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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 September 30, 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)
4th Floor
Boundary Hall, Cricket Square
Grand Cayman, Cayman Islands KY1-1102
(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 November 5, 2018, there were 221,561,070 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)
 
September 30,
2018

December 31,
2017
 
(Unaudited)
 
 
ASSETS



Investments:



Fixed maturity securities, available-for-sale, at fair value (amortized cost: September 30, 2018 - $22,143; December 31, 2017 - $20,847)
$
21,421


$
20,963

Equity securities, at fair value (cost: September 30, 2018 - $1,490; December 31, 2017 - $1,392)
1,440


1,388

Derivative investments
432


492

Short term investments
15


25

Commercial mortgage loans
497


548

Other invested assets
606


188

Total investments
24,411


23,604

Cash and cash equivalents
944

 
1,215

Accrued investment income
230

 
211

Funds withheld for reinsurance receivables, at fair value
708

 
756

Reinsurance recoverable
2,460

 
2,494

Intangibles, net
1,205

 
853

Deferred tax assets, net
285

 
182

Goodwill
467

 
467

Other assets
250

 
141

Total assets
$
30,960

 
$
29,923

 



LIABILITIES AND SHAREHOLDERS' EQUITY



 



Contractholder funds
$
23,164


$
21,827

Future policy benefits, including $684 and $728 at fair value at September 30, 2018 and December 31, 2017, respectively
4,631


4,751

Liability for policy and contract claims
60


78

Debt
540


307

Revolving credit facility


105

Other liabilities
1,091


892

Total liabilities
29,486


27,960

 



Commitments and contingencies ("Note 12")



 



 Shareholders' equity:

 

Preferred stock ($.0001 par value, 100,000,000 shares authorized, 391,694 and 375,000 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively)

 

Common stock ($.0001 par value, 800,000,000 shares authorized, 214,370,000 issued and outstanding at September 30, 2018 and December 31, 2017, respectively)

 

Additional paid-in capital
2,056

 
2,037

Retained earnings (Accumulated deficit)
(13
)
 
(149
)
Accumulated other comprehensive income (loss)
(569
)
 
75

Total shareholders' equity
1,474

 
1,963

Total liabilities and shareholders' equity
$
30,960

 
$
29,923

 
 
 
 

See accompanying notes to unaudited condensed consolidated financial statements.


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Table of Contents

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

 
Three months ended
 
Nine months ended
 
September 30, 2018
 
 
September 30, 2017
 
September 30,
2018
 
 
September 30,
2017
 
 
 
 
Predecessor
 
 
 
 
Predecessor
 
(Unaudited)
 
 
(Unaudited)
 
(Unaudited)
 
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
 
 
Premiums
$
12

 
 
$
16

 
$
45

 
 
$
31

Net investment income
267

 
 
261

 
812

 
 
765

Net investment gains (losses)
119

 
 
117

 
(74
)
 
 
265

Insurance and investment product fees and other
46

 
 
41

 
139

 
 
129

Total revenues
444

 
 
435

 
922

 
 
1,190

Benefits and expenses:
 
 
 
 
 
 
 
 
 
Benefits and other changes in policy reserves
297

 
 
320

 
475

 
 
823

Acquisition and operating expenses, net of deferrals
40

 
 
36

 
126

 
 
109

Amortization of intangibles
28

 
 
(14
)
 
72

 
 
70

        Total benefits and expenses
365

 
 
342

 
673

 
 
1,002

Operating income
79

 
 
93

 
249

 
 
188

Interest expense
(8
)
 
 
(6
)
 
(21
)
 
 
(18
)
Income (loss) before income taxes
71

 
 
87

 
228

 
 
170

Income tax expense
(15
)
 
 
(26
)
 
(67
)
 
 
(55
)
        Net income (loss)
$
56

 
 
$
61

 
$
161

 
 
$
115

Less preferred stock dividend
7

 
 

 
21

 
 

Net income (loss) available to common shareholders
$
49

 
 
$
61

 
$
140

 
 
$
115

 
 
 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
 
 
Basic
$
0.23

 
 
$
1.06

 
$
0.65

 
 
$
1.98

Diluted
$
0.23

 
 
