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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020March 31, 2021
or
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-20501000-20501
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Equitable Financial Life Insurance Company
(Exact name of registrant as specified in its charter)
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| New York | | 13-5570651 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1290 Avenue of the Americas, New York, New York 10104
(Address of principal executive offices) (Zip Code)
(212) 554-1234
(Registrant’s telephone number, including area code)
AXA Equitable Life Insurance Company
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 ☒ 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 ☒ 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 definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☐ | 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 ☐ No ☒
As of August 3, 2020,May 6, 2021, 2,000,000 shares of the registrant’s Common Stock , $1.25 par value Common Stock were outstanding, all of which were owned indirectly by Equitable Holdings, Inc.
REDUCED DISCLOSURE FORMAT
Equitable Financial Life Insurance Company meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
See Notes to Consolidated Financial Statements (Unaudited).
TABLE OF CONTENTS
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| PART I - FINANCIAL INFORMATION | | | |
| Consolidated Financial Statements | | | |
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| Note 9 - Income Taxes | |
| Note 10 - Related Party Transactions | |
| Note 11 - Equity | |
| Note 12 - Redeemable Noncontrolling Interest | |
| Note 13 - Commitments and Contingent Liabilities | |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | |
| Quantitative and Qualitative Disclosures About Market Risk | | | |
| Controls and Procedures | | | |
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| PART II - OTHER INFORMATION | | | |
| Item 1. | Legal Proceedings | | | |
| Item 1A. | Risk Factors | | | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | | | |
| Item 3. | Defaults Upon Senior Securities | | | |
| Item 4. | Mine Safety Disclosures | | | |
| Item 5. | Other Information | | | |
| Item 6. | Exhibits | | | |
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NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
Certain of the statements included or incorporated by reference in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “intends,” “seeks,” “aims,” “plans,” “assumes,” “estimates,” “projects,” “should,” “would,” “could,” “may,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Equitable Financial Life Insurance Company (“Equitable Financial”) and its consolidated subsidiaries. “We,” “us” and “our” refer to Equitable Financial and its consolidated subsidiaries, unless the context refers only to Equitable Financial as a corporate entity. There can be no assurance that future developments affecting Equitable Financial will be those anticipated by management. Forward-looking statements include, without limitation, all matters that are not historical facts.
These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (i) conditions in the financial markets and economy, including the impact of COVID-19 and related economic conditions, equity market declines and volatility, interest rate fluctuations and changes in liquidity and, access to and cost of capital and the impact of COVID-19 and related economic conditions;capital; (ii) operational factors, remediation of our material weakness, indebtedness, protection of confidential customer information or proprietary business information, information systems failing or being compromised,operational failures, our separation and rebranding, strong industry competitionservice providers, and catastrophic events, such as the outbreak of pandemic diseases including COVID-19; (iii) credit, counterparties and investments, including counterparty default on derivative contracts, failure of financial institutions, defaults errors or omissions by third parties and affiliates and gross unrealized losses on fixed maturity and equity securities; (iv) our reinsurance and hedging programs; (v) our products, structure and product distribution, including variable annuity guaranteed benefits features within certain of our products, complex regulation and administration of our products, variations in statutory capital requirements, financial strength and claims-paying ratings and key product distribution relationships; (vi) estimates, assumptions and valuations, including risk management policies and procedures, potential inadequacy of reserves, actual mortality, longevity, morbidity and lapse experience differing from pricing expectations or reserves, amortization of Deferred Policy Acquisition Costs (“DAC”)deferred acquisition costs and financial models; and (vii) legal and regulatory risks, including federal and state legislation affecting financial institutions, insurance regulation and tax reform.
Forward-looking statements should be read in conjunction with the other cautionary statements, risks, uncertainties and other factors identified in Equitable Financial’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, as amended or supplemented in our subsequently filed Quarterly Reports on Form 10-Q, including in the section entitled “Risk Factors,” and elsewhere in this Quarterly Report on Form 10-Q. You should read this Form 10-Q completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this Form 10-Q are qualified by these cautionary statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by law.
Other risks, uncertainties and factors, including those discussed under “Risk Factors”, in our Annual Report on Form 10-K could cause our actual results to differ materially from those projected in any forward-looking statements we make. Readers should read carefully the factors described in “Risk Factors” in our Annual Report on Form 10-K to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.
Throughout this Quarterly Report on Form 10-Q we use certain defined terms and abbreviations, which are summarized in the “Glossary” and “Acronyms” sections.
Part I FINANCIAL INFORMATION
Item 1.Consolidated Financial Statements
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Consolidated Balance Sheets
June 30, 2020March 31, 2021 (Unaudited) and December 31, 20192020
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| (in millions, except share data) | | |
| ASSETS | | | |
| Investments: | | | |
| Fixed maturities available-for-sale, at fair value (amortized cost of $63,615 and $59,278) (allowance for credit losses of $13 at June 30, 2020) | $ | 71,822 | | | $ | 62,362 | |
| Mortgage loans on real estate (net of allowance for credit losses of $66 at June 30, 2020) | 12,506 | | | 12,090 | |
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| Policy loans | 3,225 | | | 3,270 | |
| Other equity investments (1) | 1,154 | | | 1,149 | |
| Trading securities, at fair value | 6,141 | | | 6,598 | |
| Other invested assets | 1,962 | | | 2,156 | |
| Total investments | 96,810 | | | 87,625 | |
| Cash and cash equivalents | 4,318 | | | 1,492 | |
| Deferred policy acquisition costs | 3,746 | | | 4,337 | |
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| Amounts due from reinsurers (allowance for credit losses of $6 at June 30, 2020) | 3,032 | | | 3,001 | |
| Loans to affiliates | 1,200 | | | 1,200 | |
| GMIB reinsurance contract asset, at fair value | 3,433 | | | 2,466 | |
| Current and deferred income taxes | — | | | 224 | |
| Other assets | 3,071 | | | 3,050 | |
| Separate Accounts assets | 116,768 | | | 124,646 | |
| Total Assets | $ | 232,378 | | | $ | 228,041 | |
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| LIABILITIES | | | |
| Policyholders’ account balances | $ | 55,732 | | | $ | 55,421 | |
| Future policy benefits and other policyholders' liabilities | 41,382 | | | 33,976 | |
| Broker-dealer related payables | 647 | | | 428 | |
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| Amounts due to reinsurers | 96 | | | 105 | |
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| Current and deferred income taxes | 1,020 | | | — | |
| Other liabilities | 1,531 | | | 1,768 | |
| Separate Accounts liabilities | 116,768 | | | 124,646 | |
| Total Liabilities | $ | 217,176 | | | $ | 216,344 | |
| Redeemable noncontrolling interest (2) | $ | 36 | | | $ | 39 | |
| Commitments and contingent liabilities (Note 13) |
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| EQUITY | | | |
| Equity attributable to Equitable Financial: | | | |
| Common stock, $1.25 par value; 2,000,000 shares authorized, issued and outstanding | $ | 2 | | | $ | 2 | |
| Additional paid-in capital | 7,821 | | | 7,809 | |
| Retained earnings | 2,658 | | | 2,242 | |
| Accumulated other comprehensive income (loss) | 4,676 | | | 1,592 | |
| Total equity attributable to Equitable Financial | 15,157 | | | 11,645 | |
| Noncontrolling interest | 9 | | | 13 | |
| Total Equity | 15,166 | | | 11,658 | |
| Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 232,378 | | | $ | 228,041 | |
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| March 31, 2021 | | December 31, 2020 |
| (in millions, except share data) |
| ASSETS | |
| Investments: | | | |
| Fixed maturities available-for-sale, at fair value (amortized cost of $68,927 and $68,136) (allowance for credit losses of $19 and $13) | $ | 72,032 | | | $ | 76,353 | |
| Mortgage loans on real estate (net of allowance for credit losses of $74 and $81) | 13,263 | | | 13,142 | |
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| Policy loans | 3,603 | | | 3,635 | |
| Other equity investments (1) | 2,280 | | | 1,342 | |
| Trading securities, at fair value | 4,662 | | | 5,340 | |
| Other invested assets | 2,548 | | | 2,383 | |
| Total investments | 98,388 | | | 102,195 | |
| Cash and cash equivalents | 3,217 | | | 2,043 | |
| Deferred policy acquisition costs | 4,076 | | | 3,816 | |
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| Amounts due from reinsurers (allowance for credit losses of $5 and $5 ) | 3,057 | | | 3,053 | |
| Loans to affiliates | 900 | | | 900 | |
| GMIB reinsurance contract asset, at fair value | 2,133 | | | 2,859 | |
| Current and deferred income taxes | 1,184 | | | 0 | |
| Other assets | 3,159 | | | 3,078 | |
| Separate Accounts assets | 137,070 | | | 133,350 | |
| Total Assets | $ | 253,184 | | | $ | 251,294 | |
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| LIABILITIES | | | |
| Policyholders’ account balances | $ | 69,550 | | | $ | 63,109 | |
| Future policy benefits and other policyholders' liabilities | 35,934 | | | 40,151 | |
| Broker-dealer related payables | 1,704 | | | 1,064 | |
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| Amounts due to reinsurers | 77 | | | 122 | |
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| Current and deferred income taxes | 0 | | | 234 | |
| Other liabilities | 1,894 | | | 1,580 | |
| Separate Accounts liabilities | 137,070 | | | 133,350 | |
| Total Liabilities | $ | 246,229 | | | $ | 239,610 | |
| Redeemable noncontrolling interest (2) | $ | 48 | | | $ | 41 | |
| Commitments and contingent liabilities (Note 12) | 0 | | 0 |
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| EQUITY | | | |
| Equity attributable to Equitable Financial: | | | |
| Common stock, $1.25 par value; 2,000,000 shares authorized, issued and outstanding | $ | 2 | | | $ | 2 | |
| Additional paid-in capital | 7,827 | | | 7,841 | |
| Retained earnings | (2,403) | | | (795) | |
| Accumulated other comprehensive income (loss) | 1,481 | | | 4,595 | |
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| Total Equity | 6,907 | | | 11,643 | |
| Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 253,184 | | | $ | 251,294 | |
______________
(1)See Note 2 for details of balances with variable interest entities.VIEs.
