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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, 2019
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, a 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
¨
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Ordinary shares, par value $.0001 per share
FG
New York Stock Exchange
Warrants to purchase ordinary shares
FG WS
New York Stock Exchange
As of April 30, 2019, there were 221,660,974 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,
2019

December 31,
2018
 
(Unaudited)
 
 
ASSETS



Investments:



Fixed maturity securities, available-for-sale, at fair value (amortized cost: March 31, 2019 - $21,908; December 31, 2018 - $22,219)
$
21,605


$
21,109

Equity securities, at fair value (cost: March 31, 2019 - $1,226; December 31, 2018 - $1,526)
1,171


1,382

Derivative investments
305


97

Mortgage loans
674


667

Other invested assets
755


662

Total investments
24,510


23,917

Cash and cash equivalents
1,357

 
571

Accrued investment income
238

 
216

Funds withheld for reinsurance receivables, at fair value
837

 
757

Reinsurance recoverable
3,113

 
3,190

Intangibles, net
1,421

 
1,359

Deferred tax assets, net
283

 
343

Goodwill
467

 
467

Other assets
220

 
125

Total assets
$
32,446

 
$
30,945

 



LIABILITIES AND SHAREHOLDERS' EQUITY



 



Contractholder funds
$
23,881


$
23,387

Future policy benefits, including $797 and $725 at fair value at March 31, 2019 and December 31, 2018, respectively
4,677


4,641

Funds withheld for reinsurance liabilities
653

 
722

Liability for policy and contract claims
70


64

Debt
541


541

Other liabilities
873


700

Total liabilities
30,695


30,055

 



Commitments and contingencies ("Note 12")



 



 Shareholders' equity:

 

Preferred stock ($.0001 par value, 100,000,000 shares authorized, 406,510 and 399,033 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively)

 

Common stock ($.0001 par value, 800,000,000 shares authorized, 221,660,974 and 221,660,974 issued and outstanding at March 31, 2019 and December 31, 2018, respectively)

 

Additional paid-in capital
2,007

 
1,998

Retained earnings (Accumulated deficit)
(6
)
 
(167
)
Accumulated other comprehensive income (loss)
(216
)
 
(937
)
Treasury stock, at cost (4,328,077 shares at March 31, 2019; 600,000 shares at December 31, 2018)
(34
)
 
(4
)
Total shareholders' equity
1,751

 
890

Total liabilities and shareholders' equity
$
32,446

 
$
30,945

 
 
 
 

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
 
March 31, 2019
 
March 31, 2018
 
(Unaudited)
 
(Unaudited)
Revenues:
 
 
 
Premiums
$
16

 
$
18

Net investment income
289

 
263

Net investment gains (losses)
240

 
(191
)
Insurance and investment product fees and other
55

 
48

Total revenues
600

 
138

Benefits and expenses:
 
 
 
Benefits and other changes in policy reserves
339

 
(39
)
Acquisition and operating expenses, net of deferrals
44

 
40

Amortization of intangibles
29

 
27

        Total benefits and expenses
412

 
28

Operating income
188

 
110

Interest expense
(8
)
 
(6
)
Income (loss) before income taxes
180

 
104

Income tax expense
(9
)
 
(39
)
        Net income (loss)
$
171

 
$
65

Less Preferred stock dividend
8

 
7

Net income (loss) available to common shareholders
$
163

 
$
58

 
 
 
 
Net income (loss) per common share:
 
 
 
Basic
$
0.74

 
$
0.27

Diluted
$
0.74

 
$
0.27

Weighted average common shares used in computing net income per common share:
 
 
 
Basic
219,645,679

 
214,370,000

Diluted
219,681,528

 
214,370,000

 
 
 
 
Cash dividend per common share
$
0.01

 
$

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

 

Net other-than-temporary impairments
(2
)
 
(2
)
Gains (losses) on derivatives and embedded derivatives
164

 
(145
)
Other investment gains (losses)
78

 
(44
)
        Total net investment gains (losses)
$
240

 
$
(191
)


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, 2019
 
March 31,
2018
 
(Unaudited)
 
(Unaudited)
Net income (loss)
$
171

 
$
65

 
 
 
 
Other comprehensive income (loss):
 
 
 
Net change in unrealized gains/losses on investments
724

 
(359
)
 
 
 
 
Change in reinsurance liabilities held at fair value resulting from a change in the instrument-specific credit risk
(3
)
 
2

 
 
 
 
Net changes to derive comprehensive income (loss) for the period
721

 
(357
)
Comprehensive income (loss), net of tax
$
892

 
$
(292
)

See accompanying notes to unaudited condensed consolidated financial statements.


