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Section 1: 10-Q (10-Q)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-Q
 
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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)
Boundary Hall, Cricket Square
4th Floor
Grand Cayman, Cayman Islands
(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)
 
 
 
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 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
As of May 7, 2018, there were 214,370,000 ordinary shares, $.0001 par value, issued and outstanding.
 


Table of Contents

FGL HOLDINGS
TABLE OF CONTENTS

 
Page
PART I. FINANCIAL INFORMATION
 
       (4) Investments
       (9) Equity
 
 
PART II. OTHER INFORMATION
 
 

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Table of Contents

PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
FGL HOLDINGS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
 
March 31,
2018

December 31,
2017
 
(Unaudited)
 
 
ASSETS



Investments:



Fixed maturity securities, available-for-sale, at fair value (amortized cost: March 31, 2018 - $21,738; December 31, 2017 - $21,475)
$
21,366


$
21,590

Equity securities, at fair value (amortized cost: March 31, 2018 - $780; December 31, 2017 - $764)
769


761

Derivative investments
293


492

Short term investments


25

Commercial mortgage loans
528


548

Other invested assets
276


188

Total investments
23,232


23,604

Cash and cash equivalents
1,157

 
1,215

Accrued investment income
240

 
211

Funds withheld for reinsurance receivables, at fair value
748

 
756

Reinsurance recoverable
2,495

 
2,494

Intangibles, net
954

 
856

Deferred tax assets, net
258

 
176

Goodwill
476

 
476

Other assets
105

 
141

Total assets
$
29,665

 
$
29,929

 



LIABILITIES AND SHAREHOLDERS' EQUITY



 



Contractholder funds
$
22,083


$
21,844

Future policy benefits, including $712 and $728 at fair value at March 31, 2018 and December 31, 2017, respectively
4,711


4,751

Liability for policy and contract claims
70


78

Debt
307


307

Revolving credit facility
135


105

Other liabilities
717


892

Total liabilities
28,023


27,977

 



Commitments and contingencies ("Note 12")



 



 Shareholders' equity:

 

Preferred stock ($.0001 par value, 100,000,000 shares authorized, 377,417 and 375,000 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively)

 

Common stock ($.0001 par value, 800,000,000 shares authorized, 214,370,000 issued and outstanding at March 31, 2018 and December 31, 2017, respectively)

 

Additional paid-in capital
2,039

 
2,037

(Accumulated deficit) Retained earnings
(119
)
 
(160
)
Accumulated other comprehensive (loss) income
(278
)
 
75

Total shareholders' equity
1,642

 
1,952

Total liabilities and shareholders' equity
$
29,665

 
$
29,929

 
 
 
 

See accompanying notes to unaudited condensed consolidated financial statements.


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FGL HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share data)

 
Three months ended
 
March 31, 2018
 
 
March 31,
2017
 
 
 
 
Predecessor
 
(Unaudited)
 
 
(Unaudited)
Revenues:
 
 
 
 
Premiums
$
18

 
 
$
3

Net investment income
263

 
 
247

Net investment (losses) gains
(191
)
 
 
81

Insurance and investment product fees and other
41

 
 
44

Total revenues
131

 
 
375

Benefits and expenses:
 
 
 
 
Benefits and other changes in policy reserves
(18
)
 
 
268

Acquisition and operating expenses, net of deferrals
40

 
 
33

Amortization of intangibles
16

 
 
33

        Total benefits and expenses
38

 
 
334

Operating income
93

 
 
41

Interest expense
(6
)
 
 
(6
)
Income before income taxes
87

 
 
35

Income tax expense
(35
)
 
 
(13
)
        Net income
$
52

 
 
$
22

Less preferred stock dividend
7

 
 

Net income available to common shareholders
$
45

 
 
$
22

Net income per common share
 
 
 
 
 
 
 
 
 
Basic
$
0.21

 
 
$
0.38

Diluted
$
0.21

 
 
$
0.38

Weighted average common shares used in computing net income per common share:
 
 
 
 
Basic
214,370,000

 
 
58,326,396

Diluted
214,370,000

 
 
58,382,130

 
 
 
 
 
Cash dividend per common share
$

 
 
$
0.065

 
 
 
 
 
 
 
 
 
 
Supplemental disclosures
 
 
 
 
Total other-than-temporary impairments
$
(2
)
 
 
$
(21
)
Portion of other-than-temporary impairments included in other comprehensive income

 
 

Net other-than-temporary impairments
(2
)
 
 
(21
)
(Losses) gains on derivatives and embedded derivatives
(145
)
 
 
99

Other investment (losses) gains
(44
)
 
 
3

        Total net investment gains (losses)
$
(191
)
 
 
$
81



See accompanying notes to unaudited condensed consolidated financial statements.

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FGL HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
 
Three months ended
 
March 31, 2018
 
 
March 31, 2017
 
 
 
 
Predecessor
 
(Unaudited)
 
 
(Unaudited)
Net income
$
52

 
 
$
22

 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
Unrealized investment gains/losses:
 
 
 
 
Change in unrealized investment gains/losses before reclassification adjustment
(526
)
 
 
298

Net reclassification adjustment for gains/losses included in net income
40

 
 
18

Changes in unrealized investment gains/losses after reclassification adjustment
(486
)
 
 
316

Adjustments to intangible assets
37

 
 
(101
)
Changes in deferred income tax asset/liability
92

 
 
(77
)
Net change in unrealized gains/losses on investments
(357
)
 
 
138

Non-credit related other-than-temporary impairment:
 
 
 
 
Changes in non-credit related other than-temporary impairment

 
 

Net non-credit related other-than-temporary impairment

 
 

Net changes to derive comprehensive (loss) income for the period
(357
)
 
 
138

Comprehensive (loss) income, net of tax
$
(305
)
 
 
$
160


See accompanying notes to unaudited condensed consolidated financial statements.


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Table of Contents

FGL HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited) (In millions)

 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings (Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017

 

 
2,037

 
(160
)
 
75

 
1,952

Dividends

 

 
2

 
(7
)
 

 
(5
)
Net income

 

 

 
52

 

 
52

Unrealized investment gains (losses), net

 

 

 

 
(357
)
 
(357
)
Cumulative effect of changes in accounting principles

 

 

 
(4
)
 
4

 

Balance, March 31, 2018
$

 
$

 
$
2,039

 
$
(119
)
 
$
(278
)
 
$
1,642

 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes to unaudited condensed consolidated financial statements.