(2)See Note 1211 for details of Redeemableredeemable noncontrolling interest.
See Notes to Consolidated Financial Statements (Unaudited).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Consolidated Statements of Income (Loss)
For the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)
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| Three Months Ended June 30, | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | 2020 | | 2019 | | |
| (in millions) | | | | | | | |
| REVENUES | | | | | | | | |
| Policy charges and fee income | $ | 825 | | | $ | 865 | | $ | 1,729 | | | $ | 1,724 | | | |
| Premiums | 199 | | | 232 | | 435 | | | 464 | | | |
| Net derivative gains (losses) | (5,903) | | | (178) | | 3,630 | | | (1,733) | | | |
| Net investment income (loss) | 934 | | | 879 | | 1,525 | | | 1,783 | | | |
| Investment gains (losses), net: | | | | | | | | |
| Credit losses on AFS debt securities and loans | (31) | | | — | | (43) | | | — | | | |
| Other investment gains (losses), net | 176 | | | (12) | | 243 | | | (20) | | | |
| Total investment gains (losses), net | 145 | | | (12) | | 200 | | | (20) | | | |
| Investment management and service fees | 235 | | | 255 | | 487 | | | 503 | | | |
| Other income | 8 | | | 30 | | 25 | | | 40 | | | |
| Total revenues | (3,557) | | | 2,071 | | 8,031 | | | 2,761 | | | |
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| BENEFITS AND OTHER DEDUCTIONS | | | | | | | | |
| Policyholders’ benefits | 700 | | | 868 | | 3,297 | | | 1,687 | | | |
| Interest credited to policyholders’ account balances | 279 | | | 288 | | 568 | | | 557 | | | |
| Compensation and benefits | 54 | | | 85 | | 134 | | | 167 | | | |
| Commissions | 148 | | | 152 | | 309 | | | 309 | | | |
| Interest expense | — | | | — | | — | | | 4 | | | |
| Amortization of deferred policy acquisition costs | 164 | | | 144 | | 1,222 | | | 309 | | | |
| Other operating costs and expenses | 218 | | | 216 | | 431 | | | 400 | | | |
| Total benefits and other deductions | 1,563 | | | 1,753 | | 5,961 | | | 3,433 | | | |
| Income (loss) from continuing operations, before income taxes | (5,120) | | | 318 | | 2,070 | | | (672) | | | |
| Income tax (expense) benefit | 1,029 | | | (53) | | (425) | | | 109 | | | |
| Net income (loss) | (4,091) | | | 265 | | 1,645 | | | (563) | | | |
| Less: Net income (loss) attributable to the noncontrolling interest | 4 | | | 1 | | (3) | | | 3 | | | |
| Net income (loss) attributable to Equitable Financial | $ | (4,095) | | | $ | 264 | | $ | 1,648 | | | $ | (566) | | | |
See Notes to Consolidated Financial Statements (Unaudited).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Consolidated Statements of Comprehensive Income (Loss)
For the Three and Six Months Ended June 30,March 31, 2021 and 2020 and 2019 (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | |
| (in millions) | | | | | | | | |
| COMPREHENSIVE INCOME (LOSS) | | | | | | | | | |
| Net income (loss) | $ | (4,091) | | | $ | 265 | | | $ | 1,645 | | | $ | (563) | | | |
| | | | | | | | | |
| Other comprehensive income (loss), net of income taxes: | | | | | | | | | |
| Change in unrealized gains (losses), net of adjustments (1) | 1,569 | | | 1,291 | | | 3,083 | | | 2,055 | | | |
| Changes in defined benefit plan related items not yet recognized in periodic benefit cost, net of reclassification adjustment | 1 | | | — | | | 1 | | | — | | | |
| Other comprehensive income (loss), net of income taxes | 1,570 | | | 1,291 | | | 3,084 | | | 2,055 | | | |
| | | | | | | | | |
| Comprehensive income (loss) | (2,521) | | | 1,556 | | | 4,729 | | | 1,492 | | | |
| Less: Comprehensive income (loss) attributable to the noncontrolling interest (2) | (3) | | | (2) | | | (3) | | | — | | | |
| Comprehensive income (loss) attributable to Equitable Financial | $ | (2,518) | | | $ | 1,558 | | | $ | 4,732 | | | $ | 1,492 | | | |
_____________
(1)See Note 11 for details of Change in unrealized gains (losses), net of adjustments.
(2)Amounts for the three and six months ended June 30, 2019 were reclassified to conform to the current year’s presentation.
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| | | Three Months Ended March 31, |
| | | | | 2021 | | 2020 | | |
| | | | | (in millions) |
| REVENUES | | | | | | | | | |
| Policy charges and fee income | | | | | $ | 880 | | | $ | 905 | | | |
| Premiums | | | | | 205 | | | 236 | | | |
| Net derivative gains (losses) | | | | | (2,778) | | | 9,532 | | | |
| Net investment income (loss) | | | | | 836 | | | 604 | | | |
| Investment gains (losses), net: | | | | | | | | | |
| Credit losses on available-for-sale debt securities and loans | | | | | 1 | | | (12) | | | |
| Other investment gains (losses), net | | | | | 182 | | | 67 | | | |
| Total investment gains (losses), net | | | | | 183 | | | 55 | | | |
| Investment management and service fees | | | | | 283 | | | 252 | | | |
| Other income | | | | | 14 | | | 15 | | | |
| Total revenues | | | | | (377) | | | 11,599 | | | |
| | | | | | | | | |
| BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | |
| Policyholders’ benefits | | | | | 823 | | | 2,626 | | | |
| Interest credited to policyholders’ account balances | | | | | 270 | | | 289 | | | |
| Compensation and benefits | | | | | 81 | | | 80 | | | |
| Commissions | | | | | 182 | | | 161 | | | |
| Interest expense | | | | | 1 | | | 0 | | | |
| Amortization of deferred policy acquisition costs | | | | | 62 | | | 1,022 | | | |
| Other operating costs and expenses | | | | | 399 | | | 214 | | | |
| Total benefits and other deductions | | | | | 1,818 | | | 4,392 | | | |
| Income (loss) from continuing operations, before income taxes | | | | | (2,195) | | | 7,207 | | | |
| Income tax (expense) benefit | | | | | 587 | | | (1,457) | | | |
| Net income (loss) | | | | | (1,608) | | | 5,750 | | | |
| | | | | | | | | |
| | | | | | | | | |
| Less: Net income (loss) attributable to the noncontrolling interest | | | | | 0 | | | (7) | | | |
| Net income (loss) attributable to Equitable Financial | | | | | $ | (1,608) | | | $ | 5,757 | | | |
See Notes to Consolidated Financial Statements (Unaudited).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Consolidated Statements of Comprehensive Income (Loss)
For the Three Months Ended March 31, 2021 and 2020 (Unaudited)
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2021 | | 2020 | | |
| | | | | (in millions) |
| COMPREHENSIVE INCOME (LOSS) | | | | | | | | | |
| Net income (loss) | | | | | $ | (1,608) | | | $ | 5,750 | | | |
| | | | | | | | | |
| Other comprehensive income (loss), net of income taxes: | | | | | | | | | |
| Change in unrealized gains (losses), net of adjustments (1) | | | | | (3,114) | | | 1,510 | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other comprehensive income (loss), net of income taxes | | | | | (3,114) | | | 1,510 | | | |
| Comprehensive income (loss) | | | | | (4,722) | | | 7,260 | | | |
| Less: Comprehensive income (loss) attributable to the noncontrolling interest | | | | | 0 | | | (7) | | | |
| Comprehensive income (loss) attributable to Equitable Financial | | | | | $ | (4,722) | | | $ | 7,267 | | | |
_____________
(1)See Note 10 for details of change in unrealized gains (losses), net of adjustments.
