adverse to a holder if holders of at least 65% of the then outstanding public warrants approve of such amendment. Although our ability to amend the terms of the public warrants with the consent of at least 65% of the then outstanding public warrants is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of the warrants, shorten the exercise period or decrease the number of ordinary shares purchasable upon exercise of a warrant.
We may redeem unexpired warrants prior to their exercise at a time that is disadvantageous to warrant holders, thereby making their warrants worthless.
We have the ability to redeem outstanding warrants at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sales price of our ordinary shares equals or exceeds $18.00 per share for any 20 trading days within a 30 trading-day period ending on the third trading day prior to the date we send the notice of redemption to the warrant holders. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding warrants could force the warrant holders (i) to exercise their warrants and pay the exercise price therefor at a time when it may be disadvantageous for them to do so, (ii) to sell their warrants at the then-current market price when they might otherwise wish to hold their warrants or (iii) to accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of their warrants. None of the private placement warrants will be redeemable by us so long as they are held by our Sponsor or its permitted transferees.
Holders of our Series A Preferred Shares and Series B Preferred Shares will have no voting rights except under limited circumstances.
Except with respect to certain material and adverse changes to the Series A Preferred Shares or Series B Preferred Shares and the right to appoint a director upon certain nonpayment events, holders of the preferred shares do not have voting rights and will not have the right to vote for any members of the board of directors, except as may be required by law.
Upon a successful remarketing of the Series A Preferred Shares or Series B Preferred Shares, the terms of the preferred shares may be modified even if holders are unable to participate in the remarketing.
When we attempt to remarket the Series A Preferred Shares or Series B Preferred Shares, the remarketing agent will agree to use its reasonable best efforts to sell such preferred shares included in the remarketing. In connection with the remarketing, we and the remarketing agent may remarket such preferred shares with different terms prior to the remarketing, including a later earliest redemption date and a different dividend rate. Only the original holders may request or elect to participate in a remarketing. However, if the remarketing is successful, the modified terms will apply to all of the Series A Preferred Shares and Series B Preferred Shares, including those shares that were not included in the remarketing.
The Series A Preferred Shares and Series B Preferred Shares have no maturity or mandatory redemption date.
Each of the Series A Preferred Shares and Series B Preferred Shares is a perpetual equity security. The Series A Preferred Shares and Series B Preferred Shares have no maturity or mandatory redemption date and are not redeemable at the option of the holders. Accordingly, the Series A Preferred Shares and Series B Preferred Shares will remain outstanding indefinitely unless we elect to redeem the Series A Preferred Shares or Series B Preferred Shares or, in the case of an original holder, such original holder decides to convert its preferred shares, subject to the conditions described herein.
On or after November 30, 2022, we may redeem any or all of the Series A Preferred Shares or Series B Preferred Shares, and upon any redemption of the Series A Preferred Shares or Series B Preferred Shares, holders will not receive any “make whole” cash or shares or other compensation for future dividends or lost time value of the Series A Preferred Shares or Series B Preferred Shares.

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On or after November 30, 2022 (or such later date as is determined in connection with a successful remarketing), we may redeem any or all of the Series A Preferred Shares or Series B Preferred Shares. The redemption price will equal 100% of the liquidation preference of the Series A Preferred Shares and Series B Preferred Shares to be redeemed, plus any accumulated and unpaid dividends (whether or not declared) to, but excluding, the redemption date. Upon any such redemption, we will not be required to pay any “make whole” cash or shares or otherwise compensate holders in any way for any future dividend payments, if any, that holders would have otherwise received or any other lost time value of the Series A Preferred Shares or Series B Preferred Shares.
Holders of the Series A Preferred Shares and Series B Preferred Shares have no right to vote for directors until and unless dividends on of the Series A Preferred Shares or Series B Preferred Shares are in arrears and unpaid for the equivalent of six or more dividend periods.
Until and unless dividends on any of the Series A Preferred Shares or Series B Preferred Shares are in arrears and unpaid for the equivalent of six or more dividend periods, purchasers of the Series A Preferred Shares and Series B Preferred Shares have no voting rights with respect to the election of directors. If dividends on any shares of the Series A Preferred Shares or Series B Preferred Shares are in arrears and unpaid for the equivalent of six or more dividend periods, whether or not consecutive, the holders of our Series A Preferred Shares and Series B Preferred Shares, voting as a single class with all of our other classes or series of preferred shares upon which equivalent voting rights have been conferred and are exercisable, will have the right to elect two additional directors to our board of directors. These voting rights and the terms of the directors so elected will continue until all dividends on the Series A Preferred Shares and Series B Preferred Shares have been paid in full, or declared and a sum or number of preferred shares sufficient for such payment is set aside for payment.
Item 1B. Unresolved Staff Comments
None.