$
1.06

 
$
0.65

 
 
$
1.98

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

 
 
58,335,216

 
214,370,000

 
 
58,332,666

Diluted
214,418,693

 
 
58,478,612

 
214,390,931

 
 
58,437,832

 
 
 
 
 
 
 
 
 
 
Cash dividend per common share
$

 
 
$
0.065

 
$

 
 
$
0.195

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
)
Gains (losses) on derivatives and embedded derivatives
159

 
 
111

 
58

 
 
284

Other investment gains (losses)
(40
)
 
 
6

 
(130
)
 
 
2

        Total net investment gains (losses)
$
119

 
 
$
117

 
$
(74
)
 
 
$
265



See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

FGL HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
 
Three months ended
 
Nine months ended
 
September 30, 2018
 
 
September 30, 2017
 
September 30,
2018
 
 
September 30,
2017
 
 
 
 
Predecessor
 
 
 
 
Predecessor
 
(Unaudited)
 
 
(Unaudited)
 
(Unaudited)
 
 
(Unaudited)
Net income
$
56

 
 
$
61

 
$
161

 
 
$
115

 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Unrealized investment gains/losses:
 
 
 
 
 
 
 
 
 
Change in unrealized investment gains/losses before reclassification adjustment
(11
)
 
 
173

 
(922
)
 
 
845

Net reclassification adjustment for gains/losses included in net income
23

 
 
(4
)
 
84

 
 
20

Changes in unrealized investment gains/losses after reclassification adjustment
12

 
 
169

 
(838
)
 
 
865

Adjustments to intangible assets and unearned revenue
37

 
 
(51
)
 
89

 
 
(265
)
Changes in deferred income tax asset/liability
(15
)
 
 
(42
)
 
101

 
 
(210
)
Net change in unrealized gains/losses on investments
34

 
 
76

 
(648
)
 
 
390

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 income (loss) for the period
34

 
 
76

 
(648
)
 
 
390

Comprehensive income (loss), net of tax
$
90

 
 
$
137

 
$
(487
)
 
 
$
505


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

 
(149
)
 
75

 
1,963

Dividends
 

 

 
16

 
(21
)
 

 
(5
)
Net income
 

 

 

 
161

 

 
161

Unrealized investment gains (losses), net
 

 

 

 

 
(648
)
 
(648
)
Cumulative effect of changes in accounting principles
 

 

 

 
(4
)
 
4

 

Stock-based compensation
 

 

 
3

 

 

 
3

Balance, September 30, 2018
 
$

 
$

 
$
2,056

 
$
(13
)
 
$
(569
)
 
$
1,474


See accompanying notes to unaudited condensed consolidated financial statements.


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Table of Contents

FGL HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
Nine months ended
 
September 30,
2018
 
 
September 30,
2017
 
 
 
 
Predecessor
 
(Unaudited)
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
 
Net income
$
161

 
 
$
115

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Stock based compensation
3

 
 
5

Amortization
40

 
 
(36
)
Deferred income taxes
(4
)
 
 
(80
)
Interest credited/index credits to contractholder account balances
452

 
 
714

Net recognized losses (gains) on investments and derivatives
74

 
 
(254
)
Charges assessed to contractholders for mortality and administration
(103
)
 
 
(99
)
Deferred policy acquisition costs, net of related amortization
(237
)
 
 
(167
)
Gain on extinguishment of debt
(2
)
 
 

Changes in operating assets and liabilities:
 
 
 
 
     Reinsurance recoverable
11

 
 
(10
)
     Future policy benefits
(120
)
 
 
(41
)
  Funds withheld from reinsurers
11

 
 
(79
)
  Collateral (returned) posted
(62
)
 
 
118

     Other assets and other liabilities
40

 
 
(21
)
Net cash provided by (used in) operating activities
264

 
 
165

Cash flows from investing activities:
 
 
 
 
Proceeds from available-for-sale investments sold, matured or repaid
5,865

 
 
2,022

Proceeds from derivatives instruments and other invested assets
430

 
 
387

Proceeds from commercial mortgage loans
50

 
 
35

Cost of available-for-sale investments
(7,345
)
 
 
(2,768
)
Costs of derivatives instruments and other invested assets
(632
)
 