See Notes to Consolidated Financial Statements (Unaudited).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Consolidated Statements of Equity
For the Three and Six Months Ended June 30,March 31, 2021 and 2020 and 2019 (Unaudited)
| | | Three Months Ended June 30, | | | Three Months Ended March 31, |
| | Equitable Financial Equity | | | | Equitable Financial Equity | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total | | Non-controlling Interest | | Total Equity | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total | | Non-controlling Interest | | Total Equity |
| | (in millions) | | | (in millions) |
| April 1, 2020 | $ | 2 | | | $ | 7,811 | | | $ | 7,953 | | | $ | 3,106 | | | $ | 18,872 | | | $ | 9 | | | $ | 18,881 | | |
| January 1, 2021 | | January 1, 2021 | $ | 2 | | | $ | 7,841 | | | $ | (795) | | | $ | 4,595 | | | $ | 11,643 | | | $ | 0 | | | $ | 11,643 | |
| Dividend to parent company | Dividend to parent company | — | | | — | | | (1,200) | | | — | | | (1,200) | | | — | | | (1,200) | | Dividend to parent company | — | | | — | | | 0 | | | — | | | 0 | | | — | | | 0 | |
| | Net income (loss) | Net income (loss) | — | | | — | | | (4,095) | | | — | | | (4,095) | | | — | | | (4,095) | | Net income (loss) | — | | | — | | | (1,608) | | | — | | | (1,608) | | | — | | | (1,608) | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | — | | | — | | | — | | | 1,570 | | | 1,570 | | | — | | | 1,570 | | Other comprehensive income (loss) | — | | | — | | | — | | | (3,114) | | | (3,114) | | | — | | | (3,114) | |
| Other | Other | — | | | 10 | | | — | | | — | | | 10 | | | — | | | 10 | | Other | — | | | (14) | | | — | | | — | | | (14) | | | — | | | (14) | |
| June 30, 2020 | $ | 2 | | | $ | 7,821 | | | $ | 2,658 | | | $ | 4,676 | | | $ | 15,157 | | | $ | 9 | | | $ | 15,166 | | |
| March 31, 2021 | | March 31, 2021 | $ | 2 | | | $ | 7,827 | | | $ | (2,403) | | | $ | 1,481 | | | $ | 6,907 | | | $ | 0 | | | $ | 6,907 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| April 1, 2019 | $ | 2 | | | $ | 7,815 | | | $ | 4,268 | | | $ | 273 | | | $ | 12,358 | | | $ | 12 | | | $ | 12,370 | |
| | | | | | | | | | | | | |
| Net income (loss) | — | | | — | | | 264 | | | — | | | 264 | | | — | | | 264 | |
| Other comprehensive income (loss) | — | | | — | | | — | | | 1,291 | | | 1,291 | | | — | | | 1,291 | |
| Other | — | | | 7 | | | — | | | — | | | 7 | | | — | | | 7 | |
| June 30, 2019 | $ | 2 | | | $ | 7,822 | | | $ | 4,532 | | | $ | 1,564 | | | $ | 13,920 | | | $ | 12 | | | $ | 13,932 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | | | | | | | |
| Equitable Financial Equity | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total | | Non-controlling Interest | | Total Equity |
| (in millions) | | | | | | | | | | | | |
| January 1, 2020 | $ | 2 | | | $ | 7,809 | | | $ | 2,242 | | | $ | 1,592 | | | $ | 11,645 | | | $ | 13 | | | $ | 11,658 | |
| Dividend to parent company | — | | | — | | | (1,200) | | | — | | | (1,200) | | | — | | | (1,200) | |
| Cumulative effect of adoption of ASU 2016-13, CECL | — | | | — | | | (32) | | | — | | | (32) | | | — | | | (32) | |
| Net income (loss) | — | | | — | | | 1,648 | | | — | | | 1,648 | | | (2) | | | 1,646 | |
| Other comprehensive income (loss) | — | | | — | | | — | | | 3,084 | | | 3,084 | | | — | | | 3,084 | |
| Other | — | | | 12 | | | — | | | — | | | 12 | | | (2) | | | 10 | |
| June 30, 2020 | $ | 2 | | | $ | 7,821 | | | $ | 2,658 | | | $ | 4,676 | | | $ | 15,157 | | | $ | 9 | | | $ | 15,166 | |
| | | | | January 1, 2019 | $ | 2 | | | $ | 7,807 | | | $ | 5,098 | | | $ | (491) | | | $ | 12,416 | | | $ | 12 | | | $ | 12,428 | | |
| | January 1, 2020 | | January 1, 2020 | $ | 2 | | | $ | 7,809 | | | $ | 2,145 | | | $ | 1,596 | | | $ | 11,552 | | | $ | 13 | | | $ | 11,565 | |
| Dividend to parent company | | Dividend to parent company | — | | | — | | | 0 | | | — | | | 0 | | | — | | | 0 | |
| Cumulative effect of adoption of ASU 2016-13, CECL | | Cumulative effect of adoption of ASU 2016-13, CECL | — | | | — | | | (32) | | | — | | | (32) | | | — | | | (32) | |
| Net income (loss) | Net income (loss) | — | | | — | | | (566) | | | — | | | (566) | | | — | | | (566) | | Net income (loss) | — | | | — | | | 5,757 | | | — | | | 5,757 | | | (2) | | | 5,755 | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | — | | | — | | | — | | | 2,055 | | | 2,055 | | | — | | | 2,055 | | Other comprehensive income (loss) | — | | | — | | | — | | | 1,510 | | | 1,510 | | | — | | | 1,510 | |
| Other | Other | — | | | 15 | | | — | | | — | | | 15 | | | — | | | 15 | | Other | — | | | 2 | | | — | | | — | | | 2 | | | (2) | | | 0 | |
| June 30, 2019 | $ | 2 | | | $ | 7,822 | | | $ | 4,532 | | | $ | 1,564 | | | $ | 13,920 | | | $ | 12 | | | $ | 13,932 | | |
| March 31, 2020 | | March 31, 2020 | $ | 2 | | | $ | 7,811 | | | $ | 7,870 | | | $ | 3,106 | | | $ | 18,789 | | | $ | 9 | | | $ | 18,798 | |
See Notes to Consolidated Financial Statements (Unaudited).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
For the SixThree Months Ended June 30,March 31, 2021 and 2020 and 2019 (Unaudited)
| | | Six Months Ended June 30, | | | Three Months Ended March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020 | |
| | (in millions) | | | (in millions) |
| Cash flows from operating activities: | Cash flows from operating activities: | | | Cash flows from operating activities: | | |
| Net income (loss) | Net income (loss) | $ | 1,645 | | | $ | (563) | | | Net income (loss) | $ | (1,608) | | | $ | 5,750 | | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | |
| Interest credited to policyholders’ account balances | Interest credited to policyholders’ account balances | 568 | | | 557 | | | Interest credited to policyholders’ account balances | 270 | | | 289 | | |
| Policy charges and fee income | Policy charges and fee income | (1,729) | | | (1,724) | | | Policy charges and fee income | (880) | | | (905) | | |
| Net derivative (gains) losses | Net derivative (gains) losses | (3,630) | | | 1,733 | | | Net derivative (gains) losses | 2,778 | | | (9,532) | | |
| Credit losses on AFS debt securities and loans | Credit losses on AFS debt securities and loans | 43 | | | — | | | Credit losses on AFS debt securities and loans | (1) | | | 12 | | |
| Investment (gains) losses, net | Investment (gains) losses, net | (243) | | | 20 | | | Investment (gains) losses, net | (182) | | | (67) | | |
| Realized and unrealized (gains) losses on trading securities | Realized and unrealized (gains) losses on trading securities | (104) | | | (401) | | | Realized and unrealized (gains) losses on trading securities | 27 | | | 148 | | |
| Non-cash long-term incentive compensation expense | Non-cash long-term incentive compensation expense | 13 | | | 17 | | | Non-cash long-term incentive compensation expense | 15 | | | 4 | | |
| | Amortization and depreciation | Amortization and depreciation | 1,181 | | | 268 | | | Amortization and depreciation | 68 | | | 990 | | |
| | Equity (income) loss from limited partnerships | Equity (income) loss from limited partnerships | 53 | | | (39) | | | Equity (income) loss from limited partnerships | (107) | | | (25) | | |
| Changes in: | Changes in: | | | Changes in: | | |
| | Reinsurance recoverable | Reinsurance recoverable | (149) | | | (59) | | | Reinsurance recoverable | (130) | | | (96) | | |