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FGL HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
Three months ended
 
March 31,
2018
 
 
March 31, 2017
 
 
 
 
Predecessor
 
(Unaudited)
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
 
Net income
$
52

 
 
$
22

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Stock based compensation

 
 
1

Amortization
15

 
 
(7
)
Deferred income taxes
9

 
 
(95
)
Interest credited/index credits to contractholder account balances
(13
)
 
 
243

Net recognized (gains) losses on investments and derivatives
191

 
 
(81
)
Charges assessed to contractholders for mortality and administration
(38
)
 
 
(32
)
Deferred policy acquisition costs, net of related amortization
(60
)
 
 
(57
)
Changes in operating assets and liabilities:
 
 
 
 
     Reinsurance recoverable
(8
)
 
 
(4
)
     Future policy benefits
(40
)
 
 
(18
)
  Funds withheld from reinsurers
(12
)
 
 
(15
)
  Collateral (returned) posted
(145
)
 
 
17

     Other assets and other liabilities
15

 
 
86

Net cash (used in) provided by operating activities
(34
)
 
 
60

Cash flows from investing activities:
 
 
 
 
Proceeds from available-for-sale investments sold, matured or repaid
3,286

 
 
594

Proceeds from derivatives instruments and other invested assets
143

 
 
138

Proceeds from commercial mortgage loans
20

 
 
3

Cost of available-for-sale investments
(3,699
)
 
 
(786
)
Costs of derivatives instruments and other invested assets
(94
)
 
 
(127
)
Capital expenditures
(3
)
 
 
(4
)
Contingent purchase price payment
(30
)
 
 

Net cash (used in) investing activities
(377
)
 
 
(182
)
Cash flows from financing activities:
 
 
 
 
Draw on revolving credit facility
30

 
 
5

Dividends paid

 
 
(4
)
Contractholder account deposits
959

 
 
795

Contractholder account withdrawals
(636
)
 
 
(419
)
Net cash provided by financing activities
353

 
 
377

Change in cash & cash equivalents
(58
)
 
 
255

Cash & cash equivalents, beginning of period
1,215

 
 
632

Cash & cash equivalents, end of period
$
1,157

 
 
$
887

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
$
2

 
 
$
1

Income taxes (refunded) paid
$
(30
)
 
 
$

Deferred sales inducements
$
26

 
 
$
5


See accompanying notes to consolidated financial statements.

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FGL HOLDINGS
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (In millions)
(1) Basis of Presentation
FGL Holdings (the “Company”, formerly known as CF Corporation (NASDAQ: CFCO) (“CF Corp”) and its
related entities (“CF Entities”)), a Cayman Islands exempted company, was originally incorporated in the Cayman Islands on February 26, 2016 as a Special Purpose Acquisition Company (“SPAC”). CF Corp 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 (the “FGL Merger Agreement”). The transactions contemplated by the FGL Merger Agreement are referred to herein as the “Business Combination.”
Pursuant to the FGL Merger Agreement, except for shares specified in the FGL Merger Agreement, each issued and outstanding share of common stock of FGL was automatically canceled and converted into the right to receive $31.10 in cash, without interest and less any required withholding taxes (the “Merger Consideration”). Accordingly, CF Corp acquired FGL for a total of approximately $2 billion in cash, plus the assumption of $405 of existing debt.
In addition to the Business Combination, on November 30, 2017, CF Entities bought all of the issued and outstanding shares of Front Street Re Cayman Ltd. (“FSRC”) and Front Street Re Ltd. (“FSR”, and, together with FSRC, the “FSR Companies”) from Front Street Re (Delaware) Ltd. (“FSRD”), a direct wholly owned subsidiary of HRG Group, Inc. (“HRG”; NYSE: HRG), pursuant to the Share Purchase Agreement, for cash consideration of $65, subject to certain adjustments.
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 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 reports under a fiscal year end of December 31.
On December 1, 2017, upon completion of the acquisitions, FGL Holdings began trading ordinary shares and warrants on the New York Stock Exchange ("NYSE") under the symbols “FG” and “FG WS,” respectively. For additional info related to the Business Combination please refer to “Item 1. Business" to FGL Holdings' Annual Report on Form 10-K, for the period ended December 31, 2017 (“2017 Form 10-K”).
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions for the Securities and Exchange Commission (“SEC”) Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X, for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Therefore, the information contained in the Notes to Consolidated Financial Statements included in the Company's 2017 Form 10-K, should be read in connection with the reading of these interim unaudited condensed consolidated financial statements. Dollar amounts in the accompanying sections are presented in millions, unless otherwise noted.
The Company markets products through its wholly-owned insurance subsidiaries, Fidelity & Guaranty Life Insurance Company (“FGL Insurance”) and Fidelity & Guaranty Life Insurance Company of New York (“FGL NY Insurance”), which together are licensed in all fifty states and the District of Columbia.
In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results.  Operating results for the three months ended March 31, 2018, are not

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necessarily indicative of the results that may be expected for the full year ending December 31, 2018.  Amounts reclassified out of other comprehensive income are reflected in net investment gains in the unaudited Condensed Consolidated Statements of Operations.

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(2) Significant Accounting Policies and Practices
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and all other entities in which the Company has a controlling financial interest and any variable interest entities ("VIEs") in which we are the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.
We are involved in certain entities that are considered VIEs as defined under GAAP. Our involvement with VIEs is primarily to invest in assets that allow us to gain exposure to a broadly diversified portfolio of asset classes. A VIE is an entity that does not have sufficient equity to finance its own activities without additional financial support or where investors lack certain characteristics of a controlling financial interest. We assess our relationships to determine if we have the ability to direct the activities, or otherwise exert control, to evaluate if we are the primary beneficiary of the VIE. If we determine we are the primary beneficiary of a VIE, we consolidate the assets and liabilities of the VIE in our condensed consolidated financial statements. The Company has determined that we are not the primary beneficiary of a VIE as of March 31, 2018. See "Note 4. Investments" to the Company’s condensed consolidated financial statements for additional information on the Company’s investments in unconsolidated VIEs.
Adoption of New Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance on revenue recognition (ASU 2014-09, Revenue from Contracts with Customers (Topic 606)), effective for fiscal years beginning after December 15, 2016 and interim periods within those years. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year. The FASB also issued the following ASUs which clarify the guidance in ASU 2014-09:
ASU 2016-08 - Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net) issued in March 2016
ASU 2016-10 - Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing issued in April 2016
ASU 2016-11 - Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815) - Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting issued in May 2016
ASU 2016-12 - Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients issued in May 2016
The guidance in ASU 2014-09 and the related ASUs supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance unless the contracts are within the scope of other standards (for example, financial instruments, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance establishes a five-step process to achieve this core principle.
The Company adopted these standards effective January 1, 2018. The adoption of these standards has had an insignificant impact on its consolidated financial statements as the Company’s primary sources of revenue, insurance contracts and financial instruments, are excluded from the scope of these standards.
Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued new guidance (ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments), effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Notable amendments in this update will change the classification of certain cash receipts and cash payments in the Statement of Cash Flows in the following ways:
cash payments for debt prepayment or debt extinguishment costs will be classified as cash outflows for financing activities