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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)
 
Treasury Stock
 
Total Shareholders' Equity
Balance, December 31, 2018
 
$

 
$

 
$
1,998

 
$
(167
)
 
$
(937
)
 
$
(4
)
 
$
890

Treasury shares purchased
 

 

 

 

 

 
(30
)
 
(30
)
Dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock (paid in kind)
 

 

 
8

 
(8
)
 

 

 

Common stock ($0.01/share)
 

 

 

 
(2
)
 

 

 
(2
)
Net income (loss)
 

 

 

 
171

 

 

 
171

Unrealized investment gains (losses), net
 

 

 

 

 
724

 

 
724

Change in reinsurance liabilities held at fair value resulting from a change in the instrument-specific credit risk
 

 

 

 

 
(3
)
 

 
(3
)
Stock-based compensation
 

 

 
1

 

 

 

 
1

Balance, March 31, 2019
 
$

 
$

 
$
2,007

 
$
(6
)
 
$
(216
)
 
$
(34
)
 
$
1,751


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

 
$

 
$
2,037

 
$
(149
)
 
$
75

 
$

 
$
1,963

Dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock (paid in kind)
 

 

 
2

 
(7
)
 

 

 
(5
)
Net income (loss)
 

 

 

 
65

 

 

 
65

Unrealized investment gains (losses), net
 

 

 

 

 
(359
)
 

 
(359
)
Change in reinsurance liabilities held at fair value resulting from a change in the instrument-specific credit risk
 

 

 

 

 
2

 

 
2

Cumulative effect of changes in accounting principles
 

 

 

 
(4
)
 
4

 

 

Balance, March 31, 2018
 
$

 
$

 
$
2,039

 
$
(95
)
 
$
(278
)
 
$

 
$
1,666


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,
2019
 
March 31,
2018
 
(Unaudited)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
171

 
$
65

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Stock based compensation
1

 

Amortization
4

 
15

Deferred income taxes
5

 
12

Interest credited/index credits to contractholder account balances
308

 
(30
)
Net recognized losses (gains) on investments and derivatives
(240
)
 
191

Charges assessed to contractholders for mortality and administration
(32
)
 
(38
)
Intangibles, net
(90
)
 
(55
)
Changes in operating assets and liabilities:
 
 
 
     Reinsurance recoverable
(16
)
 
(8
)
     Future policy benefits
36

 
(40
)
  Funds withheld for reinsurers
(129
)
 
(12
)
  Collateral (returned) posted
141

 
(145
)
     Other assets and other liabilities
(63
)
 
10

Net cash provided by (used in) operating activities
96

 
(35
)
Cash flows from investing activities:
 
 
 
Proceeds from available-for-sale investments sold, matured or repaid
962

 
3,286

Proceeds from derivatives instruments and other invested assets
44

 
143

Proceeds from mortgage loans
4

 
20

Cost of available-for-sale investments
(421
)
 
(3,699
)
Costs of derivatives instruments and other invested assets
(172
)
 
(94
)
Costs of mortgage loans
(12
)
 

Capital expenditures
(1
)
 
(3
)
Contingent purchase price payment

 
(30
)
Net cash provided by (used in) investing activities
404

 
(377
)
Cash flows from financing activities:
 
 
 
Treasury stock
(30
)
 

Draw on revolving credit facility

 
30

Dividends paid
(2
)
 

Contractholder account deposits
1,225

 
959

Contractholder account withdrawals
(907
)
 
(635
)
Net cash provided by (used in) financing activities
286

 
354

Change in cash & cash equivalents
786

 
(58
)
Cash & cash equivalents, beginning of period
571

 
1,215

Cash & cash equivalents, end of period
$
1,357

 
$
1,157

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$

 
$
2

Income taxes (refunded) paid
$
(1
)
 
$
(30
)
Deferred sales inducements
$
35

 
$
26


See accompanying notes to unaudited condensed consolidated financial statements.

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FGL HOLDINGS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (In millions)
(1) Basis of Presentation
FGL Holdings (the “Company”), a Cayman Islands exempted 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.
F&G Reinsurance Ltd (“F&G Re”), an exempted company incorporated in Bermuda with limited liability, provides a platform for non-affiliated international business. Front Street Re Cayman Ltd (“FSRC”), an exempted company incorporated in the Cayman Islands with limited liability, has a license to carry on business as an Unrestricted Class “B” Insurer that permits FSRC to conduct offshore direct and reinsurance business. F&G Re and FSRC (together herein referred to as the “F&G Reinsurance Companies”), are indirect wholly owned subsidiaries of FGL Holdings and parties to reinsurance transactions.
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 2018 Form 10-K, should be read in connection with the reading of these interim unaudited condensed consolidated financial statements.
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, 2019, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019.  Amounts reclassified out of other comprehensive income are reflected in net investment gains in the unaudited Condensed Consolidated Statements of Operations.
Dollar amounts in the accompanying sections are presented in millions, unless otherwise noted.
(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 March 31, 2019. See "Note 4. Investments" to the Company’s unaudited condensed consolidated financial statements for additional information on the Company’s investments in unconsolidated VIEs.