| | Capitalization of deferred policy acquisition costs | Capitalization of deferred policy acquisition costs | (291) | | | (310) | | | Capitalization of deferred policy acquisition costs | (157) | | | (159) | | |
| Future policy benefits | Future policy benefits | 1,666 | | | 91 | | | Future policy benefits | 19 | | | 1,846 | | |
| Current and deferred income taxes | Current and deferred income taxes | 433 | | | 99 | | | Current and deferred income taxes | (590) | | | 1,465 | | |
| Other, net | Other, net | (324) | | | 28 | | | Other, net | 281 | | | (329) | | |
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | $ | (868) | | | $ | (283) | | | Net cash provided by (used in) operating activities | $ | (197) | | | $ | (609) | | |
| | Cash flows from investing activities: | Cash flows from investing activities: | | | Cash flows from investing activities: | | |
| Proceeds from the sale/maturity/prepayment of: | Proceeds from the sale/maturity/prepayment of: | | | Proceeds from the sale/maturity/prepayment of: | | |
| Fixed maturities, available-for-sale | Fixed maturities, available-for-sale | $ | 7,269 | | | $ | 4,842 | | | Fixed maturities, available-for-sale | $ | 9,151 | | | $ | 2,576 | | |
| Mortgage loans on real estate | Mortgage loans on real estate | 383 | | | 288 | | | Mortgage loans on real estate | 245 | | | 120 | | |
| Trading account securities | Trading account securities | 801 | | | 7,117 | | | Trading account securities | 709 | | | 476 | | |
| Real estate joint ventures | — | | | 2 | | | |
| | Short-term investments | Short-term investments | 935 | | | 1,518 | | | Short-term investments | 18 | | | 715 | | |
| Other | Other | 155 | | | 95 | | | Other | 775 | | | 132 | | |
| Payment for the purchase/origination of: | Payment for the purchase/origination of: | | | Payment for the purchase/origination of: | | |
| Fixed maturities, available-for-sale | Fixed maturities, available-for-sale | (11,292) | | | (12,385) | | | Fixed maturities, available-for-sale | (9,939) | | | (4,772) | | |
| Mortgage loans on real estate | Mortgage loans on real estate | (860) | | | (757) | | | Mortgage loans on real estate | (353) | | | (181) | | |
| Trading account securities | Trading account securities | (236) | | | (663) | | | Trading account securities | (61) | | | (110) | | |
| Short-term investments | Short-term investments | (651) | | | (1,594) | | | Short-term investments | (5) | | | (359) | | |
| Other | Other | (232) | | | (108) | | | Other | (1,225) | | | (183) | | |
| Cash settlements related to derivative instruments | 5,084 | | | (1,089) | | | |
| Cash settlements related to derivative instruments, net | | Cash settlements related to derivative instruments, net | (2,980) | | | 5,630 | | |
| | Investment in capitalized software, leasehold improvements and EDP equipment | Investment in capitalized software, leasehold improvements and EDP equipment | (21) | | | (31) | | | Investment in capitalized software, leasehold improvements and EDP equipment | (8) | | | (11) | | |
| Other, net | Other, net | 51 | | | (11) | | | Other, net | 198 | | | 84 | | |
| Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | $ | 1,386 | | | $ | (2,776) | | | Net cash provided by (used in) investing activities | $ | (3,475) | | | $ | 4,117 | | |
|
See Notes to Consolidated Financial Statements (Unaudited).
8
See Notes to Consolidated Financial Statements (Unaudited).
9
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
For the SixThree Months Ended June 30,March 31, 2021 and 2020 and 2019 (Unaudited)
| | | | | | | | | | | | | | Three Months Ended March 31, |
| | Six Months Ended June 30, | | | 2021 | | 2020 | |
| | 2020 | | 2019 | | | (in millions) |
| | (in millions) | | | | | | |
| Cash flows from financing activities: | Cash flows from financing activities: | | | Cash flows from financing activities: | | |
| Policyholders’ account balances: | Policyholders’ account balances: | | | Policyholders’ account balances: | | |
| Deposits | Deposits | $ | 4,327 | | | $ | 4,609 | | | Deposits | $ | 7,101 | | | $ | 2,362 | | |
| Withdrawals | Withdrawals | (2,045) | | | (2,291) | | | Withdrawals | (1,478) | | | (1,117) | | |
| Transfer (to) from Separate Accounts | Transfer (to) from Separate Accounts | 900 | | | 876 | | | Transfer (to) from Separate Accounts | 526 | | | 529 | | |
| | Change in collateralized pledged assets | Change in collateralized pledged assets | 58 | | | (8) | | | Change in collateralized pledged assets | (1,393) | | | 44 | | |
| Change in collateralized pledged liabilities | Change in collateralized pledged liabilities | 247 | | | 1,479 | | | Change in collateralized pledged liabilities | 93 | | | 656 | | |
| Shareholder dividend paid | (1,200) | | | — | | | |
| Purchase (redemption) of noncontrolling interests of consolidated company-sponsored
investment funds | Purchase (redemption) of noncontrolling interests of consolidated company-sponsored
investment funds | 1 | | | 10 | | | Purchase (redemption) of noncontrolling interests of consolidated company-sponsored investment funds | 7 | | | 0 | | |
| Repayment of loans from affiliates | — | | | (572) | | | |
| Increase (decrease) in securities sold under agreement to repurchase | — | | | (573) | | | |
| | Other, net | Other, net | 20 | | | — | | | Other, net | (10) | | | 18 | | |
| Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | $ | 2,308 | | | $ | 3,530 | | | Net cash provided by (used in) financing activities | $ | 4,846 | | | $ | 2,492 | | |
| | Change in cash and cash equivalents | Change in cash and cash equivalents | 2,826 | | | 471 | | | Change in cash and cash equivalents | 1,174 | | | 6,000 | | |
| Cash and cash equivalents, beginning of year | Cash and cash equivalents, beginning of year | 1,492 | | | 2,622 | | | Cash and cash equivalents, beginning of year | 2,043 | | | 1,492 | | |
| Cash and cash equivalents, end of year | Cash and cash equivalents, end of year | $ | 4,318 | | | $ | 3,093 | | | Cash and cash equivalents, end of year | $ | 3,217 | | | $ | 7,492 | | |
| | | Non-cash transactions: | Non-cash transactions: | | | Non-cash transactions: | | |
| Right-of-use assets obtained in exchange for lease obligations | Right-of-use assets obtained in exchange for lease obligations | $ | 14 | | | $ | 7 | | | Right-of-use assets obtained in exchange for lease obligations | $ | 0 | | | $ | 13 | | |
|
See Notes to Consolidated Financial Statements (Unaudited).
910
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited)
1) ORGANIZATION
Equitable Financial Life Insurance Company’s (“Equitable Financial” and, collectivelyFinancial’s (collectively with its consolidated subsidiaries, the “Company”) primary business is providing variable annuity, life insurance and employee benefit products to both individuals and businesses. The Company is an indirect, wholly-owned subsidiary of Equitable Holdings, Inc. (“Holdings”).Holdings. Equitable Financial is a stock life insurance company organized in 1859 under the laws of the State of New York.
The Company’s two2 principal subsidiaries include Equitable Distributors LLC (“Equitable Distributors”) and Equitable Investment Management, LLC (“EIM”).EIM. Both Equitable Distributors and EIM are wholly-owned Delaware limited liability companies.
2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The unaudited interim consolidated financial statements (the “consolidated financial statements”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to the Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”).