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the settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing should be classified as follows: the portion of the cash payment attributable to the accreted interest related to the debt discount as cash outflows for operating activities, and the portion of the cash payment attributable to the principal as cash outflows for financing activities
a reporting entity must make an accounting policy election to classify distributions received from equity method investees using either:
the cumulative earnings approach, which considers distributions received as returns on the investment and are classified as cash inflows from operating activities (with an exception when cumulative distributions received less distributions received in prior periods that were classified as returns of investment exceeds cumulative equity in earnings, in which case the current period distribution up to this excess amount will be considered a return of investment and classified as cash inflows from investing activities); or
the nature of the distribution approach, which classifies distributions received based on the nature of the activity or activities of the investee that generated the distribution (would be considered either a return on investment and classified as cash inflows from operating activities or a return of investment and classified as cash inflows from investing activities)
in the absence of specific GAAP guidance, an entity should classify cash receipts and payments that have aspects of more than one class of cash flows by determining and appropriately classifying each separately identifiable source or use within the cash receipts and cash payments on the basis of the underlying cash flows. If cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the activity that is likely to be the predominant source or use of cash flows for the item will determine the classification.
The amendments in this ASU were adopted by the Company effective January 1, 2018, as required. The Company has elected to use the nature of distribution approach to classify distributions received from equity method investees. The amendments in the update should be applied using a retrospective transition method to each period presented (except where impracticable to apply retrospectively; those specific amendments would be applied prospectively as of the earliest date practicable). The adoption of this standard had an insignificant impact on the Company's Condensed Consolidated Statements of Cash Flows.
Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued new guidance (ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory), effective for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Under this update:
an entity should recognize current and deferred income taxes for an intra-entity transfer of an asset other than inventory at the time of the transfer
the entity will no longer delay recognition of the income tax consequences of these types of intra-entity asset transfers until the asset has been sold to an outside party, as is practiced under current guidance
The amendments in this ASU were adopted by the Company effective January 1, 2018, as required. The Company does not have any intra-entity asset transfers, therefore this new accounting guidance is not expected to impact the Company's consolidated financial statements.
Presentation of Changes in Restricted Cash on the Cash Flow Statement
In November 2016, the FASB issued amended guidance regarding the presentation of changes in restricted cash on the cash flow statement (ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash), effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The ASU requires amounts generally described as changes in restricted cash and restricted cash equivalents to be included with cash and cash equivalents on the statement of cash flows. The amendments in this ASU were adopted effective January 1, 2018, as required. The adoption of this guidance had an insignificant impact on the Company's Condensed Consolidated Statements of Cash Flows.

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Scope of Modification Accounting for Stock Compensation
In May 2017, the FASB issued new guidance on the scope of modification accounting for stock compensation (ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting), effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2017-09 may be early adopted. The ASU provides guidance on which changes to the terms or conditions of a share-based payment award would require an entity to apply modification accounting in Topic 718, Stock Compensation. Under the new guidance, an entity would account for the effects of a modification unless the fair value of the modified award is the same as the fair value of the original award, the vesting conditions of the modified award are the same as the vesting conditions of the original award, and the classification of the modified award (equity instrument or liability instrument) is the same as the classification of the original award, all immediately before the original award is modified. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The Company adopted the amendments in this ASU effective January 1, 2018 as required. The adoption of this guidance did not have an impact on the Company's condensed consolidated financial statements.
Amendments to Recognition and Measurement of Financial Assets and Financial Liabilities
In March 2018, February 2018 and January 2016, the FASB issued amended guidance on the measurement of financial assets and financial liabilities (ASU 2018-04, Investments-Debt Securities (Topic 320) and Regulated Operations (Topic 980) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and
SEC Release No. 33-9273; ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities; and ASU 2016-01, Financial Instruments- Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, respectively), effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Notable amendments in these updates:
require all equity securities (other than equity investments accounted for under the equity method of accounting or requiring the consolidation of the investee) to be measured at fair value with changes in fair value recognized through net income. Equity securities that do not have readily determinable fair values may be measured at cost minus impairment
require qualitative assessment for impairment of equity investments without readily determinable fair values at each reporting period and, if the qualitative assessment indicates that impairment exists, to measure the investment at fair value
eliminate the requirement to disclose the methods and significant assumptions used to estimate fair value (which is currently required to be disclosed, for financial instruments measured at amortized cost on the balance sheet)
require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments
The amendments in these ASUs should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, and the amendments related to equity securities without readily determinable fair values should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASUs 2016-01, 2018-03, and 2018-04 effective January 1, 2018, with a cumulative-effect adjustment to decrease retained earnings and increase AOCI by $4.
Future Accounting Pronouncements
Accounting pronouncements that will impact the Company in future periods have been disclosed in the Company's 2017 Form 10-K. There have not been any additional accounting pronouncements expected to impact the Company.

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(3) Significant Risks and Uncertainties
Federal Regulation    
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 ("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. The rule took effect June 2016 but the “applicability date" was delayed by DOL to June 9, 2017. DOL also acted to delay many aspects of the prohibited transaction exemption requirements during a transition period which has been extended to July 1, 2019. If 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 the Company's 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. Management will continue to monitor developments closely, including potential action to implement rules similar to the DOL Rule by state officials or the Securities and Exchange Commission and believes it is prepared to execute implementation plans as necessary to meet the rule and exemption requirements on the requisite applicability dates.
Use of Estimates and Assumptions
The preparation of the Company's unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions used.
Concentrations of Financial Instruments
As of March 31, 2018 and December 31, 2017, the Company’s most significant investment in one industry, excluding United States ("U.S.") Government securities, was its investment securities in the banking industry with a fair value of $2,484 or 11% and $2,851 or 12%, respectively, of the invested assets portfolio and an amortized cost of $2,537 and $2,850, respectively. As of March 31, 2018, the Company’s holdings in this industry include investments in 110 different issuers with the top ten investments accounting for 31% of the total holdings in this industry. As of March 31, 2018 and December 31, 2017, the Company had no investments in issuers that exceeded 10% of shareholders' equity. The Company's largest concentration in any single issuer as of March 31, 2018 and December 31, 2017 was AT&T Inc. and Wells Fargo & Company, respectively, with a total fair value of $127 or 1% and $155 or 1% of the invested assets portfolio, respectively.
Concentrations of Financial and Capital Markets Risk
The Company is exposed to financial and capital markets risk, including changes in interest rates and credit spreads which can have an adverse effect on the Company’s results of operations, financial condition and liquidity. The Company expects to continue to face challenges and uncertainties that could adversely affect its results of operations and financial condition. The Company attempts to mitigate the risk, including changes in interest rates by investing in less rate-sensitive investments, including senior tranches of collateralized loan obligations, non-agency residential mortgage-backed securities, and various types of asset backed securities.
The Company’s exposure to such financial and capital markets risk relates primarily to the market price and cash flow variability associated with changes in interest rates. A rise in interest rates, in the absence of other countervailing changes, will increase the net unrealized loss position of the Company’s investment portfolio and, if long-term interest rates rise dramatically within a six to twelve month time period, certain of the Company’s products may be exposed to disintermediation risk. Disintermediation risk refers to the risk that policyholders surrender their contracts in a rising interest rate environment, requiring the Company to liquidate assets in an unrealized loss position. Management believes this risk is mitigated to some extent by surrender charge protection provided by the Company’s products.