Item 2. Properties
We lease our headquarters at 601 Locust Street, Des Moines, Iowa, and sublease property in Baltimore, Maryland. Such leases expire December 2020, May 2021 and January 2022, respectively. We believe our existing facilities are suitable and adequate for our present purposes. As of January 2018, we believe that our Des Moines, Iowa, and Baltimore, Maryland, properties will be sufficient for us to conduct our operations and we have successfully exited our lease in Lincoln, Nebraska on January 30, 2018.

Item 3. Legal Proceedings
See "Note 12. Commitments and Contingencies" to our audited consolidated financial statements.
Item 4. Mine Safety Disclosures
Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Effective as of the closing of the Business Combination on November 30, 2017, (a) all of the units of the Company separated into their component securities of one ordinary share and one-half of one warrant to purchase one ordinary share, and the units ceased trading as a separate security, (b) all Class B ordinary shares, par value $0.0001 per share (“Class B ordinary shares”), converted into Class A ordinary shares, par value $0.0001 per share (“Class A ordinary shares”), and (c) all issued Class A ordinary shares were redesignated as ordinary shares, par value $0.0001 per share (“ordinary shares”) and all unissued Class A ordinary shares and Class B ordinary shares were redesignated as ordinary shares.
Our ordinary shares and warrants are listed on the NYSE under the symbols “FG” and “FG WS,” respectively. The Company’s ordinary shares and warrants began trading on the NYSE on December 1, 2017. Prior to the closing of the Business Combination, the Company’s units, Class A ordinary shares and warrants were historically quoted on the Nasdaq Capital Market (“Nasdaq”) under the symbols “CFCOU,” “CFCO” and “CFCOW,” respectively. The Company’s units commenced public trading on May 20, 2016, and the Class A ordinary shares and warrants each commenced separate trading on July 8, 2016.
The following table sets forth, for the calendar quarter indicated, the high and low sales prices per ordinary share and warrant as reported on Nasdaq or NYSE, as applicable.
 
 
Ordinary Shares (FG)(a)
 
Warrants (FG WS)
 
 
High
 
Low
 
High
 
Low
Fiscal Year 2017:
 
 
 
 
 
 
 
 
Fourth Quarter (b)(c)
 
$
11.94

 
$
9.19

 
$
2.20

 
$
0.97

Third Quarter
 
11.75

 
10.52

 
2.50

 
1.63

Second Quarter
 
12.25

 
10.00

 
2.52

 
1.35

First Quarter
 
10.25

 
9.89

 
1.70

 
1.20

 
 
 
 
 
 
 
 
 
Fiscal Year 2016:
 
 
 
 
 
 
 
 
Fourth Quarter
 
$
9.98

 
$
9.78

 
$
1.25

 
$
0.81

Third Quarter(d)
 
10.02

 
9.50

 
1.18

 
0.53

(a) On November 30, 2017, our Class A ordinary shares were redesignated as ordinary shares.
(b) Beginning December 1, 2017 with respect to FG and FG WS.
(c) Through November 30, 2017 with respect to CFCO and CFCOW.
(d) Beginning July 8, 2016 with respect to CFCO and CFCOW.
As of March 5, 2018, there were approximately 130 holders of record of our ordinary shares. This number does not include the stockholders for whom shares are held in a “nominee” or “street” name.
Dividends on Ordinary Shares
The Company has not paid any cash dividends on ordinary shares to date. The payment of cash dividends on ordinary shares in the future will be dependent upon the Company’s revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends on ordinary shares will be within the discretion of the Company’s board of directors at such time. In addition, the terms of the preferred shares and agreements governing the indebtedness of the Company and its subsidiaries contain restrictions on the Company’s ability to declare and pay dividends. For further discussion on dividends and other distribution payment limitations, see “Note 9. Equity” to our audited consolidated financial statements.