In the opinion of management, all adjustments necessary for a fair presentationstatement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature, with the exception of the Company’s update of its interest rate assumption and adoption of new economic scenario generator as further described below in Assumption Updates and Model Changes. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
The accompanying unaudited consolidated financial statements present the consolidated results of operations, financial condition and cash flows of the Company and its subsidiaries and those investment companies, partnerships and joint ventures in which the Company has control and a majority economic interest as well as those variable interest entities (“VIEs”) that meet the requirements for consolidation.
All significant intercompany transactions and balances have been eliminated in consolidation. The terms “second“first quarter 2020”2021” and “second“first quarter 2019”2020” refer to the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. The terms “first sixthree months of 2021” and “first three months of 2020” and “first six months of 2019” refer to the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively.
Certain prior year amounts have been reclassified to conform to the current year’s presentation.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Adoption of New Accounting Pronouncements
| | | | | |
| Description | Effect on the Financial Statement or Other Significant Matters |
ASU 2016-13: Financial Instruments—Credit Losses2019-12: Income Taxes (Topic 326), as clarified and amended by ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments and ASU 2019-05: Financial Instruments—Credit Losses (Topic 326) Targeted Transition Relief, ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments-Credit Losses740): Simplifying the Accounting for Income Taxes | |
This ASU 2016-13 contains new guidance which introduces an approach based on expected lossessimplifies the accounting for income taxes by removing certain exceptions to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securitiesgeneral principles in Topic 740, as well as clarifying and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.
ASU 2019-05 provides entities that have instruments within the scope of Subtopic 326-20 an option to irrevocably elect the fair value option on an instrument-by instrument basis upon adoption of Topic 326.
ASU 2018-19, ASU 2019-04 and ASU 2019-11 clarified the codification guidance and did not materially change the standard.amending existing guidance. | On January 1, 2020,2021, the Company adopted the new standardaccounting standards update. The new guidance is applied either on a retrospective, modified retrospective or prospective basis based on the items to which the amendments relate. The adoption did not have a material impact on the Company’s consolidated financial position, results of operations and completed implementation of its updated current expected credit losses (“CECL”) models, processes and controls related to the identified financial assets that fall within the scopecash flows as of the new standard. Upon adoption the Company recorded a cumulative effect adjustment to reduce the opening retained earnings balance by approximately $40 million, on a pre-tax and pre-DAC basis. The adjustment is primarily attributable to an increase in the allowance for credit losses associated with the Company’s commercial and agricultural mortgage loan portfolios and reinsurance.
Results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.date. |
ASU 2018-13: Fair Value Measurement (Topic 820)
|
| |
This ASU improves the effectiveness of fair value disclosures in the notes to financial statements. Amendments in this ASU impact the disclosure requirements in Topic 820, including the removal, modification and addition to existing disclosure requirements. | The Company elected to early adopt during 2019 the removal of disclosures relating to transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and valuation processes for Level 3 fair value measurements. The Company adopted the additional disclosures related to Level 3 fair value information on January 1, 2020. |
ASU 2018-17: Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
| |
This ASU provides guidance requiring that indirect interests held through related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. |
| The Company adopted this new standard effective for January 1, 2020. Adoption of this standard did not materially impact the Company’s financial position or results of operations. |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Future Adoption of New Accounting Pronouncements
| | | | | | | | |
| Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-12:2018-12: Financial Services - Insurance (Topic 944); ASU 2019-09:2020-11: Financial Services - Insurance (Topic 944): Effective Date | | and Early Application |
This ASU provides targeted improvements to existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The ASU primarily impacts four key areas, including:
1. Measurement of the liability for future policy benefits for traditional and limited payment contracts. The ASU requires companies to review, and if necessary, update, cash flow assumptions at least annually for non-participating traditional and limited-payment insurance contracts. Interest rates used to discount the liability will need to be updated quarterly using an upper medium grade (low credit risk) fixed-income instrument yield. | In November 2019,2020, the FASB issued ASU 2019-09 was issued2020-11 which modifieddeferred the effective date of the amendments in ASU 2018-12 to befor all insurance entities. ASU 2018-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021.2022. Early adoption is permitted. On July 9, 2020, the FASB issued an exposure draft which proposed a one-year deferral of the effective date of the amendments in ASU 2018-12 for all insurance entities. Early adoption would still be allowed.
For the liability for future policyholder benefits for traditional and limited payment contracts, companies can elect one of two adoption methods. Companies can either elect a modified retrospective transition method applied to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in Accumulated other comprehensive income (“AOCI”) or a full retrospective transition method using actual historical experience information as of contract inception. The same adoption method must be used for deferred policy acquisition costs. | The Company is currently evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements, however the adoption of the ASU is expected to have a significant impact on the Company’s consolidated financial condition, results of operations, cash flows and required disclosures, as well as processes and controls. |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | |
Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
2. Measurement of market risk benefits (“MRBs”). MRBs, as defined under the ASU, will encompass certain variable annuity guaranteed benefit (“GMxB”) features associated with variable annuity products and other general account annuities with other than nominal market risk. The ASU requires MRBs to be measured at fair value with changes in value attributable to changes in instrument-specific credit risk recognized in Other comprehensive income (“OCI”).
3. Amortization of deferred acquisition costs. The ASU simplifies the amortization of deferred acquisition costs and other balances amortized in proportion to premiums, gross profits, or gross margins, requiring such balances to be amortized on a constant level basis over the expected term of the contracts. Deferred costs will be required to be written off for unexpected contract terminations but will not be subject to impairment testing.
4. Expanded footnote disclosures. The ASU requires additional disclosures including disaggregated roll-forwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, MRBs, separate account liabilities and deferred acquisition costs. Companies will also be required to disclose information about significant inputs, judgements, assumptions and methods used in measurement. | For MRBs, the ASU should be applied retrospectively as of the beginning of the earliest period presented.
For deferred policy acquisition costs, companies can elect one of two adoption methods. Companies can either elect a modified retrospective transition method applied to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or a full retrospective transition method using actual historical experience information as of contract inception. The same adoption method must be used for the liability for future policyholder benefits for traditional and limited payment contracts.
| |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
| | | | | | | | |
This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, as well as clarifying and amending existing guidance.Description | Effective for fiscal years,Date and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted.Method of Adoption | The Company is currently evaluating the impact adopting the guidance will haveEffect on the Company’s consolidated financial statements, however the adoption is not expected to materially impact the Company’s financial position, results of operation,Financial Statement or cash flows.Other Significant Matters |
ASU2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting | | |
| The amendments in this ASU provide optional expedients and exceptions to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. | This ASU is effective as of March 12, 2020 through December 31, 2022. | The Company will determineis currently assessing the applicability of the optional expedients and exceptions provided under the ASU as reference rate reform continues to develop.ASU. Management is evaluating the impact that the adoption of this guidance will have on the Company’s consolidated financial statements. |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Investments
The carrying values of fixed maturities classified as available-for-sale (“AFS”)AFS are reported at fair value. Changes in fair value are reported in OCI, net of allowance for credit losses, policy related amounts and deferred income taxes. With the adoption of the new Financial Instruments-Credit Losses standard, changesChanges in credit losses are recognized in Investment gains (losses), net. The redeemable preferred stock investments that are reported in fixed maturities include real estate investment trusts (“REIT”),REIT, perpetual preferred stock and redeemable preferred stock. These securities may not have a stated maturity, may not be cumulative and do not provide for mandatory redemption by the issuer. Effective January 1, 2021, the Company began classifying certain preferred stock as equity securities to better reflect the economics and nature of these securities. These preferred stock securities are reported in other equity investments.
The Company determines the fair values of fixed maturities and equity securities based upon quoted prices in active markets, when available, or through the use of alternative approaches when market quotes are not readily accessible or available. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a discounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment. The Company’s management, with the assistance of its investment advisors, evaluates AFS debt securities that experienced a decline in fair value below amortized cost for credit losses which are evaluated in accordance with the new financial instruments credit losses guidance effective January 1, 2020.guidance. Integral to this review is an assessment made each quarter, on a security-by-security basis, by the Company’s Investments Under Surveillance (“IUS”)IUS Committee, of various indicators of credit deterioration to determine whether the investment security has experienced a credit loss. This assessment includes, but is not limited to, consideration of the severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, the financial strength, liquidity and continued viability of the issuer.
The Company recognizes an allowance for credit losses on AFS debt securities with a corresponding adjustment to earnings rather than a direct write down that reduces the cost basis of the investment, and credit losses are limited to the amount by which the security’s amortized cost basis exceeds its fair value. Any improvements in estimated credit losses on AFS debt securities are recognized immediately in earnings. Management does not use the length of time a security has been in an unrealized loss position as a factor, either by itself or in combination with other factors, to conclude that a credit loss does not exist, as they were permittedexist.