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Reclassifications and Retrospective Adjustments
The Company identified immaterial errors, as described below, during the period ended September 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 immaterial corrections to the Consolidated Statement of Operations for the three months ended March 31, 2018 by decreasing the benefits and other changes in policy reserves by $21, as well as increasing the amortization of intangibles by $4, and income tax expense by $4.
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.
Adoption of New Accounting Pronouncements
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued new guidance on the amortization of callable securities (ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities), effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The ASU requires premiums paid on purchased debt securities with an explicit call option to be amortized to the earliest call date, as opposed to the maturity date (as under current GAAP). The updated guidance is applicable to instruments that are callable based on explicit, non-contingent call features that are callable at fixed prices on preset dates. The amendments in this update should be applied using the modified retrospective method through a cumulative effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted this new accounting guidance effective January 1, 2019, as required, and it had an immaterial impact on its unaudited condensed consolidated financial statements.
Amendments to Lease Accounting
In February 2016, the FASB issued amended guidance (ASU 2016-02, Leases (Topic 842)), effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Notable amendments in this update will:
require entities to recognize the rights and obligations resulting from all leases or lease components of contracts, including operating leases, as lease assets and lease liabilities, with an exception allowed for leases with a term of 12 months or less
create a distinction between finance leases and operating leases, with classification criteria substantially similar to that for distinguishing between capital leases and operating leases under previous guidance
not retain the accounting model for leveraged leases under previous guidance for leases that commence after the effective date of ASU 2016-02
provide additional guidance on separating the lease components from the nonlease components of a contract
require qualitative disclosures along with specific quantitative disclosures to provide information regarding the amount, timing, and uncertainty of cash flows arising from leases
include modifications to align lessor accounting with the changes to lessee accounting, as well as changes to the requirements of recognizing a transaction as a sale and leaseback transaction, however, these changes will have no impact on the Company's current lease arrangements
The amendments are required to be applied at the beginning of the earliest period presented using a modified retrospective approach (including several optional practical expedients related to leases commenced before the effective date). The Company has adopted this standard effective January 1, 2019, as required, and it had an immaterial impact on its unaudited condensed consolidated financial statements.

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Future Accounting Pronouncements
Accounting pronouncements that will impact the Company in future periods have been disclosed in the Company’s 2018 Form 10-K. There have not been any additional accounting pronouncements issued during the quarter ended March 31, 2019 that are expected to impact the Company. The following two pronouncements were discussed in our 2018 Form 10-K but have been included below so as to provide an update on the Company’s status of adoption.
New Credit Loss Standard
In June 2016, the FASB issued new guidance (ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments), effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Notable amendments in this update will change the accounting for impairment of most financial assets and certain other instruments in the following ways:
financial assets (or a group of financial assets) measured at amortized cost will be required to be presented at the net amount expected to be collected, with an allowance for credit losses deducted from the amortized cost basis, resulting in a net carrying value that reflects the amount the entity expects to collect on the financial asset at purchase
credit losses relating to AFS fixed maturity securities will be recorded through an allowance for credit losses, rather than reductions in the amortized cost of the securities. The allowance methodology recognizes that value may be realized either through collection of contractual cash flows or through the sale of the security. Therefore, the amount of the allowance for credit losses will be limited to the amount by which fair value is below amortized cost because the classification as available for sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value
the income statement will reflect the measurement of expected credit losses for newly recognized financial assets as well as the expected increases or decreases (including the reversal of previously recognized losses) of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount
disclosures will be required to include information around how the credit loss allowance was developed, further details on information currently disclosed about credit quality of financing receivables and net investments in leases, and a rollforward of the allowance for credit losses for AFS fixed maturity securities as well as an aging analysis for securities that are past due
The amendments in this ASU may be early adopted during any interim or annual period beginning after December 15, 2018, however the Company has elected not to. 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 has developed a project plan to complete our adoption of this new standard, and is evaluating the impact of the new guidance on its consolidated financial statements.
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
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

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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 does not currently expect to early adopt this standard. The Company has identified specific areas that will be 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 as well as the impact of the new guidance on its consolidated financial statements.