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Performance Graph
The information contained in this Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934.
The following graph shows a comparison from July 8, 2016 (the date our ordinary shares commenced trading on the Nasdaq) through December 31, 2017 of the cumulative total return for our ordinary shares with the comparable cumulative return of four indices: the Standard & Poor's 500 Stock Index (S&P 500 Index), the S&P 500 Life & Health Insurance Index, the NASDAQ Composite Index and the Russell 2000 Index. Prior to the Business Combination, CF Corp. had previously used the NASDAQ Composite Index and the Russell 2000 Index for comparison with the performance of its units. As a result of the Business Combination, we are changing to using the S&P 500 Index and S&P 500 Life & Health Insurance Index because we believe they are more comparable indices going forward. The graph assumes that $100 was invested at the market close on July 8, 2016 in ordinary shares of FGL Holdings and the four indices and assumes reinvestments of dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
392621295_stockperformance.jpg
Recent Sales of Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities
There were no sales of unregistered securities other than as previously reported by the Company in either its quarterly reports on Form 10-Q or current reports on Form 8-K.


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Item 6. Selected Financial Data

We have prepared the following selected financial data as of and for the Successor period from December 1, 2017 to December 31, 2017, the Predecessor period from October 1, 2017 to November 31, 2017, the Predecessor period from October 1, 2016 to December 31, 2016, and the Predecessor years ended September 30, 2017, 2016, 2015, 2014, and 2013.

As a result of the business combination ("Business Combination"), for accounting purposes, FGL Holdings is the acquirer and FGL is the acquired party and accounting predecessor. Our financial statement presentation includes the financial statements of FGL and its subsidiaries as “Predecessor” for the periods prior to the completion of the Business Combination and FGL Holdings, including the consolidation of FGL and its subsidiaries and FSR Companies, as "Successor" for periods from and after the Closing Date. FGL Holdings was determined to be the Successor company as it is the surviving company organized and existing under the laws of the United States of America, any State of the United States, the District of Columbia or any territory thereof (and in the case of the Company, Bermuda or the Cayman Islands). Prior to the acquisition, FGL Holdings reported under a fiscal year end of December 31, and the Predecessor companies reported under a fiscal year end of September 30. Subsequent to the acquisition, the Successor company will report under a fiscal year end of December 31.
 
 
FGL Holdings
(In millions, except share data)
 
Period from December 1 to December 31, 2017
 
 
Period from October 1 to November 30, 2017
 
Period from October 1 to December 31, 2016 (Unaudited)
 
 
 
Successor
 
 
Predecessor
 
Predecessor
 
SUMMARY OF OPERATIONS
 
 
 
 
 
 
 
 
Total operating revenues
 
$
165

 
 
$
362

 
$
340

 
Total benefits and expenses
 
158

 
 
314

 
171

 
Net income (loss)
 
$
(102
)
 
 
$
28

 
$
108

 
 
 
 
 
 
 
 
 
 
PER SHARE DATA (a)
 
 
 
 
 
 
 
 
Net income per common share - basic
 
(0.49
)
 
 
0.48

 
1.85

 
Net income per common share - diluted
 
(0.49
)
 
 
0.47

 
1.85

 
Cash dividends declared per common share (a)
 

 
 
0.065

 
0.065

 
Common shares outstanding
 
214.4

 
 
59.0

 
59.0

 
 
 
 
 
 
 
 
 
 
BALANCE SHEET DATA
 
 
 
 
 
 
 
 
Total investments
 
$
23,604

 
 
$
23,326

 
$
21,076

 
Total assets
 
29,929

 
 
29,227

 
26,952

 
Total debt
 
412

 
 
405

 
400

 
Total liabilities
 
27,978

 
 
26,943

 
25,200

 
Total equity
 
1,952

 
 
2,284

 
1,752

 
Total equity excluding AOCI
 
1,877

 
 
2,209

 
1,599

 
(a) On November 30, 2017 and onward, FSRC's results are included in our results as FGL Holdings acquired FSRC pursuant to the Merger Agreement.