When the Company determines that there is more than 50% likelihood that it is not going to do priorrecover the principal and interest cash flows related to January 1, 2020.an AFS debt security, the security is placed on nonaccrual status and the Company reverses accrued interest receivable against interest income. Since the nonaccrual policy results in a timely reversal of accrued interest receivable, the Company does not record an allowance for credit losses on accrued interest receivable.
If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting allowance is recognized in income (loss) and the remainder of the fair value loss is recognized in OCI. The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by discounting management’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
security. For mortgage and asset-backed securities, projected future cash flows also include assumptions regarding prepayments and underlying collateral value.
Write-offs of AFS debt securities are recorded when all or a portion of a financial asset is deemed uncollectible. Full or partial write-offs are recorded as reductions to the amortized cost basis of the AFS debt security and deducted from the allowance in the period in which the financial assets are deemed uncollectible. The Company elected to reverse accrued interest deemed uncollectible as a reversal of interest income. In instances where the Company collects cash that it has previously written off, the recovery will be recognized through earnings or as a reduction of the amortized cost basis for interest and principal, respectively.
Real estate held for the production of income is stated at depreciated cost less allowance for credit losses. Depreciation of real estate held for production of income is computed using the straight-line method over the estimated useful lives of the properties, which generally range from 40 to 50 years.
Policy loans represent funds loaned to policyholders up to the cash surrender value of the associated insurance policies and are carried at the unpaid principal balances due to the Company from the policyholders. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies.
Partnerships, investment companies and joint venture interests that the Company has control of and has an economic interest in or those that meet the requirements for consolidation under accounting guidance for consolidation of VIEs are consolidated. Those that the Company does not have control of and does not have a majority economic interest in and those that do not meet the VIE requirements for consolidation are reported on the equity method of accounting and are
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
reported in other equity investments. The Company records its interests in certain of these partnerships on a month or one quarter lag.
Trading securities, which include equity securities and fixed maturities, are carried at fair value based on quoted market prices, with realized and unrealized gains (losses) reported in net investment income (loss) in the consolidated statements of income (loss).
Corporate owned life insurance (“COLI”)COLI has been purchased by the Company and certain subsidiaries on the lives of certain key employees and the Company and these subsidiaries are named as beneficiaries under these policies. COLI is carried at the cash surrender value of the policies. At June 30, 2020As of March 31, 2021 and December 31, 2019,2020, the carrying value of COLI was $947$990 million and $942$989 million, respectively, and is reported in Otherother invested assets in the consolidated balance sheets.
Cash and cash equivalents includes cash on hand, demand deposits, money market accounts, overnight commercial paper and highly liquid debt instruments purchased with an original maturity of three months or less. Due to the short-term nature of these investments, the recorded value is deemed to approximate fair value.
All securities owned, including U.S. government and agency securities, mortgage-backed securities, futures and forwards transactions, are reported in the consolidated financial statements on a trade-date basis.
Commercial and Agricultural Mortgage Loans on Real Estate
Mortgage loans are stated at unpaid principal balances, net of unamortized discounts and the allowance for credit losses. The Company calculates the allowance for credit losses in accordance with the CECL model in order to provide for the risk of credit losses in the lending process.
Expected credit losses for loans with similar risk characteristics are estimated on a collective (i.e., pool) basis in order to meet CECL’s risk of loss concept which requires the Company to consider possibilities of loss, even if remote.
For collectively evaluated mortgages, the Company estimates the allowance for credit losses based on the amortized cost basis of its mortgages over their expected life using a probability of default (“PD”) / loss given default (“LGD”) model. The PD/LGD model incorporates the Company’s reasonable and supportable forecast of macroeconomic information over a specified period. For periods beyond the reasonable and supportable forecast period, the model reverts to historical loss information.
The CECL model is configured to the Company’s specifications and takes into consideration the detailed risk attributes of each discrete loan in the mortgage portfolio which include, but are not limited to the following:
•Loan-to-value (“LTV”) ratio - Derived from current loan balance divided by the fair market value of the property. An LTV ratio in excess of 100% indicates an underwater mortgage.
•Debt service coverage (“DSC”) ratio - Derived from actual operating earnings divided by annual debt service. If the ratio is below 1.0x, then the income from the property does not support the debt.
•Occupancy - Criteria varies by property type but low or below market occupancy is an indicator of sub-par property performance.
•Lease expirations - The percentage of leases expiring in the upcoming 12 to 36 months are monitored as a decline in rent and/or occupancy may negatively impact the debt service coverage ratio. In the case of single-tenant properties or properties with large tenant exposure, the lease expiration is a material risk factor.
•Other - Any other factors such as maturity, borrower/tenant related issues, payment status, property condition, or current economic conditions may call into question the performance of the loan.
Mortgage loans that do not share similar risk characteristics with other loans in the portfolio are individually evaluated quarterly by the Company’s IUS Committee. The allowance for credit losses on these individually evaluated mortgages is a loan-specific reserve as a result of the loan review process that is recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral. The individually assessed allowance for mortgage loans can increase or decrease from period to period based on such factors.
Individually assessed loans may include, but are not limited to, mortgages that have deteriorated in credit quality such as troubled debt restructurings (“TDR”) and reasonably expected TDRs, mortgages for which foreclosure is probable, and mortgages which have been classified as “potential problem” or “problem” loans within the Company’s IUS Committee processes as described below.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Within the IUS process, Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem mortgages. Based on its monthly monitoring of mortgages, a class of potential problem mortgages are also identified, consisting of mortgage loans not currently classified as problem mortgages but for which management has doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being modified. The decision whether to classify a performing mortgage loan as a potential problem involves judgments by management as to likely future industry conditions and developments with respect to the borrower or the individual mortgaged property.
Individually assessed mortgage loans without provision for losses are mortgage loans where the fair value of the collateral or the net present value of the expected future cash flows related to the loan equals or exceeds the recorded investment. Interest income earned on mortgage loans where the collateral value is used to measure impairment is recorded on a cash basis. Interest income on mortgage loans where the present value method is used to measure impairment is accrued on the net carrying value amount of the loan at the interest rate used to discount the cash flows.
Mortgage loans are placed on nonaccrual status once management believes the collection of accrued interest is not probable. Once mortgage loans are classified as nonaccrual mortgage loans, interest income is recognized under the cash basis of accounting and the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured to where the collection of interest is considered likely. The Company charges off loan balances and accrued interest that are deemed uncollectible.
Net Investment Income (Loss), Investment Gains (Losses), Net, and Unrealized Investment Gains (Losses)
Realized investment gains (losses) are determined by identification with the specific asset and are presented as a component of revenue. Changes in the allowance for credit losses are included in Investment gains (losses), net.
Realized and unrealized holding gains (losses) on trading and equity securities are reflected in Net investment income (loss).
Unrealized investment gains (losses) on fixed maturities designated as AFS held by the Company are accounted for as a separate component of AOCI, net of related deferred income taxes, as are amounts attributable to certain pension operations, Closed Block’s policyholders’ dividend obligation, insurance liability loss recognition, DAC related to UL policies, investment-type products and participating traditional life policies.
Changes in unrealized gains (losses) reflect changes in fair value of only those fixed maturities classified as AFS and do not reflect any change in fair value of policyholders’ account balances and future policy benefits.
Accounting and Consolidation of VIEs
For all new investment products and entities developed by the Company, (other than Collateralized Debt Obligations (“CDOs”)), the Company first determines whether the entity is a VIE, which involves determining an entity’s variability and variable interests, identifying the holders of the equity investment at risk and assessing the five characteristics of a VIE. Once an entity has been determined to be a VIE, the Company then identifiesdetermines whether it is the primary beneficiary of the VIE.VIE based on its beneficial interests. If the Company is deemed to be the primary beneficiary of the VIE, then the Company consolidates the entity.
Management of the Company reviews quarterly its investment management agreements and its investments in, and other financial arrangements with, certain entities that hold client assets under management (“AUM”)AUM to determine the entities that the Company is required to consolidate under this guidance. These entities include certain mutual fund products, hedge funds, structured products, group trusts, collective investment trusts and limited partnerships.