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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 March 31, 2019 and December 31, 2018, 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 $2,348 or 10% and $2,491 or 10%, respectively, of the invested assets portfolio and an amortized cost of $2,416 and $2,691, respectively. As of March 31, 2019, the Company’s holdings in this industry include investments in 107 different issuers with the top ten investments accounting for 35% of the total holdings in this industry. As of March 31, 2019 the Company had no investments in issuers that exceeded 10% of shareholders' equity. As of December 31, 2018, the Company had 16 investments in issuers that exceeded 10% of shareholders' equity, with a total fair value of $1,634 or 7% of the invested assets portfolio: JP Morgan Chase & Co, Metropolitan Transportation Authority (NY), AT&T Inc, HSBC Holdings, Wells Fargo & Company, General Motors Co, Nationwide Mutual Insurance Company, Goldman Sachs Group Inc, United Mexican States, Energy Transfer Partners, Prudential Financial Inc, Citigroup Inc, HP Enterprise Co, Viacom Inc, Kinder Morgan Energy Partners, and Fuel Trust. The Company's largest concentration in any single issuer as of March 31, 2019 and December 31, 2018 was AT&T and JP Morgan Chase & Co, respectively, with a total fair value of $124 or 1% and $115 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 risk with third party reinsurers, Wilton Reassurance Company (“Wilton Re”) and Kubera Insurance (SAC) Ltd. acting in respect of Annuity Reinsurance Cell A1 ("Kubera") that could have a material impact on the Company’s financial position in the event that Wilton

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Re or Kubera fail 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, 2019. Kubera is not rated, however, management has attempted to mitigate the risk of non-performance through the funds withheld arrangement. As of March 31, 2019, the net amount recoverable from Wilton Re was $1,541 and the net amount recoverable from Kubera was $681. The Company monitors both the financial condition of individual reinsurers and risk concentration arising from similar activities and economic characteristics of reinsurers to attempt to reduce the risk of default by such reinsurers. Wilton Re and Kubera are current on all amounts due as of March 31, 2019.
On March 6, 2019, Scottish Re (U.S.), Inc. (“SRUS”), a Delaware domestic life and health reinsurer of FGL Insurance, was ordered into receivership for purposes rehabilitation. As of March 31, 2019, the net amount recoverable from SRUS was $47. The financial exposure related to these ceded reserves are substantially mitigated via a reinsurance agreement whereby Wilton Re assumes treaty non-performance including credit risk for this business.




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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 March 31, 2019 and December 31, 2018 are summarized as follows:
 
March 31, 2019
 
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Carrying Value
Available-for sale securities
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
5,033

 
$
23

 
$
(82
)
 
$
4,974

 
$
4,974

Commercial mortgage-backed securities
2,596

 
60

 
(9
)
 
2,647

 
2,647

Corporates
10,886

 
60

 
(356
)
 
10,590

 
10,590

Hybrids
988

 
6

 
(33
)
 
961

 
961

Municipals
1,211

 
16

 
(10
)
 
1,217

 
1,217

Residential mortgage-backed securities
1,000

 
27

 
(5
)
 
1,022

 
1,022

U.S. Government
56

 

 

 
56

 
56

Foreign Governments
138

 
2

 
(2
)
 
138

 
138

Total available-for-sale securities
21,908

 
194

 
(497
)
 
21,605

 
21,605

Equity securities
1,226

 
3

 
(58
)
 
1,171

 
1,171

Derivative investments
318

 
74

 
(87
)
 
305

 
305

Commercial mortgage loans
479

 

 

 
485

 
479

Residential mortgage loans
195

 

 

 
199

 
195

Other invested assets
759

 

 
(4
)
 
744

 
755

Total investments
$
24,885

 
$
271

 
$
(646
)
 
$
24,509

 
$
24,510

 
December 31, 2018
 
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Carrying Value
Available-for sale securities
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
4,954

 
$
15

 
$
(137
)
 
$
4,832

 
$
4,832

Commercial mortgage-backed securities
2,568

 
9

 
(40
)
 
2,537

 
2,537

Corporates
11,213

 
16

 
(848
)
 
10,381

 
10,381

Hybrids
992

 

 
(91
)
 
901

 
901

Municipals
1,216

 
3

 
(32
)
 
1,187

 
1,187

Residential mortgage-backed securities
1,027

 
12

 
(8
)
 
1,031

 
1,031

U.S. Government
120

 

 
(1
)
 
119

 
119

Foreign Governments
129

 

 
(8
)
 
121

 
121

Total available-for-sale securities
22,219

 
55

 
(1,165
)
 