54


 
 
Fidelity & Guaranty Life
 
 
Year Ended September 30,
(In millions, except share data)
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
Predecessor
SUMMARY OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
Total operating revenues
 
$
1,530

 
$
1,139

 
$
961

 
$
1,191

 
$
1,347

Total benefits and expenses
 
1,173

 
964

 
755

 
979

 
827

Net income
 
$
223

 
$
97

 
$
118

 
$
163

 
$
348

 
 
 
 
 
 
 
 
 
 
 
PER SHARE DATA (a)
 
 
 
 
 
 
 
 
 
 
Net income per common share - basic
 
$
3.83

 
$
1.67

 
$
2.03

 
$
2.91

 
7.40

Net income per common share - diluted
 
3.83

 
1.66

 
2.02

 
2.90

 
7.40

Cash dividends declared per common share (b)
 
0.26

 
0.26

 
0.26

 
1.11

 
1.99

Common shares outstanding
 
58.9

 
59.0

 
58.9

 
58.4

 
47.0

 
 
 
 
 
 
 
 
 
 
 
BALANCE SHEET DATA
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
23,072

 
$
21,025

 
$
19,094

 
$
18,802

 
$
16,223

Total assets
 
28,965

 
27,035

 
24,925

 
24,153

 
22,403

Total debt
 
405

 
400

 
300

 
300

 
300

Total liabilities
 
26,718

 
25,101

 
23,423

 
22,494

 
21,264

Total equity
 
2,247

 
1,934

 
1,502

 
1,659

 
1,139

Total equity excluding AOCI
 
1,704

 
1,495

 
1,414

 
1,310

 
1,026

(a) Common shares outstanding and per share amounts give retroactive effect to our statutory conversion on August 26, 2013 and the 4,700-for-1 stock split of our shares of common stock effected on November 26, 2013.
(b) On August 9, 2013, we distributed our ownership interests in the parent company of FSRC to HRG. As a result, FSRC’s results are not included in our results from the Predecessor year ended September 30, 2013 to November 30, 2017. On November 30, 2017 and onward, FSRC's results are included in our results as FGL Holdings acquired FSRC pursuant to the Merger Agreement.


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of FGL Holdings (“FGL Holdings,” “we,” “us,” “our” and, collectively with its subsidiaries, the “Company”) should be read in conjunction with “Item 6. Selected Financial Data,” and our accompanying consolidated financial statements and related notes (the “Consolidated Financial Statements”) referred to in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K (the “Form 10-K”). Certain statements we make under this Item 7 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Forward-Looking Statements” at the beginning of Part I of this Form 10-K. You should consider our forward-looking statements in light of our Consolidated Financial Statements, related notes, and other financial information appearing elsewhere in this Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).
Basis of Presentation
As a result of the completion of the Business Combination on November 30, 2017, our Consolidated Financial Statements included elsewhere in the Annual Report are presented: (i) as of December 31, 2017 and for the period December 1, 2017 to December 31, 2017 (Successor); (ii) for the period October 1, 2017 to November 30, 2017 (Predecessor); (iii) for the unaudited period October 1, 2016 to December 31, 2016 (Predecessor); (iv) as of September 30, 2017 and for the year ended September 30, 2017 (Predecessor); and as of September 30, 2016 and for the years ended September 30, 2016 and September 30, 2015 (Predecessor). In this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we discuss the Predecessor’s year ended September 30, 2017 results compared to the Predecessor year ended September 30, 2016 results as well as the Predecessor year ended September 30, 2016 results compared to the Predecessor year ended September 30, 2015 results.We believe this discussion provides helpful information with respect to performance of our business during those respective periods.
Overview
See “Item 1. Business” for a detailed discussion of FGL Holdings company overview, strategy and products.
Trends and Uncertainties
The following factors represent some of the key trends and uncertainties that have influenced the development of our business and our historical financial performance and that we believe will continue to influence our business and financial performance in the future.
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 mortality rates, morbidity rates, annuitization rates and lapse rates, which vary in response to changes in market conditions.
Interest Rate Environment
Some of our products include guaranteed minimum crediting rates, most notably our fixed rate annuities. As of December 31, 2017 (Successor), the Company's reserves, net of reinsurance, and average crediting rate on our fixed rate annuities were $4 billion and 3%, respectively. We are required to pay these 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 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.