The analysis performed to identify variable interests held, determine whether entities are VIEs or voting interest entities (“VOEs”),VOEs, and evaluate whether the Company has a controlling financial interest in such entities requires the exercise of judgment and is updated on a continuous basis as circumstances change or new entities are developed. The primary beneficiary evaluation generally is performed qualitatively based on all facts and circumstances, including consideration of economic interests in the VIE held directly and indirectly through related parties and entities under common control, as well as quantitatively, as appropriate.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Consolidated VIEs
At June 30, 2020As of March 31, 2021 and December 31, 2019,2020, the Company consolidated 1 real estate joint ventureprivate equity limited partnership for which it was identified as the primary beneficiary under the VIE model. The consolidated entity is jointly owned by Equitable Financial and AXA France and holds an investment in a real estate venture. Included in Otherother invested assets in the Company’s consolidated balance sheets at June 30, 2020March 31, 2021 and December 31, 20192020 are total assets of $30of $10 million and $32and $12 million, respectively related to this VIE, primarily resulting from the consolidated presentation of this real estate joint venture as real estate held for sale. Redeemable noncontrolling interests are presented in mezzanine equity and non-redeemable noncontrolling interests are presented within permanent equity.VIE.
Non-Consolidated VIEs
At June 30, 2020As of March 31, 2021 and December 31, 2019,2020, respectively, the Company held approximately $1.1$1.5 billion and $1.1$1.3 billion of investment assets in the form of equity interests issued by non-corporate legal entities determined under the guidance to be VIEs, such as limited partnerships and limited liability companies, including CLOs, hedge funds, private equity funds and real estate-related funds. As an equity investor, the Company is considered to have a variable interest in each of these VIEs as a result of its participation in the risks and/or rewards these funds were designed to create by their defined portfolio objectives and strategies. Primarily through qualitative assessment, including consideration of related party interests or other financial arrangements, if any, the Company was not identified as primary beneficiary of any of these VIEs, largely due to its inability to direct the activities that most significantly impact their economic performance. Consequently, the Company continues to reflect these equity interests in the consolidated balance sheets as Otherother equity investments and applies the equity method of accounting for these positions. The net assets of these non-consolidated VIEs are approximately $146.6$173.1 billion and $160.2$165.8 billion at June 30, 2020as of March 31, 2021 and December 31, 2019,2020, respectively. The Company’s maximum exposure to loss from its direct involvement with these VIEs is the carrying value of its investment of $1.1$1.5 billion and $1.1$1.3 billion and approximately $1.2 billion and $1.1$1.2 billion of unfunded commitments at June 30, 2020as of March 31, 2021 and December 31, 2019,2020, respectively. The Company has no further economic interest in these VIEs in the form of guarantees, derivatives, credit enhancements or similar instruments and obligations.
In addition, at June 30, 2020 and December 31, 2019, Other invested assets includes real estate held for sale
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to 1 non-consolidated real estate joint venture.Consolidated Financial Statements (Unaudited), Continued
Assumption Updates and Model Changes
The Company conducts its annual review of its assumptions and models during the third quarter of each year. The annual review encompasses assumptions underlying the valuation of unearned revenue liabilities, embedded derivatives for our insurance business, liabilities for future policyholder benefits, DAC and deferred sales inducement (“DSI”)DSI assets.
However, the Company updates its assumptions as needed in the event it becomes aware of economic conditions or events that could require a change in assumptions that it believes may have a significant impact to the carrying value of product liabilities and assets and consequently materially impact its earnings in the period of the change.
In the first quarter of 2020, dueDue to the extraordinary economic conditions driven by the COVID-19 pandemic in the first quarter of 2020, the Company updated its interest rate assumption to grade from the current interest rate environment to an ultimate five-year historical average over a 10-year period. As such, the 10-year U.S. Treasury yield grades from the current level to an ultimate 5-year average of 2.25%. The Company determined that no assumption updates were necessary in the second quarter of 2020.
The low interest rate environment and update to the interest rate assumption caused a loss recognition event for the Company’s life interest-sensitive products, as well as to certain run-off business. This loss recognition event caused an acceleration of DAC amortization on the life interest-sensitive products and an increase in the premium deficiency reserve on the run-off business in the first quarter of 2020.
Impact of Assumption Updates
There were no assumption changes in the first quarter of 2021.
The net impact of the economic assumption update in the first six monthsquarter of 2020 increased Policyholders’ benefits by $1.3 billion, increased Amortization of DAC by $861 million, increased Policywas an increase in policy charges and fee income byof $54 million, and decreased Interestan increase in policyholders’ benefits of $1.3 billion, a decrease in interest credited to policyholders’ account balances byof $6 million, and an increase in amortization of DAC of $840 million. This resulted in a decrease in Incomeincome (loss) from continuing operations, before income taxes of $2.1 billion and decreased Neta decrease in net income (loss) of $1.7 billion.
AlsoModel Changes
There were no model changes in the first quarter of 2021.
In the first quarter of 2020, the Company adopted a new economic scenario generator to calculate the fair value of the GMIB reinsurance contract asset and GMxB derivative features liability, eliminating reliance on AXA Group for scenario production. The new economic scenario generator allows for a tighter calibration of U.S. indices, better reflecting the Company’s actual portfolio. The net impact of the new economic scenario generator resulted in an increase in Income
income (loss) from continuing operations, before income taxes of $165 million, and an increase to Net Incomenet income (loss) of $130 million during 2020.
Revision of Prior Period Financial Statements
The Company identified certain errors in its previously issued financial statements primarily related to the first six monthscalculation of 2020.actuarially determined insurance contract assets and liabilities. The impact of these errors to the current and the prior periods consolidated financial statements was not considered to be material. In order to improve the consistency and comparability of the financial statements, management revised the consolidated financial statements to include the revisions discussed herein. See Note 13to the Notes to Consolidated Financial Statements for details of the revisions.
3) INVESTMENTS
Fixed Maturities Available-for-Sale
Accounting for credit impairments of fixed maturities classified as AFS has changed from a direct write-down, or other-than-temporary impairment (“OTTI”) approach to an allowance for credit loss model starting in 2020 upon adoption of CECL (see Note 2, Significant Accounting Policies – Investments).
The components of fair value and amortized cost for fixed maturities classified as AFS on the consolidated balance sheets excludes accrued interest receivable because the Company elected to present accrued interest receivable within Otherother assets. Accrued interest receivable on AFS fixed maturities at June 30, 2020as of March 31, 2021 was $480 $503 million.
When the Company determines that there is more than 50% likelihood that it is not going to recover the principal and interest cash flows related to an AFS debt security, the security is placed on nonaccrual status and the Company reverses accrued interest receivable against interest income. Since the nonaccrual policy results in a timely reversal of accrued interest receivable, the Company does not record an allowance for credit losses on accrued interest receivable.
There was 0accrued interest written off for AFS fixed maturities for the three and six months ended June 30, 2020.
Comparative tables as of DecemberMarch 31, 2019 include OTTI, reported net of tax in OCI and in AOCI until realized.2021.