 
(297
)
Capital expenditures
(7
)
 
 
(2
)
Contingent purchase price payment
(57
)
 
 

Net cash provided by (used in) investing activities
(1,696
)
 
 
(623
)
Cash flows from financing activities:
 
 
 
 
Debt issuance costs
(7
)
 
 

Proceeds from issuance of new debt
547

 
 

Retirement and paydown on debt and revolving credit facility
(440
)
 
 

Draw on revolving credit facility
30

 
 
5

Dividends paid

 
 
(11
)
Contractholder account deposits
3,020

 
 
2,192

Contractholder account withdrawals
(1,989
)
 
 
(1,475
)
Net cash provided by (used in) financing activities
1,161

 
 
711

Change in cash & cash equivalents
(271
)
 
 
253

Cash & cash equivalents, beginning of period
1,215

 
 
632

Cash & cash equivalents, end of period
$
944

 
 
$
885

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
$
14

 
 
$
13

Income taxes (refunded) paid
$
30

 
 
$
114

Deferred sales inducements
$
98

 
 
$
20


See accompanying notes to unaudited condensed consolidated financial statements.

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Table of Contents

FGL HOLDINGS
NOTES TO UNAUDITED CONDENSED 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 ("FGL"), a Delaware corporation, 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.”
Dollar amounts in the accompanying sections are presented in millions, unless otherwise noted.
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 F&G Reinsurance, Ltd. (formerly known as Front Street Re Ltd., and, together with FSRC herein referred to as 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 the 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" within 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.
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.

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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 and nine months ended September 30, 2018, are not 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 unaudited 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 unaudited condensed consolidated financial statements. The Company has determined that we are not the primary beneficiary of a VIE as of September 30, 2018. See "Note 4. Investments" to the Company’s unaudited 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 unaudited condensed 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 has not had an impact on the Company's unaudited condensed 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 no 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, immediately before the original award is modified, 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. 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 unaudited 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
Long-Duration Contracts
In August 2018, the FASB issued new guidance (ASU 2018-12, Financial Services-Insurance (Topic 944), Targeted Improvements to the Accounting for Long-Duration Contracts), effective for fiscal years beginning after December 15, 2020 including interim periods within those fiscal years. Under this update:
assumptions used to measure cash flows for traditional and limited-payment contracts must be reviewed at least annually with the effect of changes in those assumptions being recognized in the statement of operations

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the discount rate applied to measure the liability for future policy benefits and limited-payment contracts must be updated at each reporting date with the effect of changes in the rate being recognized in other comprehensive income
market risk benefits associated with deposit contracts must be measured at fair value, with the effect of the change in the fair value attributable to a change in the instrument-specific credit risk being recognized in other comprehensive income
deferred acquisition costs are required to be amortized in proportion to premiums, gross profits, or gross margins and those balances must be amortized on a constant level basis over the expected term of the related contracts
deferred acquisition costs must be written off for unexpected contract terminations
disaggregated rollforwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities and deferred acquisition costs, as well as information about significant inputs, judgments, assumptions, and methods used in measurement are required to be disclosed
The amendments in this ASU may be early adopted as of the beginning of an annual reporting period for which financial statements have not yet been issued, including interim financial statements. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued new guidance (ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement), effective for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. Under this update:
for investments in certain entities that calculate net asset value, investors are required to disclose the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse if the investee has communicated timing to the entity or announced timing publicly
entities should use the measurement uncertainty disclosure to communicate information about the uncertainty in measurement as of the reporting date
entities must disclose changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements, as well as the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, or other quantitative information in lieu of weighted average if the entity determines such information would be more reasonable and rational
entities are no longer required to disclose the amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements.
The amendments in this ASU may be early adopted. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.
Internal Use Software
In August 2018, the FASB issued new guidance (ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract), effective for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. Under this update:
entities are required to capitalize certain implementation costs incurred during the application development stage that relate to a hosting arrangement that is a service contract
entities are required to amortize the capitalized implementation costs over the term of the hosting arrangement.