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See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” 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 products. As the “baby boomer” generation prepares for retirement, we believe that demand for retirement savings, growth, and income products will grow. 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
Demographics and macroeconomic factors are increasing the demand for our FIA and indexed universal life ("IUL") products, for which demand is large and growing: over 10,000 people will turn 65 each day in the United States over the next 15 years. According to the U.S. Census Bureau, the proportion of the U.S. population over the age of 65 is expected to grow from 15% in 2015 to 20% in 2030.
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 the Company. As a tool for addressing the unmet need for retirement planning, we believe that many middle-income Americans have grown to appreciate the “sleep at night protection” that annuities such as our FIA products afford. Accordingly, the FIA market grew from nearly $12 billion of sales in 2002 to $40 billion of sales in 2017. Additionally, this market demand has positively impacted the IUL market as it has expanded from $100 million of annual premiums in 2002 to $1 billion of annual premiums in 2017.
 
Competition
Please refer to "Part I-Item 1. Business-Competition" for discussion on our competition.
Annuity and Life Sales
Sales of annuities and IULs by Predecessor fiscal quarter for the years ended September 30 were as follows:
 
Annuity Sales
 
IUL Sales
(dollars in millions) 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
First Fiscal Quarter
$
648

 
$
489

 
$
903

 
$
17

 
$
13

 
$
7

Second Fiscal Quarter
732

 
601

 
610

 
14

 
11

 
7

Third Fiscal Quarter
582

 
832

 
519

 
9

 
15

 
10

Fourth Fiscal Quarter
588

 
603

 
434

 
6

 
17

 
11

Total
$
2,550

 
$
2,525

 
$
2,466

 
$
46

 
$
56

 
$
35

Sales of annuities and IULs for the Successor period from December 1, 2017 to December 31, 2017 were $222 and $3, respectively. Sales of annuities and IULs for the Predecessor period from October 1, 2017 to November 30, 2017 were $401 and $4, respectively.
Key Components of Our Historical Results of Operations
Under U.S. GAAP, premium collections for fixed indexed annuities, fixed rate annuities, and immediate annuities without life contingency 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 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 cost of providing index credits to the policyholder), amortization of deferred acquisition cost (“DAC”) and value of business acquired (“VOBA”), other operating costs and expenses, and income taxes.
Through our insurance subsidiaries, we issue a broad portfolio of deferred annuities (fixed indexed and fixed rate annuities) and immediate annuities. 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

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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 makes payments of principal and interest earnings over a period of time.
The Company 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 on the equity indices underlying the applicable policy. These derivatives are used to fund the statutory reserve impact of the index credits due to policyholders under the FIA contracts. The majority of all such call options are one-year options purchased to match the funding requirements underlying the FIA contracts. We attempt to manage the cost of these purchases through the terms of our FIA contracts, which permit us to change caps, spread, or participation rates, subject to certain guaranteed minimums that must be maintained. The change in the fair value of the call options and futures contracts is generally designed to offset the equity market related change in the fair value of the FIA contract’s reserve liability. 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 policies, known as the net investment spread. With respect to FIAs, the cost of hedging our risk includes the expenses incurred to fund the index credits, and where applicable, minimum guaranteed interest credited. Proceeds received upon expiration or early termination of call options purchased to fund annual index 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 assets under management (“AUM”), the net investment spreads earned on our average assets under management ("AAUM"), 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 net investment spreads involves the ability to manage our investment portfolios to maximize returns and minimize risks on our AUM such as interest rate changes and defaults or impairment of investments, and 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 FIAs or IULs. We analyze returns on AAUM pre- and post-DAC and VOBA as well as pre- and post-tax to measure our profitability in terms of growth and improved earnings.
Adjusted Operating Income ("AOI")
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 a non-GAAP economic measure we use to evaluate financial performance each period. AOI is calculated by adjusting net income (loss) 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 affiliated reinsurance embedded derivative, (iv) the effect of integration, merger related & other non-operating items, (v) impact of extinguishment of debt, and (vi) net impact from Tax Cuts and Jobs Act. Adjustments to AOI are net of the corresponding impact on amortization of intangibles, as appropriate. 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 the Company, market conditions and/or the non-recurring or non-operating nature of these items can overshadow the underlying performance of the core business. Accordingly, Management considers 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.
Together with net income, we believe AOI provides a meaningful financial metric that helps investors understand our underlying results and profitability.