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Table of Contents

Concentration of Reinsurance Risk
The Company has a significant concentration of reinsurance with Wilton Reassurance Company (“Wilton Re”), a third-party reinsurer, that could have a material impact on the Company’s financial position in the event that Wilton Re fails to perform their obligations under the various reinsurance treaties. Wilton Re is a wholly-owned subsidiary of Canada Pension Plan Investment Board ("CPPIB"). CPPIB has an AAA issuer credit rating from Standard & Poor's Ratings Services ("S&P") as of March 31, 2018. As of March 31, 2018, the net amount recoverable from Wilton Re was $1,572. The Company monitors the financial condition of Wilton Re and other individual reinsurers to attempt to reduce the risk of default by such reinsurers. The Company also monitors concentration risk arising from similar economic characteristics of reinsurers. Wilton Re is current on all amounts due as of March 31, 2018.


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Table of Contents

(4) Investments
The Company’s fixed maturity securities investments have been designated as available-for-sale and are carried at fair value with unrealized gains and losses included in AOCI, net of associated adjustments for deferred acquisition costs ("DAC"), value of business acquired ("VOBA"), deferred sales inducements ("DSI"), unearned revenue ("UREV"), and deferred income taxes. The Company's equity securities investments are carried at fair value with unrealized gains and losses included in net income. The Company’s consolidated investments at March 31, 2018 and December 31, 2017 are summarized as follows:          
 
March 31, 2018
 
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Carrying Value
Available-for sale securities
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
3,062

 
$
6

 
$
(16
)
 
$
3,052

 
$
3,052

Commercial mortgage-backed securities
938

 
1

 
(15
)
 
924

 
924

Corporates
13,379

 
22

 
(317
)
 
13,084

 
13,084

Hybrids
1,230

 
4

 
(30
)
 
1,204

 
1,204

Municipals
1,733

 
4

 
(27
)
 
1,710

 
1,710

Residential mortgage-backed securities
1,235

 
5

 
(8
)
 
1,232

 
1,232

U.S. Government
161

 

 
(1
)
 
160

 
160

Total available-for-sale securities
21,738

 
42

 
(414
)
 
21,366

 
21,366

Equities
780

 
2

 
(13
)
 
769

 
769

Derivative investments
389

 
6

 
(102
)
 
293

 
293

Commercial mortgage loans
528

 

 

 
526

 
528

Other invested assets
276

 

 

 
272

 
276

Total investments
$
23,711

 
$
50

 
$
(529
)
 
$
23,226

 
$
23,232

 
December 31, 2017
 
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Carrying Value
Available-for sale securities
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
3,061

 
$
7

 
$
(3
)
 
$
3,065

 
$
3,065

Commercial mortgage-backed securities
956

 
1

 
(1
)
 
956

 
956

Corporates
12,914

 
122

 
(21
)
 
13,015

 
13,015

Equities
764

 
1

 
(4
)
 
761

 
761

Hybrids
1,445

 
6

 
(5
)
 
1,446

 
1,446

Municipals
1,736

 
12

 
(1
)
 
1,747

 
1,747

Residential mortgage-backed securities
1,279

 
1

 
(3
)
 
1,277

 
1,277

U.S. Government
84

 

 

 
84

 
84

Total available-for-sale securities
22,239

 
150

 
(38
)
 
22,351

 
22,351

Derivative investments
459

 
36

 
(3
)
 
492

 
492

Short term investments
25

 

 

 
25

 
25

Commercial mortgage loans
548

 

 

 
549

 
548

Other invested assets
188

 

 

 
186

 
188

Total investments
$
23,459

 
$
186

 
$
(41
)
 
$
23,603

 
$
23,604

The unrealized gains and losses were reset to zero effective November 30, 2017 as a result of the Business Combination and application of acquisition accounting. Included in AOCI were cumulative gross unrealized gains of $0 and gross unrealized losses of $0 related to the non-credit portion of other-than-temporary-impairments ("OTTI") on non-agency residential mortgage backed securities ("RMBS") at March 31, 2018 and gross unrealized gains of $0 and gross unrealized losses of $0 related to the non-credit portion of OTTI on non-agency RMBS at December 31, 2017.

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Table of Contents

Securities held on deposit with various state regulatory authorities had a fair value of $20,138 and $20,301 at March 31, 2018 and December 31, 2017, respectively. Under Iowa regulations, insurance companies are required to hold securities on deposit in an amount no less than the Company's legal reserve as prescribed by Iowa regulations.
At March 31, 2018 and December 31, 2017, the Company held investments that were non-income producing for a period greater than twelve months with fair values of $0 and $0, respectively.
In accordance with the Company's FHLB agreements, the investments supporting the funding agreement liabilities are pledged as collateral to secure the FHLB funding agreement liabilities. The collateral investments had a fair value of $927 and $715 at March 31, 2018 and December 31, 2017, respectively.
The amortized cost and fair value of fixed maturity available-for-sale securities by contractual maturities, as applicable, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.
 
March 31, 2018
 
Amortized Cost
 
 Fair Value
Corporates, Non-structured Hybrids, Municipal and U.S. Government securities:
 
 
 
Due in one year or less
$
188

 
$
188

Due after one year through five years
1,176

 
1,166

Due after five years through ten years
2,543

 
2,488

Due after ten years
11,917

 
11,654

Subtotal
15,824

 
15,496

Other securities which provide for periodic payments:
 
 
 
Asset-backed securities
3,062

 
3,052

Commercial mortgage-backed securities
938

 
924

Structured hybrids
679

 
662

Residential mortgage-backed securities
1,235

 
1,232

Subtotal
5,914

 
5,870

Total fixed maturity available-for-sale securities
$
21,738

 
$
21,366

The Company's available-for-sale securities with unrealized losses are reviewed for potential OTTI. For factors considered in evaluating whether a decline in value is other-than-temporary, please refer to “Note 2. Significant Accounting Policies and Practices" to the Company’s 2017 Form 10-K.
The Company analyzes its ability to recover the amortized cost by comparing the net present value of cash flows expected to be collected with the amortized cost of the security. For mortgage-backed and asset-backed securities, cash flow estimates consider the payment terms of the underlying assets backing a particular security, including interest rate and prepayment assumptions, based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also include other assumptions regarding the underlying collateral including default rates and recoveries, which vary based on the asset type and geographic location, as well as the vintage year of the security. For structured securities, the payment priority within the tranche structure is also considered. For all other fixed maturity securities, cash flow estimates are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. If the net present value is less than the amortized cost of the investment, an OTTI is recognized.
Based on the results of our process for evaluating available-for-sale securities in unrealized loss positions for OTTI as discussed above, the Company determined that the unrealized losses as of March 31, 2018 increased due to higher interest rates during the quarter coupled with an increase in the spreads over Treasuries required by investors for corporate and municipal bonds. Based on an assessment of all securities in the portfolio in unrealized loss positions, the Company determined that the unrealized losses on the securities presented in the table below were not other-than-temporarily impaired as of March 31, 2018.