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The amendments in this ASU may be early adopted. The Company is currently evaluating the impact of this new accounting guidance on its unaudited condensed consolidated financial statements.
Credit Losses
In June 2016, the FASB issued new guidance on measurement of credit losses on financial instruments (ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments). The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. This ASU replaces the current incurred loss impairment methodology with one that reflects expected credit losses. The measurement of expected credit losses should be based on historical loss information, current conditions, and reasonable and supportable forecasts. The new guidance requires that an other-than-temporary impairment (“OTTI”) on a debt security will be recognized as an allowance going forward, such that improvements in expected future cash flows after an impairment will no longer be reflected as a prospective yield adjustment through net investment income, but rather a reversal of the previous impairment and recognized through realized investment gains and losses. The guidance also requires enhanced disclosures. The Company has identified the material asset classes impacted by the new guidance and is in the process of assessing the accounting, reporting and/or process changes that will be required to comply with the new guidance. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
Reclassifications and Retrospective Adjustments

The Company identified immaterial errors, as described below, during the periods ended September 30, 2018 and June 30, 2018. Management has reviewed the impact of these errors on prior periods in accordance with SEC Staff Accounting Bulletin No. 99, “Materiality,” (SAB 99) and determined none of these were material to the prior periods impacted.

Effective December 1, 2017, the Company measured the identifiable assets acquired and liabilities assumed from the Business Combination at acquisition-date fair value in accordance with ASC 805. This required significant model changes for the re-bifurcation of the host contract and embedded derivative components of the fixed income annuity ("FIA") liability. During the quarter ended September 30, 2018, the Company identified an immaterial error resulting from the model code used in the calculation of the FIA embedded derivative liability. In issuing the September 30, 2018 Form 10-Q, the Company recorded an immaterial correction to the Condensed Consolidated Balance Sheet as of December 31, 2017 by decreasing the contractholder funds liability by $17 as well as a resulting decrease to the intangibles and deferred tax assets of $3 and $3, respectively. In addition, the Company recorded immaterial corrections to the Condensed Consolidated Statement of Operations for each of the three months ended March 31, 2018 and June 30, 2018, and the one month ended December 31, 2017 by decreasing the benefits and other changes in policy reserves by $21, $32, and $17, respectively, as well as increasing the amortization of intangibles by $4, $7 and $3, and income tax expense by $4, $5, and $3 respectively. These immaterial corrections had no impact on the Company’s net income for the three and nine months ended September 30, 2018.

During the quarter ended September 30, 2018, the Company identified an immaterial error related to the December 1, 2017 fair value of the deferred income tax valuation allowance acquired from the Business Combination. In issuing the September 30, 2018 Form 10-Q, the Company recorded an immaterial correction to the Condensed Consolidated Balance Sheet as of December 31, 2017 by decreasing the deferred income tax valuation allowance by $9 and increasing goodwill by a corresponding amount.

During the quarter ended June 30, 2018, the Company identified an immaterial error related to the classification of certain securities as debt or equity under ASC 320, “Investments - Debt and Equity Securities.” In issuing the June 30, 2018 Form 10-Q, the Company recorded an immaterial correction to the Condensed Consolidated Balance Sheet as of December 31, 2017 by decreasing fixed maturity securities, available for sale by $627 and increasing equity securities, at fair value by a corresponding amount. Effective January 1, 2018, the Company adopted guidance under ASU 2016-01 which among other things, requires that the change in fair value of equity securities be reported in income rather than as a direct adjustment to AOCI. As a result, the Company also recorded an immaterial $9 out of period adjustment in the Condensed Consolidated Statement of Operations for the three months ended June 30, 2018 to recognize the Q1 change in fair value associated with the proper classification of equity securities with a corresponding increase in AOCI, as reported in the June 30, 2018 Form 10-Q.


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Certain prior year amounts have been reclassified or combined to conform to the current year presentation.
These reclassifications and combinations had no effect on previously reported results of operations.