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AOI should not be used as a substitute for net income. However, we believe the adjustments made to net income in order to derive AOI 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 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 movements. Similarly, we could also have poor operating results in a given period yet show net income 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 FIA 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 AOI and net income 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 income. Accordingly, our management and board of directors perform a review and analysis of these items, as part of their review of our hedging results each period.
The adjustments to net income are net of DAC and VOBA amortization. Amounts attributable to the fair value accounting for derivatives hedging the FIA 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 for FIAs, changes in the interest rates 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. The impact of the change in risk-free interest rates has been removed from net income in calculating AOI. Additionally the effect of change in the fair value of the reinsurance related embedded derivative has been removed from net income in calculating AOI.
AAUM is the sum of (i) total invested assets at amortized cost, excluding derivatives; (ii) related party loans and investments; (iii) accrued investment income; (iv) funds withheld at fair value; (v) the net payable/receivable for the purchase/sale of investments and (iv) cash and cash equivalents, excluding derivative collateral, at the beginning of the period and the end of each month in the period, divided by the total number of months in the period plus one. Management considers this non-GAAP financial measure to be useful internally and to investors and analysts when assessing the rate of return on assets available for reinvestment.
In addition, we regularly monitor and report the production volume metric titled “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 and IUL 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.
Critical Accounting Policies and Estimates
General
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgements that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical estimates and assumptions are evaluated on an ongoing basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially affected by the need to make future accounting adjustments to reflect changes in these estimates and assumptions from time to time.
We have identified the following accounting policies, judgments and estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability: valuation of available-for sale ("AFS") securities and derivatives, evaluation of OTTI, amortization of DAC and VOBA, reserves for future policy benefits and product guarantees, recognition of deferred income tax assets and related valuation allowances, estimates of loss contingencies and recognition of stock compensation expense.
In developing these accounting estimates and policies, we make subjective and complex judgments that are inherently uncertain and subject to material changes as facts and circumstances develop. Although variability is

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inherent in these estimates, we believe the amounts provided are appropriate based upon the facts available upon preparation of our audited consolidated financial statements. We continually update and assess the facts and circumstances regarding all of these critical accounting matters and other significant accounting matters affecting estimates in our financial statements.
The above critical accounting estimates are also described in "Note 2. Significant Accounting Policies and Practices" to our audited consolidated financial statements.
Valuation of AFS Securities, Derivatives and Fund withheld for reinsurance receivables
Our fixed maturity and equity securities classified as AFS are reported at fair value, with unrealized gains and losses included within accumulated other comprehensive income (loss) ("AOCI"), net of associated impact on intangibles adjustments and deferred income taxes. Unrealized gains and losses represent the difference between the cost or amortized cost basis and the fair value of these investments. We measure the fair value of our AFS securities based on assumptions used by market participants, which may include inherent risk and restrictions on the sale or use of an asset. The estimate of fair value is the price that would be received to sell an asset in an orderly transaction between market participants (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability. We utilize independent pricing services in estimating the fair values of AFS securities. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including: reported trading prices, benchmark yields, broker-dealer quotes, benchmark securities, bids and offers, credit ratings, relative credit information and other reference data.
FSRC has elected to apply the fair value option to account for its funds withheld receivables. FSRC measures fair value of the funds withheld receivables based on the fair values of the securities in the underlying funds withheld portfolio held by the cedant.
We categorize our AFS securities 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 and equity securities, AFS, by pricing source and hierarchy level as of December 31, 2017 (Successor), September 30, 2017 (Predecessor) and 2016 (Predecessor).
Successor
 
As of December 31, 2017
(dollars in millions)
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
 
Significant
Observable Inputs
(Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
 
 
Total
 
Fixed maturity securities and equity securities available-for-sale:
 
 
 
 
 
 
 
 
Prices via third party pricing services
 
$
709

 
$
19,834

 
$

 
$
20,543

Priced via independent broker quotations
 

 

 
1,355

 
1,355

Priced via other methods
 

 