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Table of Contents



The fair value and gross unrealized losses of available-for-sale securities, aggregated by investment category and duration of fair value below amortized cost, were as follows:
 
March 31, 2018
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair Value
 
Gross Unrealized
Losses
 
Fair Value
 
Gross Unrealized
Losses
 
Fair Value
 
Gross Unrealized
Losses
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
2,297

 
$
(16
)
 
$

 
$

 
$
2,297

 
$
(16
)
Commercial mortgage-backed securities
815

 
(15
)
 

 

 
815

 
(15
)
Corporates
11,588

 
(317
)
 

 

 
11,588

 
(317
)
Hybrids
1,017

 
(30
)
 

 

 
1,017

 
(30
)
Municipals
1,482

 
(27
)
 

 

 
1,482

 
(27
)
Residential mortgage-backed securities
926

 
(8
)
 

 

 
926

 
(8
)
U.S. Government
161

 
(1
)
 

 

 
161

 
(1
)
Total available-for-sale securities
$
18,286

 
$
(414
)
 
$

 
$

 
$
18,286

 
$
(414
)
Total number of available-for-sale securities in an unrealized loss position less than twelve months
 
 
 
 
 
 
 
 
 
 
2,054

Total number of available-for-sale securities in an unrealized loss position twelve months or longer
 
 
 
 
 
 
 
 
 
 
0

Total number of available-for-sale securities in an unrealized loss position
 
 
 
 
 
 
 
 
 
 
2,054


 
December 31, 2017
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair Value
 
Gross Unrealized
Losses
 
Fair Value
 
Gross Unrealized
Losses
 
Fair Value
 
Gross Unrealized
Losses
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
1,944

 
$
(3
)
 
$

 
$

 
$
1,944

 
$
(3
)
Commercial mortgage-backed securities
478

 
(1
)
 

 

 
478

 
(1
)
Corporates
4,098

 
(21
)
 

 

 
4,098

 
(21
)
Equities
436

 
(4
)
 

 

 
436

 
(4
)
Hybrids
484

 
(5
)
 

 

 
484

 
(5
)
Municipals
285

 
(1
)
 

 

 
285

 
(1
)
Residential mortgage-backed securities
939

 
(3
)
 

 

 
939

 
(3
)
U.S. Government
74

 

 

 

 
74

 

Total available-for-sale securities
$
8,738

 
$
(38
)
 
$

 
$

 
$
8,738

 
$
(38
)
Total number of available-for-sale securities in an unrealized loss position less than twelve months
 
 
 
 
 
 
 
 
 
 
1,224

Total number of available-for-sale securities in an unrealized loss position twelve months or longer
 
 
 
 
 
 
 
 
 
 
0

Total number of available-for-sale securities in an unrealized loss position
 
 
 
 
 
 
 
 
 
 
1,224


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Table of Contents

At March 31, 2018 and December 31, 2017, securities in an unrealized loss position were primarily concentrated in investment grade, corporate debt and hybrid instruments.
At March 31, 2018 and December 31, 2017, securities with a fair value of $4 and $10, respectively, had an unrealized loss greater than 20% of amortized cost (excluding U.S. Government and U.S. Government sponsored agency securities), which were insignificant to the carrying value of all investments, respectively.
The following table provides a reconciliation of the beginning and ending balances of the credit loss portion of OTTI on fixed maturity available-for-sale securities held by the Company for the three months ended March 31, 2018 and 2017 (Predecessor), for which a portion of the OTTI was recognized in AOCI:
 
Three months ended
 
March 31, 2018
 
 
March 31, 2017
 
 
 
 
Predecessor
Beginning balance
$

 
 
$
3

Increases attributable to credit losses on securities:
 
 
 
 
OTTI was previously recognized

 
 

OTTI was not previously recognized

 
 

Ending balance
$

 
 
$
3

The following table breaks out the credit impairment loss type, the associated amortized cost and fair value of the investments at the balance sheet date and non-credit losses in relation to fixed maturity securities and other invested assets held by the Company for the three months ended March 31, 2018 and 2017 (Predecessor):
 
Three months ended
 
March 31, 2018
 
 
March 31, 2017
 
 
 
 
Predecessor
Credit impairment losses in operations
$
(2
)
 
 
$
(21
)
Change-of-intent losses in operations

 
 

Amortized cost

 
 
7

Fair value

 
 
6

Non-credit losses in other comprehensive income for investments which experienced OTTI

 
 

Details of OTTI that were recognized in "Net income (loss)" and included in net realized gains on securities were as follows:
 
Three months ended
 
March 31, 2018
 
 
March 31, 2017
 
 
 
 
Predecessor
OTTI Recognized in Net Income (Loss)
 
 
 
 
Corporates
$
(2
)
 
 
$
(20
)
Other invested assets

 
 
(1
)
Total
$
(2
)
 
 
$
(21
)
The portion of OTTI recognized in AOCI is disclosed in the Condensed Consolidated Statements of Comprehensive Income (Loss).


-17

Table of Contents

Commercial Mortgage Loans
Commercial mortgage loans ("CMLs") represented approximately 2% and 2% of the Company’s total investments as of March 31, 2018 and December 31, 2017, respectively. The Company primarily makes mortgage loans on income producing properties including hotels, industrial properties, retail buildings, multifamily properties and office buildings. The Company diversifies its CML portfolio by geographic region and property type to attempt to reduce concentration risk. The Company continuously evaluates CMLs based on relevant current information to ensure properties are performing at a consistent and acceptable level to secure the related debt. The distribution of CMLs, gross of valuation allowances, by property type and geographic region is reflected in the following tables:
 
March 31, 2018
 
December 31, 2017
 
Gross Carrying Value
 
% of Total
 
Gross Carrying Value
 
% of Total
Property Type:
 
 
 
 
 
 
 
Funeral Home
$

 
%
 
$

 
%
Hotel
22

 
4
%
 
22

 
4
%
Industrial - General
45

 
9
%
 
46

 
9
%
Industrial - Warehouse
21

 
4
%
 
38

 
6
%
Multifamily
70

 
13
%
 
70

 
13
%
Office
157

 
30
%
 
158

 
29
%
Retail
213

 
40
%
 
214

 
39
%
Total commercial mortgage loans, gross of valuation allowance
$
528

 
100
%
 
$
548

 
100
%
Allowance for loan loss

 
 