21,109

 
21,109

Equity securities
1,526

 
1

 
(145
)
 
1,382

 
1,382

Derivative investments
330

 
2

 
(235
)
 
97

 
97

Commercial mortgage loans
482

 

 

 
483

 
482

Residential mortgage loans
185

 

 

 
187

 
185

Other invested assets
662

 

 

 
651

 
662

Total investments
$
25,404

 
$
58

 
$
(1,545
)
 
$
23,909

 
$
23,917


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Table of Contents

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") for both March 31, 2019 and December 31, 2018.
Securities held on deposit with various state regulatory authorities had a fair value of $16,135 and $19,930 at March 31, 2019 and December 31, 2018, respectively. Under Iowa regulations, insurance companies are required to hold securities on deposit in an amount no less than the legal reserve.
At March 31, 2019 and December 31, 2018, 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 $1,186 and $1,401 at March 31, 2019 and December 31, 2018, 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, 2019
 
Amortized Cost
 
 Fair Value
Corporates, Non-structured Hybrids, Municipal and Government securities:
 
 
 
Due in one year or less
$
160

 
$
160

Due after one year through five years
758

 
749

Due after five years through ten years
2,080

 
2,059

Due after ten years
10,281

 
9,994

Subtotal
13,279

 
12,962

Other securities which provide for periodic payments:
 
 
 
Asset-backed securities
5,033

 
4,974

Commercial mortgage-backed securities
2,596

 
2,647

Residential mortgage-backed securities
1,000

 
1,022

Subtotal
8,629

 
8,643

Total fixed maturity available-for-sale securities
$
21,908

 
$
21,605

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 2018 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. Additionally, the Company considers other factors, including, but not limited to: whether the issuer is currently meeting its financial obligations and its ability to continue to meet these obligations, its existing cash available, and its access to additional available capital. 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 the unrealized losses as of March 31, 2019 decreased due to lower interest rates during the first quarter in conjunction with tighter credit spreads over Treasuries.

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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, 2019
 
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
$
2,696

 
$
(63
)
 
$
886

 
$
(19
)
 
$
3,582

 
$
(82
)
Commercial mortgage-backed securities
243

 
(4
)
 
250

 
(5
)
 
493

 
(9
)
Corporates
684

 
(15
)
 
7,227

 
(341
)
 
7,911

 
(356
)
Hybrids
333

 
(14
)
 
343

 
(19
)
 
676

 
(33
)
Municipals
45

 

 
482

 
(10
)
 
527

 
(10
)
Residential mortgage-backed securities
41

 
(1
)
 
238

 
(4
)
 
279

 
(5
)
U.S. Government

 

 
50

 

 
50

 

Foreign Government

 

 
81

 
(2
)
 
81

 
(2
)
Total available-for-sale securities
$
4,042

 
$
(97
)
 
$
9,557

 
$
(400
)
 
$
13,599

 
$
(497
)
Total number of available-for-sale securities in an unrealized loss position less than twelve months
 
 
 
 
 
 
 
 
 
 
468

Total number of available-for-sale securities in an unrealized loss position twelve months or longer
 
 
 
 
 
 
 
 
 
 
1164

Total number of available-for-sale securities in an unrealized loss position
 
 
 
 
 
 
 
 
 
 
1,632


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Table of Contents


 
December 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
$
2,924

 
$
(116
)
 
$
643

 
$
(21
)
 
$
3,567

 
$
(137
)
Commercial mortgage-backed securities
1,466

 
(34
)
 
262

 
(6
)
 
1,728

 
(40
)
Corporates
8,016

 
(772
)
 
1,465

 
(76
)
 
9,481

 
(848
)
Hybrids
858

 
(90
)
 
7

 
(1
)
 
865

 
(91
)
Municipals
850

 
(27
)
 
172

 
(5
)
 
1,022

 
(32
)
Residential mortgage-backed securities
139

 
(3
)
 
190

 
(5
)
 
329

 
(8
)
U.S. Government
69

 

 
50

 
(1
)
 
119

 
(1
)
Foreign Government
47

 
(3
)
 
68

 
(5
)
 
115

 
(8
)
Total available-for-sale securities
$
14,369

 
$
(1,045
)
 
$
2,857

 
$
(120
)
 
$
17,226

 
$
(1,165
)
Total number of available-for-sale securities in an unrealized loss position less than twelve months
 
 
 
 
 
 
 
 
 
 
1,551

Total number of available-for-sale securities in an unrealized loss position twelve months or longer
 
 
 
 
 
 
 
 
 
 
556

Total number of available-for-sale securities in an unrealized loss position
 
 
 