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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 had a material impact on the Company, its products, distribution, and business model. The rule provided 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 and would have expanded the definition of fiduciary under ERISA to apply to commissioned insurance agents who sell the Company’s IRA products. On June 21, 2018, the United States Court of Appeals for the Fifth Circuit formally vacated the DOL fiduciary rule in total when it issued its mandate following the court’s decision on March 15, 2018, in U.S. Chamber of Commerce v. U.S. Department of Labor, 885 F.3d 360 (5th Cir. 2018). Management will continue to monitor for potential action by state officials or the SEC to implement rules similar to the vacated DOL rule.
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 September 30, 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 $2,642 or 11% and $2,851 or 12%, respectively, of the invested assets portfolio and an amortized cost of $2,760 and $2,850, respectively. As of September 30, 2018, the Company’s holdings in this industry include investments in 112 different issuers with the top ten investments accounting for 33% of the total holdings in this industry. As of September 30, 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 September 30, 2018 and December 31, 2017 was AT&T Inc. and Wells Fargo & Company, respectively, with a total fair value of $119 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.
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 September 30, 2018. As of September 30, 2018, the net amount recoverable from Wilton Re was $1,546. 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

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concentration risk arising from similar economic characteristics of reinsurers. Wilton Re is current on all amounts due as of September 30, 2018.


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(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 September 30, 2018 and December 31, 2017 are summarized as follows:          
 
September 30, 2018
 
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Carrying Value
Available-for sale securities
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
3,705

 
$
5

 
$
(28
)
 
$
3,682

 
$
3,682

Commercial mortgage-backed securities
1,808

 
11

 
(25
)
 
1,794

 
1,794

Corporates
12,227

 
15

 
(608
)
 
11,634

 
11,634

Hybrids
986

 
1

 
(36
)
 
951

 
951

Municipals
1,434

 

 
(53
)
 
1,381

 
1,381

Residential mortgage-backed securities
1,676

 
13

 
(9
)
 
1,680

 
1,680

U.S. Government
141

 

 
(2
)
 
139

 
139

Foreign Governments
166

 

 
(6
)
 
160

 
160

Total available-for-sale securities
22,143

 
45

 
(767
)
 
21,421

 
21,421

Equity securities
1,490

 
2

 
(52
)
 
1,440

 
1,440

Derivative investments
319

 
135

 
(22
)
 
432

 
432

Short term investments
15

 

 

 
15

 
15

Commercial mortgage loans
497

 

 

 
488

 
497

Other invested assets
606

 

 

 
602

 
606

Total investments
$
25,070

 
$
182

 
$
(841
)
 
$
24,398

 
$
24,411

 
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
12,467

 
122

 
(19
)
 
12,570

 
12,570

Hybrids
1,066

 
4

 
(3
)
 
1,067

 
1,067

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

Foreign Governments
198

 

 
(1
)
 
197

 
197

Total available-for-sale securities
20,847

 
147

 
(31
)
 
20,963

 
20,963

Equity securities
1,392

 
3

 
(7
)
 
1,388

 
1,388

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


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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 which requires assets and liabilities acquired to be measured at fair value as of the date of the acquisition. Included in AOCI were cumulative gross unrealized gains of $0 and gross unrealized losses of $0 related to the non-credit portion of OTTI on non-agency residential mortgage backed securities ("RMBS") for both September 30, 2018 and December 31, 2017.
Securities held on deposit with various state regulatory authorities had a fair value of $20,705 and $20,301 at September 30, 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 legal reserve.
At September 30, 2018 and December 31, 2017, the Company held no material investments that were non-income producing for a period greater than twelve months.
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 and are not available to the Company for general purposes. The collateral investments had a fair value of $889 and $715 at September 30, 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.
 
September 30, 2018
 
Amortized Cost
 
 Fair Value
Corporates, Non-structured Hybrids, Municipal and Government securities:
 
 
 
Due in one year or less
$
242

 
$
241

Due after one year through five years
1,055

 
1,039

Due after five years through ten years
2,462

 
2,384

Due after ten years
11,195

 
10,601

Subtotal
14,954

 
14,265

Other securities which provide for periodic payments:
 
 
 
Asset-backed securities
3,705

 
3,682

Commercial mortgage-backed securities
1,808

 
1,794

Residential mortgage-backed securities
1,676

 
1,680

Subtotal
7,189

 
7,156

Total fixed maturity available-for-sale securities
$
22,143

 
$
21,421

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. If the net present value is less than the amortized cost of the investment, an OTTI is recognized. 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.
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 the unrealized losses as of September 30, 2018 increased due to higher interest rates during the year 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