 

 
 
Total commercial mortgage loans
$
528

 
 
 
$
548

 
 
 
 
 
 
 
 
 
 
U.S. Region:
 
 
 
 
 
 
 
East North Central
$
112

 
21
%
 
$
108

 
20
%
East South Central
20

 
4
%
 
20

 
4
%
Middle Atlantic
85

 
16
%
 
85

 
15
%
Mountain
66

 
13
%
 
67

 
12
%
New England
14

 
3
%
 
14

 
3
%
Pacific
134

 
25
%
 
135

 
25
%
South Atlantic
58

 
11
%
 
65

 
12
%
West North Central
13

 
2
%
 
13

 
2
%
West South Central
26

 
5
%
 
41

 
7
%
Total commercial mortgage loans, gross of valuation allowance
$
528

 
100
%
 
$
548

 
100
%
Allowance for loan loss

 
 
 

 
 
Total commercial mortgage loans
$
528

 
 
 
$
548

 
 
All of the Company's investments in CMLs had a loan-to-value ("LTV") ratio of less than 75% at March 31, 2018 and December 31, 2017, as measured at inception of the loans unless otherwise updated. As of March 31, 2018, all CMLs are current and have not experienced credit or other events which would require the recording of an impairment loss.
LTV and DSC ratios are measures commonly used to assess the risk and quality of mortgage loans. The LTV ratio is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. The DSC ratio, based upon the most recently received financial statements, is expressed as a percentage of the amount of a property’s net income to its debt service payments. A DSC ratio of less than 1.00 indicates that a property’s operations do not generate sufficient income to cover debt payments. We normalize our DSC ratios to a 25-year amortization period for purposes of our general loan allowance evaluation.

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Table of Contents

The following table presents the recorded investment in CMLs by LTV and DSC ratio categories and estimated fair value by the indicated loan-to-value ratios at March 31, 2018 and December 31, 2017 :
 
Debt-Service Coverage Ratios
 
Total Amount
 
% of Total
 
Estimated Fair Value
 
% of Total
 
>1.25
 
1.00 - 1.25
 
<1.00
 
N/A(a)
 
 
 
 
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LTV Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 50%
$
275

 
$

 
$

 
$

 
$
275

 
52
%
 
$
274

 
52
%
50% to 60%
234

 
7

 

 

 
241

 
46
%
 
240

 
46
%
60% to 75%
12

 

 

 

 
12

 
2
%
 
12

 
2
%
Commercial mortgage loans
$
521

 
$
7

 
$

 
$

 
$
528

 
100
%
 
$
526

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LTV Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 50%
$
293

 
$

 
$

 
$

 
$
293

 
54
%
 
$
294

 
54
%
50% to 60%
236

 
7

 

 

 
243

 
44
%
 
243

 
44
%
60% to 75%
12

 

 

 

 
12

 
2
%
 
12

 
2
%
Commercial mortgage loans
$
541

 
$
7

 
$

 
$

 
$
548

 
100
%
 
$
549

 
100
%
(a) N/A - Current DSC ratio not available.
The Company establishes a general mortgage loan allowance based upon the underlying risk and quality of the mortgage loan portfolio using DSC ratio and LTV ratio. A higher LTV ratio will result in a higher allowance. A higher DSC ratio will result in a lower allowance. The Company believes that the DSC ratio is an indicator of default risk on loans. The Company believes that the LTV ratio is an indicator of the principal recovery risk for loans that default.
 
March 31, 2018
 
December 31, 2017
Gross balance commercial mortgage loans
$
528

 
$
548

Allowance for loan loss

 

Net balance commercial mortgage loans
$
528

 
$
548

The Company recognizes a mortgage loan as delinquent when payments on the loan are greater than 30 days past due. At March 31, 2018 and December 31, 2017, the Company had no CMLs that were delinquent in principal or interest payments. The following provides the current and past due composition of our CMLs:
 
March 31, 2018
 
December 31, 2017
Current to 30 days
$
528

 
$
548

Past due

 

Total carrying value
$
528

 
$
548


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Table of Contents

Mortgage loan workouts, refinances or restructures that are classified as troubled debt restructurings (TDR) are individually evaluated and measured for impairment. As of March 31, 2018 and December 31, 2017, our CML portfolio had no impairments, modifications or TDR.
Net Investment Income
The major sources of “Net investment income” on the accompanying Condensed Consolidated Statements of Operations were as follows:
 
Three months ended
 
March 31, 2018
 
 
March 31, 2017
 
 
 
 
Predecessor
Fixed maturity securities, available-for-sale
$
242

 
 
$
236

Equity securities
10

 
 
10

Commercial mortgage loans
7

 
 
6

Invested cash and short-term investments
3

 
 

Other investments
11

 
 
1

Gross investment income
273

 
 
253

Investment expense
(10
)
 
 
(6
)
Net investment income
$
263

 
 
$
247


Net Investment Gains (Losses)
Details underlying “Net investment gains (losses)” reported on the accompanying Consolidated Statements of Operations were as follows:
 
Three months ended
 
March 31, 2018
 
 
March 31, 2017
 
 
 
 
Predecessor
Net realized losses on fixed maturity available-for-sale securities
$
(37
)
 
 
$
(17
)
Realized losses on equity securities
(6
)
 
 

Change in fair value of other derivatives and embedded derivatives

 
 
1

Realized losses on other invested assets
(3
)
 
 
(1
)
Hedging derivatives and reinsurance-related embedded derivatives:


 
 


Realized gains on certain derivative instruments
11

 
 
75

Unrealized gains (losses) on certain derivative instruments
(135
)
 
 
34

Change in fair value of reinsurance related embedded derivatives
(21
)
 
 
(11
)
Realized gains (losses) on hedging derivatives and reinsurance-related embedded derivatives
(145
)
 
 
98

Net investment gains (losses)
$
(191
)
 
 
$
81


-20

Table of Contents

The proceeds from the sale of fixed-maturity available for-sale-securities and the gross gains and losses associated with those transactions were as follows:
 
Three months ended
 
March 31, 2018
 
 
March 31, 2017
 
 
 
 
Predecessor
Proceeds
$
2,778

 
 
$
263

Gross gains
8

 
 
8

Gross losses
(43
)
 
 
(2
)
In accordance with the Company's adoption of ASU 2016-01, for the three months ended March 31, 2018 the Company had the following realized and unrealized gains and losses on equity securities:
 
Three months ended
 
March 31, 2018
Net gains (losses) recognized during the period on equity securities
$
(6
)
Less: Net gains (losses) recognized during the period on equity securities sold during the period
1

Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date
$
(7
)
The Company's adoption of ASU 2016-01 with respect to gains and losses on equity securities had a $(7) million impact on pre-tax net income, or $0.03 per common share, for the three months ended March 31, 2018.
Unconsolidated Variable Interest Entities
FGL Insurance owns investments in VIEs that are not consolidated within the Company’s financial statements.  VIEs do not have sufficient equity to finance their own activities without additional financial support and certain of its investors lack certain characteristics of a controlling financial interest.  These VIEs are not consolidated in the Company’s financial statements for the following reasons: 1)  FGL Insurance either does not control or does not have any voting rights or notice rights; 2)  the Company does not have any rights to remove the investment manager; and 3)  the Company was not involved in the design of the investment.  These characteristics indicate that FGL Insurance lacks the ability to direct the activities, or otherwise exert control, of the VIEs and is not considered the primary beneficiary of them. 
The Company previously executed a commitment of $75 to purchase common shares in an unaffiliated private business development company ("BDC"). The BDC invests in secured and unsecured fixed maturity and equity securities of middle market companies in the United States. Due to the voting structure of the transaction, the Company does not have voting power.  The initial capital call occurred June 30, 2015, with the remaining commitment expected to fund June 2019. The Company has funded $42 as of March 31, 2018.
The Company invests in various limited partnerships as a passive investor. These investments are in corporate credit and real estate debt strategies that have a current income bias. Limited partnership interests are accounted for under the equity method and are included in “Other invested assets” on the Company’s consolidated balance sheet. The Company's maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company's consolidated balance sheet in addition to any required unfunded commitments. As of March 31, 2018, the Company's maximum exposure to loss was $191 in recorded carrying value and $160 in unfunded commitments.


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(5) Derivative Financial Instruments
The carrying amounts of derivative instruments, including derivative instruments embedded in FIA contracts, is as follows:
 
March 31, 2018
 
December 31, 2017
Assets:
 
 
 
Derivative investments:
 
 
 
Call options
$
278

 
$
477

Futures contracts
2

 

FSRC derivative contracts
13

 
15

Other invested assets:
 
 
 
Other derivatives and embedded derivatives
17

 
17

 
$
310

 
$
509

Liabilities:
 
 
 
Contractholder funds:
 
 
 
FIA embedded derivative
$
2,333

 
$
2,387

Other liabilities:
 
 
 
Preferred shares reimbursement feature embedded derivative
24

 
23

 
$
2,357

 
$
2,410

 
The change in fair value of derivative instruments included in the accompanying Condensed Consolidated Statements of Operations is as follows:
 
Three months ended
 
March 31, 2018
 
 
March 31, 2017
 
 
 
 
Predecessor
Revenues:
 
 
 
 
Net investment (losses) gains:
 
 
 
 
    Call options
$
(120
)
 
 
$
105

    Futures contracts
(2
)
 
 
4

FSRC derivative contracts
(2
)
 
 

Other derivatives and embedded derivatives

 
 
1

Reinsurance related embedded derivatives
(21
)
 
 
(11
)
Total net investment (losses) gains:
$
(145
)
 
 
$
99

 
 
 
 
 
Benefits and other changes in policy reserves:
 
 
 
 
FIA embedded derivatives
$
(54
)
 
 
$
112

 
 
 
 
 
Acquisition and operating expenses, net of deferrals:
 
 
 
 
Preferred shares reimbursement feature embedded derivative (a)
(1
)
 
 

(a) Only applicable to Successor periods.


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Additional Disclosures
Other Derivatives and Embedded Derivatives
On June 16, 2014, FGL Insurance invested in a $35 fund-linked note issued by Nomura International Funding Pte. Ltd. The note provides for an additional payment at maturity based on the value of an embedded derivative in AnchorPath Dedicated Return Fund (the "AnchorPath Fund") of $11 which was based on the actual return of the fund. At March 31, 2018, the fair value of the fund-linked note and embedded derivative were $25 and $17, respectively. At maturity of the fund-linked note, FGL Insurance will receive the $35 face value of the note plus the value of the embedded derivative in the AnchorPath Fund. The additional payment at maturity is an embedded derivative reported in "Other invested assets", while the host is an available-for-sale security reported in "Fixed maturities, available-for-sale".

Fixed Index Annuity ("FIA") Contracts
The Company has FIA Contracts that permit the holder to elect an interest rate return or an equity index linked component, where interest credited to the contracts is linked to the performance of various equity indices, primarily the S&P 500 Index. This feature represents an embedded derivative under GAAP. The FIA embedded derivative is valued at fair value and included in the liability for contractholder funds in the accompanying Condensed Consolidated Balance Sheets with changes in fair value included as a component of “Benefits and other changes in policy reserves” in the Condensed Consolidated Statements of Operations. See a description of the fair value methodology used in "Note 6. Fair Value of Financial Instruments".
The Company purchases derivatives consisting of a combination of call options and futures contracts on the applicable market indices to fund the index credits due to FIA contractholders. The call options are one, two, three, and five year options purchased to match the funding requirements of the underlying policies. On the respective anniversary dates of the index policies, the index used to compute the interest credit is reset and the Company purchases new one, two, three, or five year call options to fund the next index credit. The Company manages the cost of these purchases through the terms of its FIA contracts, which permit the Company to change caps, spreads or participation rates, subject to guaranteed minimums, on each contract’s anniversary date. The change in the fair value of the call options and futures contracts is generally designed to offset the portion of the change in the fair value of the FIA embedded derivative related to index performance. 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 instrument term or upon early termination and the changes in fair value of open positions.
Other market exposures are hedged periodically depending on market conditions and the Company’s risk tolerance. The Company’s FIA hedging strategy economically hedges the equity returns and exposes the Company to the risk that unhedged market exposures result in divergence between changes in the fair value of the liabilities and the hedging assets. The Company uses a variety of techniques, including direct estimation of market sensitivities and value-at-risk to monitor this risk daily. The Company intends to continue to adjust the hedging strategy as market conditions and the Company’s risk tolerance change.
Preferred Equity Remarketing Reimbursement Embedded Derivative Liability
On November 30, 2017 the Company issued 275,000 Series A cumulative preferred shares and 100,000 Series B cumulative preferred shares (together the “Preferred Shares”). The Preferred Shares do not have a maturity date and are non-callable for the first five years. From and after November 30, 2022, the original holders of the Preferred Shares may request and thus require, the Company (subject to customary blackout provisions) to remarket the Preferred Shares on their existing terms. If the remarketing is successful and the original holders elect to sell their preferred shares at the remarketed price and proceeds from such sale are less than the outstanding balance of the applicable shares (including dividends paid in kind and accumulated but unpaid dividends), the Company will be required to reimburse the sellers, up to a maximum of 10% of the par value of the originally issued preferred shares (including dividends paid in kind and accumulated but unpaid dividends) with such amount payable either in cash, ordinary shares, or any combination thereof, at the Company's option (the “Reimbursement Feature”). The Reimbursement Feature represents an embedded derivative that is not clearly and closely related to the preferred stock host and must be bifurcated. The Reimbursement Feature liability is held at fair value within “Other liabilities” in the accompanying Condensed Consolidated Balance Sheets using a Black Derman Toy model incorporating among other things the paid in kind dividend coupon rate and the Company’s call option. Changes in fair value of