 
 
 
 
 
 
 
2,107

At March 31, 2019 and December 31, 2018, securities in an unrealized loss position were primarily concentrated in corporate debt.
At March 31, 2019 and December 31, 2018, securities with a fair value of $40 and $132, 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, 2019 and 2018, for which a portion of the OTTI was recognized in AOCI:
 
Three months ended
 
March 31, 2019
 
March 31, 2018
Beginning balance
$

 
$

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

 

OTTI was not previously recognized

 

Ending balance
$

 
$


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Table of Contents

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, 2019 and 2018:
 
Three months ended
 
March 31, 2019
 
March 31, 2018
Credit impairment losses in operations
$
(2
)
 
$
(2
)
Change-of-intent losses in operations

 

Amortized cost
1

 

Fair value
1

 

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, 2019
 
March 31, 2018
Corporates
(2
)
 
(2
)
Total
$
(2
)
 
$
(2
)



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Table of Contents

Mortgage Loans
The Company's mortgage loans are collateralized by commercial and residential properties.
Commercial Mortgage Loans
Commercial mortgage loans ("CMLs") represented approximately 2% of the Company’s total investments as of March 31, 2019 and December 31, 2018. 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:
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying Value
 
% of Total
 
Gross Carrying Value
 
% of Total
Property Type:
 
 
 
 
 
 
 
Hotel
21

 
4
%
 
21

 
4
%
Industrial - General
37

 
8
%
 
37

 
8
%
Industrial - Warehouse
20

 
4
%
 
20

 
4
%
Multifamily
55

 
11
%
 
56

 
12
%
Office
146

 
31
%
 
147

 
30
%
Retail
200

 
42
%
 
201

 
42
%
Total commercial mortgage loans, gross of valuation allowance
$
479

 
100
%
 
$
482

 
100
%
Allowance for loan loss

 
 
 

 
 
Total commercial mortgage loans
$
479

 
 
 
$
482

 
 
 
 
 
 
 
 
 
 
U.S. Region:
 
 
 
 
 
 
 
East North Central
$
97

 
20
%
 
$
98

 
20
%
East South Central
19

 
4
%
 
19

 
4
%
Middle Atlantic
78

 
16
%
 
79

 
17
%
Mountain
65

 
14
%
 
65

 
13
%
New England
10

 
2
%
 
10

 
2
%
Pacific
115

 
24
%
 
116

 
24
%
South Atlantic
57

 
12
%
 
57

 
12
%
West North Central
13

 
3
%
 
13

 
3
%
West South Central
25

 
5
%
 
25

 
5
%
Total commercial mortgage loans, gross of valuation allowance
$
479

 
100
%
 
$
482

 
100
%
Allowance for loan loss

 
 
 

 
 
Total commercial mortgage loans
$
479

 
 
 
$
482

 
 
All of the Company's investments in CMLs had a loan-to-value ("LTV") ratio of less than 75% at March 31, 2019 and December 31, 2018, as measured at inception of the loans unless otherwise updated. As of March 31, 2019, 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, 2019 and December 31, 2018:
 
Debt-Service Coverage Ratios
 
Total Amount
 
% of Total
 
Estimated Fair Value
 
% of Total
 
>1.25
 
1.00 - 1.25
 
 
 
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
LTV Ratios:
 
 
 
 
 
 
 
 
 
 
 
Less than 50%
$
299

 
$
6

 
$
305

 
64
%
 
$
309

 
64
%
50% to 60%
163

 

 
163

 
34
%
 
165

 
34
%
60% to 75%
11

 

 
11

 
2
%
 
11

 
2
%
Commercial mortgage loans
$
473

 
$
6

 
$
479

 
100
%
 
$
485

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
LTV Ratios:
 
 
 
 
 
 
 
 
 
 
 
Less than 50%
$
296

 
$
6

 
$
302

 
63
%
 
$
302

 
63
%
50% to 60%
169

 

 
169

 
35
%
 
170

 
35
%
60% to 75%
11

 