 
409

 
409

Total
 
$
709

 
$
19,834

 
$
1,764

 
$
22,307

Available-for-sale embedded derivative:
 
 
 
 
 
 
 
 
Priced via other methods
 

 

 
17

 
17

Total
 
$
709

 
$
19,834

 
$
1,781

 
$
22,324

% of Total
 
3
%
 
89
%
 
8
%
 
100
%

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Predecessor
 
As of September 30, 2017
(dollars in millions)
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 
 
 
Significant
Observable Inputs
(Level 2) 
 
 
Significant
Unobservable
Inputs
(Level 3) 
 
 
Total 
 
Fixed maturity securities and equity securities available-for-sale:
 
 
 
 
 
 
 
 
Prices via third party pricing services
 
$
85

 
$
20,366

 
$

 
$
20,451

Priced via independent broker quotations
 

 

 
1,140

 
1,140

Priced via other methods
 

 

 
293

 
293

Total
 
$
85

 
$
20,366

 
$
1,433

 
$
21,884

Available-for-sale embedded derivative:
 
 
 
 
 
 
 
 
Priced via other methods
 

 

 
16

 
16

Total
 
$
85

 
$
20,366

 
$
1,449

 
$
21,900

% of Total
 
%
 
93
%
 
7
%
 
100
%
Predecessor
 
As of September 30, 2016
(dollars in millions)
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
 
Significant
Observable Inputs
(Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
 
 
Total
 
Fixed maturity securities and equity securities available-for-sale:
 
 
 
 
 
 
 
 
Prices via third party pricing services
 
$
83

 
$
18,554

 
$

 
$
18,637

Priced via independent broker quotations
 

 

 
1,199

 
1,199

Priced via other methods
 

 

 
258

 
258

Total
 
$
83

 
$
18,554

 
$
1,457

 
$
20,094

Available-for-sale embedded derivative:
 
 
 
 
 
 
 
 
Priced via other methods
 

 

 
13

 
13

Salus participations, included in other invested assets:
 
 
 
 
 
 
 
 
Priced via other methods
 

 

 
21

 
21

Total
 
$
83

 
$
18,554

 
$
1,491

 
$
20,128

% of Total
 
%
 
92
%
 
8
%
 
100
%
Management’s assessment of all available data when determining fair value of the AFS securities is necessary to appropriately apply fair value accounting. The independent pricing services also take into account perceived market movements and sector news, as well as a security’s terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. 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

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watch list. See “Note 4. Investments” and “Note 6. Fair Value of Financial Instruments” to our audited consolidated financial statements for a more complete discussion.
Certain FIA 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 embedded derivative is 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 Operations.
We hedge certain portions of our exposure to equity market risk by entering into derivative transactions. In doing so, we purchase derivatives consisting of a combination of call options and futures contracts on the equity indices underlying the applicable policy. These derivatives are used to fund the index credits due to contractholders under the FIA contracts. The call options are one-, two- and three-year call options, purchased to match a majority of the funding requirements underlying the FIA contracts, with the balance of the equity exposure hedged using futures contracts. On the respective anniversary dates of the applicable FIA contracts, the market index used to compute the annual index credit under the applicable FIA contract is reset. At such time, we purchase new one-, two-, three-, or five-year call options to fund the next index credit. We attempt to manage the cost of these purchases through the terms of the FIA contracts, which permit changes to caps or participation rates, subject to certain guaranteed minimums that must be maintained. We are exposed to credit loss in the event of non-performance by our counterparties on the call options. We attempt to reduce the credit risk associated with such agreements by purchasing such options from large, well-established financial institutions as well as holding collateral when individual counterparty exposures exceed certain thresholds.
All of our derivative instruments are recognized as either assets or liabilities at fair value in our Consolidated Balance Sheets. The change in fair value of our derivative assets is recognized in our Consolidated Statements of Operations within “Net investment gains (losses)”.
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. The fair value of futures contracts at the balance sheet date represents the cumulative unsettled variation margin (open trade equity net of cash settlements). 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 values of the embedded derivatives in our FIA contracts are derived using market value of options, swap rates, mortality rates, surrender rates and non-performance spread and are classified as Level 3. See “Note 5. Derivative Financial Instruments” and “Note 6. Fair Value of Financial Instruments” to our audited consolidated financial statements for a more complete discussion. The discount rate used to determine the fair value of our FIA embedded derivative liabilities includes an adjustment to reflect the risk that these obligations will not be fulfilled (“non-performance risk”). For the Successor period from December 1, 2017 to December 31, 2017, the Predecessor period from October 1, 2017 to November 30,2017, and the Predecessor year ended September 30, 2017, our non-performance risk adjustment was based on the expected loss due to default in debt obligations for similarly rated financial companies. See "Note 5. Derivative Financial Instruments” and "Note 6. Fair Value of Financial Instruments”, to our audited consolidated financial statements for a more complete discussion.
In the predecessor periods, FGLIC had a modified coinsurance arrangement with FSRC, meaning that funds were withheld by FGLIC. This arrangement created an obligation for FGLIC to pay FSRC at a later date, which resulted in an embedded derivative. This embedded derivative was considered a total return swap with contractual returns that was attributable to the assets and liabilities associated with this reinsurance arrangement. The fair value of the total return swap was based on the change in fair value of the underlying assets held in the funds withheld portfolio. Investment results for the assets that supported the coinsurance with funds withheld reinsurance arrangement, including gains and losses from sales, were passed directly to the reinsurer pursuant to contractual terms of the reinsurance arrangement. The reinsurance related embedded derivative was reported in “Other assets” if in a net gain position, or “Other liabilities”, if in a net loss position, on the Consolidated Balance Sheets and the related gains or losses were reported in “Net investment gains” on the Consolidated Statements of Operations. For further discussion on the fair value option used by FSRC for third party reinsurance, see "Note 6. Fair Value of Financial Instruments" to our audited consolidated financial statements.
 