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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 September 30, 2018.
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:
 
September 30, 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
$
2,863

 
$
(28
)
 
$

 
$

 
$
2,863

 
$
(28
)
Commercial mortgage-backed securities
1,208

 
(25
)
 

 

 
1,208

 
(25
)
Corporates
10,956

 
(608
)
 

 

 
10,956

 
(608
)
Hybrids
796

 
(36
)
 

 

 
796

 
(36
)
Municipals
1,356

 
(53
)
 

 

 
1,356

 
(53
)
Residential mortgage-backed securities
898

 
(9
)
 

 

 
898

 
(9
)
U.S. Government
139

 
(2
)
 

 

 
139

 
(2
)
Foreign Government
143

 
(6
)
 

 

 
143

 
(6
)
Total available-for-sale securities
$
18,359

 
$
(767
)
 
$

 
$

 
$
18,359

 
$
(767
)
Total number of available-for-sale securities in an unrealized loss position less than twelve months
 
 
 
 
 
 
 
 
 
 
2,049

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
 
 
 
 
 
 
 
 
 
 
2,049


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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
3,814

 
(19
)
 

 

 
3,814

 
(19
)
Hybrids
266

 
(3
)
 

 

 
266

 
(3
)
Municipals
285

 
(1
)
 

 

 
285

 
(1
)
Residential mortgage-backed securities
939

 
(3
)
 

 

 
939

 
(3
)
U.S. Government
74

 

 

 

 
74

 

Foreign Government
140

 
(1
)
 

 

 
140

 
(1
)
Total available-for-sale securities
$
7,940

 
$
(31
)
 
$

 
$

 
$
7,940

 
$
(31
)
Total number of available-for-sale securities in an unrealized loss position less than twelve months
 
 
 
 
 
 
 
 
 
 
1,182

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
 
 
 
 
 
 
 
 
 
 
1,182

At September 30, 2018 and December 31, 2017, securities in an unrealized loss position were primarily concentrated in corporate debt.
At September 30, 2018 and December 31, 2017, securities with a fair value of $5 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 and nine months ended September 30, 2018 and 2017 (Predecessor), for which a portion of the OTTI was recognized in AOCI:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
Predecessor
 
 
 
Predecessor
Beginning balance
 
$

 
$
3

 
$

 
$
3

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

 

 

 

OTTI was not previously recognized
 

 

 

 

Ending balance
 
$

 
$
3

 
$

 
$
3


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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 and nine months ended September 30, 2018 and 2017 (Predecessor):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
Predecessor
 
 
 
Predecessor
Credit impairment losses in operations
 
$

 
$

 
$
(2
)
 
$
(21
)
Change-of-intent losses in operations
 

 

 

 

Amortized cost
 

 

 

 

Fair value
 

 

 

 

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 September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
Predecessor
 
 
 
Predecessor
OTTI Recognized in Net Income (Loss)
 
 
 
 
 
 
 
 
Asset-backed securities
 
$

 
$

 
$

 
$
(1
)
Corporates
 

 

 
(2
)
 
(20
)
Other invested assets
 

 

 

 

Total
 
$

 
$

 
$
(2
)
 
$
(21
)



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Commercial Mortgage Loans
Commercial mortgage loans ("CMLs") represented approximately 2% of the Company’s total investments as of September 30, 2018 and December 31, 2017. The Company primarily invests in 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:
 
 
September 30, 2018
 
December 31, 2017
 
 
Gross Carrying Value
 
% of Total
 
Gross Carrying Value
 
% of Total
Property Type:
 
 
 
 
 
 
 
 
Hotel
 
22

 
4
%
 
22

 
4
%
Industrial - General
 
45

 
9
%
 
46

 
9
%
Industrial - Warehouse
 
12

 
2
%
 
38

 
6
%
Multifamily
 
69

 
14
%
 
70

 
13
%
Office
 
147

 
30
%
 
158

 
29
%
Retail
 
202

 
41
%
 
214

 
39
%
Total commercial mortgage loans, gross of valuation allowance
 
$
497

 
100
%
 
$
548

 
100
%
Allowance for loan loss
 

 
 
 

 
 
Total commercial mortgage loans
 
$
497

 
 