 
11

 
2
%
 
11

 
2
%
Commercial mortgage loans
$
476

 
$
6

 
$
482

 
100
%
 
$
483

 
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. The Company believes that the LTV ratio is an indicator of the principal recovery risk for loans that default. A higher LTV ratio will result in a higher allowance. The Company believes that the DSC ratio is an indicator of default risk on loans. A higher DSC ratio will result in a lower allowance.
The Company recognizes a mortgage loan as delinquent when payments on the loan are greater than 30 days past due. At March 31, 2019 and December 31, 2018, the Company had no CMLs that were delinquent in principal or interest payments.
Mortgage loan workouts, refinances or restructures that are classified as troubled debt restructurings ("TDRs") are individually evaluated and measured for impairment. As of March 31, 2019 and December 31, 2018, our CML portfolio had no impairments, modifications or TDRs.
Residential Mortgage Loans
Residential mortgage loans ("RMLs") represented approximately 1% of the Company’s total investments as of March 31, 2019 and December 31, 2018. The Company's residential mortgage loans are closed end, amortizing loans. 100% of the properties are located in the United States. The Company diversifies its RML portfolio by state to attempt to reduce concentration risk. The distribution of RMLs by state with highest-to-lowest concentration are reflected in the following tables:
 
March 31, 2019
US State:
Unpaid Principal Balance
 
% of Total
Illinois
$
29

 
15
%
Florida
25

 
13
%
South Carolina
24

 
13
%
All Other States (a)
112

 
59
%
Total mortgage loans
$
190

 
100
%
(a) The individual concentration of each state is less than 9% as of March 31, 2019.

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Table of Contents

 
December 31, 2018
US State:
Unpaid Principal Balance
 
% of Total
Florida
$
25

 
14
%
Illinois
24

 
13
%
New Jersey
17

 
9
%
All Other States (a)
114

 
64
%
Total mortgage loans
$
180

 
100
%
(a) The individual concentration of each state is less than 9% as of December 31, 2018.

Residential mortgage loans have a primary credit quality indicator of either a performing or nonperforming loan. The Company defines non-performing residential mortgage loans as those that are 90 or more days past due and/or in nonaccrual status which is assessed monthly. The credit quality of RMLs as at March 31, 2019 and December 31, 2018, respectively, was as follows:
 
March 31, 2019
 
December 31, 2018
Performance indicators:
Carrying Value
 
% of Total
 
Carrying Value
 
% of Total
Performing
$
195

 
100
%
 
$
185

 
100
%
Non-performing

 
%
 

 
%
Total residential mortgage loans, gross of valuation allowance
$
195

 
100
%
 
$
185

 
100
%
Allowance for loan loss

 
%
 

 
%
Total residential mortgage loans
$
195

 
100
%
 
$
185

 
100
%
Net Investment Income
The major sources of “Net investment income” on the accompanying unaudited Condensed Consolidated Statements of Operations were as follows:
 
Three months ended
 
March 31, 2019
 
March 31, 2018
Fixed maturity securities, available-for-sale
$
265

 
$
242

Equity securities
21

 
10

Mortgage loans
7

 
7

Invested cash and short-term investments
3

 
3

Funds withheld
8

 
7

Limited partnerships
8

 
3

Other investments
5

 
1

Gross investment income
317

 
273

Investment expense
(28
)
 
(10
)
Net investment income
$
289

 
$
263



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Table of Contents

Net Investment Gains (Losses)
Details underlying “Net investment gains (losses)” reported on the accompanying unaudited Condensed Consolidated Statements of Operations were as follows:
 
Three months ended
 
March 31, 2019
 
March 31, 2018
Net realized gains (losses) on fixed maturity available-for-sale securities
$
(3
)
 
$
(37
)
Net realized/unrealized gains (losses) on equity securities
78

 
(6
)
Realized gains (losses) on other invested assets
1

 
(3
)
Derivatives and embedded derivatives:
 
 
 
Realized gains (losses) on certain derivative instruments
(26
)
 
11

Unrealized gains (losses) on certain derivative instruments
190

 
(135
)
Change in fair value of reinsurance related embedded derivatives (a)
(3
)
 
(21
)
Change in fair value of other derivatives and embedded derivatives
3

 

Realized gains (losses) on derivatives and embedded derivatives
164

 
(145
)
Net investment gains (losses)
$
240

 
$
(191
)
(a) Change in fair value of reinsurance related embedded derivatives is due to F&G Re and FSRC unaffiliated third party business.

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, 2019
 
March 31, 2018
Proceeds
$
474

 
$
2,778

Gross gains
5

 
8

Gross losses
(10
)
 
(43
)
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 substantive 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 $54 as of March 31, 2019.
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, 2019, the Company's maximum exposure to loss was $595 in recorded carrying value and $1,093 in unfunded commitments.