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Evaluation of OTTI
We have a policy and process in place to evaluate securities in our investment portfolio quarterly to assess whether there has been an OTTI. This evaluation process entails considerable judgment and estimation and involves monitoring market events and other items that could impact issuers. The evaluation includes, but is not limited to, such factors as: whether the issuer is current on all payments and all contractual payments have been made as agreed; the remaining payment terms and the financial condition and near term prospects of the issuer; the lack of ability to refinance due to liquidity problems in the credit market; the fair value of any underlying collateral; the existence of any credit protection available; the intent to sell and whether it is more likely than not we would be required to sell prior to recovery for fixed maturity securities; the assessment in the case of equity securities including perpetual preferred stocks with credit deterioration that the security cannot recover to cost in a reasonable period of time; the intent and ability to retain equity securities for a period of time sufficient to allow for recovery; consideration of rating agency actions; and changes in estimated cash flows of residential mortgage-backed securities ("RMBS") and asset-backed securities ("ABS"). An extended and severe unrealized loss position on an AFS fixed income security may not have any impact on: (a) the ability of the issuer to service all scheduled interest and principal payments and (b) the evaluation of recoverability of all contractual cash flows or the ability to recover an amount at least equal to its amortized cost based on the present value of the expected future cash flows to be collected. When assessing our intent to sell a security or if it is more likely than not we will be required to sell a security before recovery of its amortized cost basis, we evaluate facts and circumstances such as, but not limited to, sales of investments to meet cash flow or capital needs
We determine whether OTTI losses should be recognized for fixed maturity and equity securities by assessing all facts and circumstances surrounding each security. Where the decline in market value of fixed maturity securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider these investments to be OTTI. For equity securities, we recognize an OTTI in the period in which we do not have the intent and ability to hold the securities until recovery of cost or we determine that the security will not recover to book value within a reasonable period of time. We determine what constitutes a reasonable period of time on a security-by-security basis by considering all the evidence available, including the magnitude of any unrealized loss and its duration. Impairment analysis of the investment portfolio involves considerable judgment, is subject to considerable variability, is established using management’s best estimate and is revised as additional information becomes available. As such, changes in or deviations from the assumptions used in such analysis can have a significant effect on the results of operations. See “OTTI and Watch List,” "Note 2. Significant Accounting Policies and Practices" and "Note 4. Investments" to our audited consolidated financial statements for a more complete discussion.
We also have a policy and process in place to evaluate mortgage loans held in our investment portfolio to assess whether any of the