 
$
548

 
 
 
 
 
 
 
 
 
 
 
U.S. Region:
 
 
 
 
 
 
 
 
East North Central
 
$
111

 
22
%
 
$
108

 
20
%
East South Central
 
20

 
4
%
 
20

 
4
%
Middle Atlantic
 
79

 
16
%
 
85

 
15
%
Mountain
 
65

 
13
%
 
67

 
12
%
New England
 
10

 
2
%
 
14

 
3
%
Pacific
 
116

 
23
%
 
135

 
25
%
South Atlantic
 
58

 
12
%
 
65

 
12
%
West North Central
 
13

 
3
%
 
13

 
2
%
West South Central
 
25

 
5
%
 
41

 
7
%
Total commercial mortgage loans, gross of valuation allowance
 
$
497

 
100
%
 
$
548

 
100
%
Allowance for loan loss
 

 
 
 

 
 
Total commercial mortgage loans
 
$
497

 
 
 
$
548

 
 
All of the Company's investments in CMLs had a loan-to-value ("LTV") ratio of less than 75% at September 30, 2018 and December 31, 2017, as measured at inception of the loans unless otherwise updated. As of September 30, 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 September 30, 2018 and December 31, 2017:
 
Debt-Service Coverage Ratios
 
Total Amount
 
% of Total
 
Estimated Fair Value
 
% of Total
 
>1.25
 
1.00 - 1.25
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
LTV Ratios:
 
 
 
 
 
 
 
 
 
 
 
Less than 50%
$
256

 
$

 
$
256

 
52
%
 
$
252

 
52
%
50% to 60%
222

 
7

 
229

 
46
%
 
225

 
46
%
60% to 75%
12

 

 
12

 
2
%
 
11

 
2
%
Commercial mortgage loans
$
490

 
$
7

 
$
497

 
100
%
 
$
488

 
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.
Mortgage loan workouts, refinances or restructures that are classified as troubled debt restructurings ("TDRs") are individually evaluated and measured for impairment. As of September 30, 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 September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
Predecessor
 
 
 
Predecessor
Fixed maturity securities, available-for-sale
 
$
249

 
$
247

 
$
739

 
$
725

Equity securities
 
15

 
10

 
51

 
31

Commercial mortgage loans
 
5

 
5

 
17

 
17

Related party loans
 
1

 

 
1

 

Invested cash and short-term investments
 
6

 
1

 
13

 
3

Other investments
 
13

 
3

 
39

 
6

Gross investment income
 
289

 
266

 
860

 
782

Investment expense
 
(22
)
 
(5
)
 
(48
)
 
(17
)
Net investment income
 
$
267

 
$
261

 
$
812

 
$
765



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Table of Contents

Net Investment Gains (Losses)
Details underlying “Net investment gains (losses)” reported on the accompanying Condensed Consolidated Statements of Operations were as follows:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
Predecessor
 
 
 
Predecessor
Net realized gains (losses) on fixed maturity available-for-sale securities
 
$
(24
)
 
$
3

 
$
(84
)
 
$
(22
)
Realized gains (losses) on equity securities
 
(19
)
 
3

 
(48
)
 
3

Realized gains (losses) on other invested assets
 
3

 

 

 

Derivatives and embedded derivatives:
 


 


 
 
 
 
Realized gains (losses) on certain derivative instruments
 
27

 
70

 
23

 
218

Unrealized gains (losses) on certain derivative instruments
 
135

 
48

 
72

 
91

Change in fair value of reinsurance related embedded derivatives (a)
 
(3
)
 
(8
)
 
(37
)
 
(28
)
Change in fair value of other derivatives and embedded derivatives
 

 
1

 

 
3

Realized gains (losses) on derivatives and embedded derivatives
 
159

 
111

 
58

 
284

Net investment gains (losses)
 
$
119

 
$
117

 
$
(74
)
 
$
265

(a) Change in fair value of reinsurance related embedded derivatives in the successor period is due to FSRC unaffiliated third party business and the predecessor periods activity is due to the FGL and FSRC reinsurance treaty. See "Note 14. Related Party Transactions".

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 September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
Predecessor
 
 
 
Predecessor
Proceeds
 
$
662

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