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Table of Contents

(5) Derivative Financial Instruments
The carrying amounts of derivative instruments, including derivative instruments embedded in FIA contracts, is as follows:
 
March 31, 2019
 
December 31, 2018
Assets:
 
 
 
Derivative investments:
 
 
 
Call options
$
304

 
$
97

Futures contracts
1

 

Other invested assets:
 
 
 
Other derivatives and embedded derivatives
17

 
14

 
$
322

 
$
111

Liabilities:
 
 
 
Contractholder funds:
 
 
 
FIA embedded derivative
$
2,720

 
$
2,476

Other liabilities:
 
 
 
Preferred shares reimbursement feature embedded derivative
27

 
29

 
$
2,747

 
$
2,505

 
The change in fair value of derivative instruments included in the accompanying unaudited Condensed Consolidated Statements of Operations is as follows:
 
Three months ended
 
March 31, 2019
 
March 31, 2018
Revenues:
 
 
 
Net investment gains (losses):
 
 
 
Call options
$
154

 
$
(122
)
Futures contracts
8

 
(2
)
Foreign currency forward
2

 

Other derivatives and embedded derivatives
3

 

Reinsurance related embedded derivatives
(3
)
 
(21
)
Total net investment gains (losses)
$
164

 
$
(145
)
 
 
 
 
Benefits and other changes in policy reserves:
 
 
 
FIA embedded derivatives
$
244

 
$
(98
)
 
 
 
 
Acquisition and operating expenses, net of deferrals:
 
 
 
Preferred shares reimbursement feature embedded derivative
$
2

 
$
(1
)
Additional Disclosures
Other Derivatives and Embedded Derivatives
The Company holds 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, 2019, the fair value of the fund-linked note and embedded derivative were $27 and $17, respectively. At December 31, 2018, the fair value of the fund-linked note and embedded derivative were $26 and $14, 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".

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Fixed Index Annuity ("FIA") Embedded Derivative and Call Options and Futures
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 unaudited 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, 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 this derivative are recognized within “Acquisition and operating expenses, net of deferrals” in the accompanying unaudited Condensed Consolidated Statements of Operations.

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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, 2019
Counterparty
Credit Rating
(Fitch/Moody's/S&P) (a)
 
Notional
Amount
 
Fair Value
 
Collateral
 
Net Credit Risk
Merrill Lynch
 A+/*/A+
 
$
3,496

 
$
70

 
$
25

 
$
45

Deutsche Bank
 A-/A3/BBB+
 
1,151

 
14

 
14

 

Morgan Stanley
 */A1/A+
 
1,657

 
25

 
24

 
1

Barclay's Bank
 A+/A2/A
 
2,752

 
79

 
61

 
18

Canadian Imperial Bank of Commerce
 */Aa2/A+
 
1,430

 
41

 
29

 
12

Wells Fargo
 A+/A2/A-
 
2,034

 
58

 
56

 
2

Goldman Sachs
A/A3/BBB+
 
1,030

 
17

 
16

 
1

Total
 
 
$
13,550

 
$
304

 
$
225

 
$
79

 
 
 
December 31, 2018
Counterparty
Credit Rating
(Fitch/Moody's/S&P) (a)
 
Notional
Amount
 
Fair Value
 
Collateral
 
Net Credit Risk
Merrill Lynch
 A+/*/A+
 
$
3,952

 
$
25

 
$

 
$
25

Deutsche Bank
 A-/A3/BBB+
 
1,327

 
5

 
6

 
(1
)
Morgan Stanley
 */A1/A+
 
1,648

 
9

 
6

 
3

Barclay's Bank
 A+/A2/A
 
2,205

 
27

 
20

 
7

Canadian Imperial Bank of Commerce
 */Aa2/A+
 
1,716

 
11

 
8

 
3

Wells Fargo
 A+/A2/A-
 
1,635

 
17

 
16

 
1

Goldman Sachs
A/A3/BBB+
 
647

 
3

 
3

 

Total
 
 
$
13,130

 
$
97

 
$
59

 
$
38

(a) An * represents credit ratings that were not available.

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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 option 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 option contracts. The Company's current rating doesn't allow any counterparty the right to terminate ISDA agreements. 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. For all counterparties, except one, this threshold is set to zero. As of March 31, 2019 and December 31, 2018, counterparties posted $225 and $59 of collateral, respectively, of which $200 and $59 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 $25 and $0 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, 2019 and December 31, 2018, 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 $79 and $38 at March 31, 2019 and December 31, 2018, 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.  The Company reinvests 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 774 and 664 futures contracts at March 31, 2019 and December 31, 2018, 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 Consolidated Balance Sheets. The amount of cash collateral held by the counterparties for such contracts was $4 and $3 at March 31, 2019 and December 31, 2018, respectively.
    

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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 or liability in the absence of a principal market as opposed to the price that would be paid to acquire the asset or assume 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 lowest 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. In addition to the unobservable inputs, Level 3 fair value investments may include 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, 2019
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Carrying Amount
Assets