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this derivative are recognized within “Acquisition and operating expenses, net of deferrals” in the accompanying Condensed Consolidated Statements of Operations.
 Credit Risk
The Company is exposed to credit loss in the event of non-performance by its counterparties on the call options and reflects assumptions regarding this non-performance risk in the fair value of the call options. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts less collateral held. The Company maintains a policy of requiring all derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement.
Information regarding the Company’s exposure to credit loss on the call options it holds is presented in the following table:
 
 
 
 
March 31, 2018
 
December 31, 2017
Counterparty
 
Credit Rating
(Fitch/Moody's/S&P) (a)
 
Notional
Amount
 
Fair Value
 
Collateral
 
Net Credit Risk
 
Notional
Amount
 
Fair Value
 
Collateral
 
Net Credit Risk
Merrill Lynch
 
 A/*/A+
 
$
2,636

 
$
68

 
$
24

 
$
44

 
$
2,780

 
$
150

 
$
118

 
$
32

Deutsche Bank
 
 A-/A3/A-
 
1,634

 
40

 
40

 

 
1,345

 
51

 
55

 
(4
)
Morgan Stanley
 
 */A1/A+
 
1,640

 
39

 
37

 
2

 
1,555

 
92

 
101

 
(9
)
Barclay's Bank
 
 A*+/A2/A
 
1,933

 
61

 
49

 
12

 
2,090

 
103

 
95

 
8

Canadian Imperial Bank of Commerce
 
 AA-/Aa3/A+
 
3,074

 
83

 
78

 
5

 
2,807

 
96

 
98

 
(2
)
Total
 
 
 
$
10,917

 
$
291

 
$
228

 
$
63

 
$
10,577

 
$
492

 
$
467

 
$
25

(a) An * represents credit ratings that were not available.
Collateral Agreements
The Company is required to maintain minimum ratings as a matter of routine practice as part of its over-the-counter derivative agreements on ISDA forms. Under some ISDA agreements, the Company has 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 the Company or the counterparty would be dependent on the market value of the underlying derivative contracts. The Company’s current rating allows multiple counterparties the right to terminate ISDA agreements. No ISDA agreements have been terminated, although the counterparties have reserved the right to terminate the ISDA agreements at any time. In certain transactions, the Company and the counterparty have entered into a collateral support agreement requiring either party to post collateral when the net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. As of March 31, 2018 and December 31, 2017, counterparties posted $228 and $467 of collateral, respectively, of which $204 and $349 is included in "Cash and cash equivalents" with an associated payable for this collateral included in "Other liabilities" on the Condensed Consolidated Balance Sheets. The remaining $24 and $118 of non-cash collateral was held by a third-party custodian and may not be sold or re-pledged, except in the event of default, and, therefore, is not included in the Company's Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017, respectively. This collateral generally consists of U.S. treasury bonds and mortgage-backed securities. Accordingly, the maximum amount of loss due to credit risk that the Company would incur if parties to the call options failed completely to perform according to the terms of the contracts was $63 and $25 at March 31, 2018 and December 31, 2017, respectively.
The Company is required to pay counterparties the effective federal funds rate each day for cash collateral posted to FGL for daily mark to market margin changes.  In June 2017, the Company began reinvesting derivative cash collateral to reduce the interest cost. Cash collateral is invested in short term Treasury securities and A1/P1 commercial paper which are included in "Cash and cash equivalents" in the accompanying Condensed Consolidated Balance Sheets.
The Company held 1,364 and 1,754 futures contracts at March 31, 2018 and December 31, 2017, respectively. The fair value of the futures contracts represents the cumulative unsettled variation margin (open trade equity, net of cash settlements). The Company provides cash collateral to the counterparties for the initial and variation margin on the futures contracts which is included in "Cash and cash equivalents" in the accompanying Condensed

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Consolidated Balance Sheets. The amount of cash collateral held by the counterparties for such contracts was $7 and $8 at March 31, 2018 and December 31, 2017, respectively.
Reinsurance Related Embedded Derivatives (Predecessor)

FGL Insurance has a coinsurance arrangement with FSRC, meaning that funds are withheld by FGL Insurance as the legal owner, but the credit risk is borne by FSRC. This arrangement created an obligation for FGL Insurance 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 were 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 support 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 Predecessor's Condensed Consolidated Balance Sheets and the related gains or losses were reported in “Net investment gains” on the Predecessor's Condensed Consolidated Statements of Operations. Due to the acquisition of FSRC, the reinsurance related embedded derivative is eliminated in consolidation in the Successor periods.
Call option payable to FSRC (Predecessor)
Under the terms of the coinsurance arrangement with FSRC, FGL Insurance is required to pay FSRC a portion of the net cost of equity option purchases and the proceeds from expirations related to the equity options which hedged the index credit feature of the reinsured FIA contracts. Accordingly, the payable to FSRC was reflected in "Funds withheld for reinsurance liabilities" as of the balance sheet date with changes in fair value reflected within the “Net investment gains (losses)” in Predecessor's Condensed Consolidated Statements of Operations. Due to the acquisition of FSRC, the call option payable to FSRC is eliminated in consolidation in the Successor periods.

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(6) Fair Value of Financial Instruments
The Company’s measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset, or non-performance risk, which may include the Company’s own credit risk. The Company’s estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market for that asset of liability in the absence of a principal market as opposed to the price that would be paid to acquire the asset or receive a liability (“entry price”). The Company categorizes financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows:
Level 1 - Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date.
Level 2 - Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads, and yield curves.
Level 3 - Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date based on the best information available in the circumstances.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lower level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are components that are actively quoted or can be validated to market-based sources.
 

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The carrying amounts and estimated fair values of the Company’s financial instruments for which the disclosure of fair values is required, including financial assets and liabilities measured and carried at fair value on a recurring basis, with the exception of investment contracts, related party loans, portions of other invested assets and debt which are disclosed later within this footnote, was summarized according to the hierarchy previously described, as follows:
 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Carrying Amount
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,157

 
$

 
$

 
$
1,157

 
$
1,157

Fixed maturity securities, available-for-sale:

 

 

 

 

Asset-backed securities

 
2,751

 
301

 
3,052

 
3,052

Commercial mortgage-backed securities

 
882

 
42

 
924

 
924

Corporates

 
11,852

 
1,232

 
13,084

 
13,084

Hybrids
266

 
928

 
10

 
1,204

 
1,204

Municipals

 
1,673

 
37

 
1,710

 
1,710