The following tables provide information relating to the Company’s fixed maturities classified as AFS.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
AFS Fixed Maturities by Classification
| | | Amortized
Cost | | Allowance for Credit Losses (4) | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value | | Amortized
Cost | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| | (in millions) | | | (in millions) |
| June 30, 2020: | | |
| March 31, 2021: | | March 31, 2021: | |
| Fixed Maturities: | Fixed Maturities: | | Fixed Maturities: | |
| Corporate (1) | Corporate (1) | $ | 45,706 | | | $ | 13 | | | $ | 4,091 | | | $ | 154 | | | $ | 49,630 | | Corporate (1) | $ | 46,231 | | | $ | 19 | | | $ | 2,547 | | | $ | 608 | | | $ | 48,151 | |
| U.S. Treasury, government and agency | U.S. Treasury, government and agency | 13,103 | | | — | | | 4,090 | | | — | | | 17,193 | | U.S. Treasury, government and agency | 14,786 | | | 0 | | | 1,227 | | | 174 | | | 15,839 | |
| States and political subdivisions | States and political subdivisions | 607 | | | — | | | 105 | | | — | | | 712 | | States and political subdivisions | 515 | | | 0 | | | 75 | | | 7 | | | 583 | |
| Foreign governments | Foreign governments | 770 | | | — | | | 69 | | | 6 | | | 833 | | Foreign governments | 1,064 | | | 0 | | | 47 | | | 38 | | | 1,073 | |
| Residential mortgage-backed (2) | Residential mortgage-backed (2) | 144 | | | — | | | 14 | | | — | | | 158 | | Residential mortgage-backed (2) | 109 | | | 0 | | | 11 | | | 0 | | | 120 | |
| Asset-backed (3) | Asset-backed (3) | 2,057 | | | — | | | 23 | | | 41 | | | 2,039 | | Asset-backed (3) | 4,699 | | | 0 | | | 27 | | | 2 | | | 4,724 | |
| Commercial mortgage-backed | Commercial mortgage-backed | 855 | | | — | | | 24 | | | — | | | 879 | | Commercial mortgage-backed | 1,482 | | | 0 | | | 26 | | | 18 | | | 1,490 | |
Redeemable preferred stock | Redeemable preferred stock | 373 | | | — | | | 15 | | | 10 | | | 378 | | Redeemable preferred stock | 41 | | | 0 | | | 11 | | | 0 | | | 52 | |
| Total at June 30, 2020 | $ | 63,615 | | | $ | 13 | | | $ | 8,431 | | | $ | 211 | | | $ | 71,822 | | |
| Total at March 31, 2021 | | Total at March 31, 2021 | $ | 68,927 | | | $ | 19 | | | $ | 3,971 | | | $ | 847 | | | $ | 72,032 | |
| | December 31, 2019: | | |
| December 31, 2020: | | December 31, 2020: | |
| Fixed Maturities: | Fixed Maturities: | | Fixed Maturities: | |
| Corporate (1) | Corporate (1) | $ | 42,347 | | | $ | — | | | $ | 2,178 | | | $ | 61 | | | $ | 44,464 | | Corporate (1) | $ | 48,501 | | | $ | 13 | | | $ | 4,703 | | | $ | 89 | | | $ | 53,102 | |
| U.S. Treasury, government and agency | U.S. Treasury, government and agency | 14,385 | | | — | | | 1,151 | | | 305 | | | 15,231 | | U.S. Treasury, government and agency | 12,644 | | | 0 | | | 3,304 | | | 5 | | | 15,943 | |
| States and political subdivisions | States and political subdivisions | 584 | | | — | | | 68 | | | 3 | | | 649 | | States and political subdivisions | 482 | | | 0 | | | 92 | | | 0 | | | 574 | |
| Foreign governments | Foreign governments | 460 | | | — | | | 35 | | | 5 | | | 490 | | Foreign governments | 1,011 | | | 0 | | | 98 | | | 6 | | | 1,103 | |
| Residential mortgage-backed (2) | Residential mortgage-backed (2) | 161 | | | — | | | 12 | | | — | | | 173 | | Residential mortgage-backed (2) | 119 | | | 0 | | | 12 | | | 0 | | | 131 | |
| Asset-backed (3) | Asset-backed (3) | 843 | | | — | | | 3 | | | 2 | | | 844 | | Asset-backed (3) | 3,633 | | | 0 | | | 28 | | | 5 | | | 3,656 | |
| Commercial mortgage-backed | | Commercial mortgage-backed | 1,148 | | | 0 | | | 55 | | | 0 | | | 1,203 | |
| Redeemable preferred stock | Redeemable preferred stock | 498 | | | — | | | 18 | | | 5 | | | 511 | | Redeemable preferred stock | 598 | | | 0 | | | 46 | | | 3 | | | 641 | |
| Total at December 31, 2019 | $ | 59,278 | | | $ | — | | | $ | 3,465 | | | $ | 381 | | | $ | 62,362 | | |
| Total at December 31, 2020 | | Total at December 31, 2020 | $ | 68,136 | | | $ | 13 | | | $ | 8,338 | | | $ | 108 | | | $ | 76,353 | |
______________
(1)Corporate fixed maturities include both public and private issues.
(2)Includes publicly traded agency pass-through securities and collateralized obligations.
(3)Includes credit-tranched securities collateralized by sub-prime mortgages, credit risk transfer securities. and other asset types and credit tenant loans.types.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
(4)Amounts represent the allowance for credit losses for 2020 - Effective January 1, 2021, certain preferred stock have been reclassified to other equity investments (see Note 2 Significant Accounting Policies -– Investments).
The contractual maturities of AFS fixed maturities at June 30, 2020as of March 31, 2021 are shown in the table below. Bonds not due at a single maturity date have been included in the table in the final year of maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Contractual Maturities of AFS Fixed Maturities
| | | | | | | | | | | |
| Amortized Cost (Less Allowance for Credit Losses) | | Fair Value |
| | (in millions) | | |
| June 30, 2020 (1): | | | |
| Contractual maturities: | | | |
| Due in one year or less | $ | 4,393 | | | $ | 4,433 | |
| Due in years two through five | 14,167 | | | 14,944 | |
| Due in years six through ten | 16,475 | | | 18,256 | |
| Due after ten years | 25,138 | | | 30,735 | |
| Subtotal | 60,173 | | | 68,368 | |
| Residential mortgage-backed | 144 | | | 158 | |
| Asset-backed | 2,057 | | | 2,039 | |
| Commercial mortgage-backed | 855 | | | 879 | |
| Redeemable preferred stock | 373 | | | 378 | |
| Total at June 30, 2020 | $ | 63,602 | | | $ | 71,822 | |
______________ | | | | | | | | | | | |
| Amortized Cost (Less Allowance for Credit Losses) | | Fair Value |
| | (in millions) |
| March 31, 2021: | | | |
| Contractual maturities: | | | |
| Due in one year or less | $ | 2,462 | | | $ | 2,480 | |
| Due in years two through five | 14,540 | | | 15,300 | |
| Due in years six through ten | 17,488 | | | 18,443 | |
| Due after ten years | 28,087 | | | 29,423 | |
| Subtotal | 62,577 | | | 65,646 | |
| Residential mortgage-backed | 109 | | | 120 | |
| Asset-backed | 4,699 | | | 4,724 | |
| Commercial mortgage-backed | 1,482 | | | 1,490 | |
| Redeemable preferred stock | 41 | | | 52 | |
| Total at March 31, 2021 | $ | 68,908 | | | $ | 72,032 | |
(1)Net amortized cost is equal to amortized cost, less any allowance for credit losses to the extent applicable.
The following table shows proceeds from sales, gross gains (losses) from sales and credit losses for AFS fixed maturities for the three and six months ended June 30, 2020March 31, 2021 and 2019:2020:
Proceeds from Sales, Gross Gains (Losses) from Sales and Credit Losses for AFS Fixed Maturities
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | |
| | (in millions) | | | | | | | | |
| Proceeds from sales | $ | 2,864 | | | $ | 1,556 | | | $ | 4,586 | | | $ | 2,917 | | | |
| Gross gains on sales | $ | 205 | | | $ | 9 | | | $ | 274 | | | $ | 17 | | | |
| Gross losses on sales | $ | (24) | | | $ | (6) | | | $ | (27) | | | $ | (21) | | | |
| | | | | | | | | |
| Credit losses (1) | $ | (11) | | | $ | — | | | $ | (13) | | | $ | — | | | |
______________ | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2021 | | 2020 | | |
| | | | | | (in millions) |
| Proceeds from sales | | | | | $ | 7,188 | | | $ | 1,722 | | | |
| Gross gains on sales | | | | | $ | 291 | | | $ | 69 | | | |
| Gross losses on sales | | | | | $ | (116) | | | $ | (3) | | | |
| | | | | | | | | |
| Credit losses | | | | | $ | (6) | | | $ | (2) | | | |
(1)Commencing with the Company’s adoption of ASU 2016-13 on January 1, 2020, credit losses on AFS debt securities were recognized as an allowance for credit losses. In 2019 and prior, credit losses on AFS fixed maturities were recognized as OTTI.
The following table sets forth the amount of credit loss impairments on AFS fixed maturities held by the Company at the dates indicated and the corresponding changes in such amounts.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
AFS Fixed Maturities - Credit Loss Impairments
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 |
| | (in millions) | | | | (in millions) |
| Balance, beginning of period | Balance, beginning of period | $ | (17) | | | $ | (18) | | | $ | (15) | | | $ | (46) | | Balance, beginning of period | | $ | 28 | | | $ | 15 | |
| Previously recognized impairments on securities that matured, paid, prepaid or sold | Previously recognized impairments on securities that matured, paid, prepaid or sold | — | | | — | | | — | | | 28 | | Previously recognized impairments on securities that matured, paid, prepaid or sold | | 0 | | | 0 | |
| Recognized impairments on securities impaired to fair value this period (1) | Recognized impairments on securities impaired to fair value this period (1) | — | | | — | | | — | | | — | | Recognized impairments on securities impaired to fair value this period (1) | | 0 | | | 0 | |
| Credit losses recognized this period on securities for which credit losses were not previously recognized | Credit losses recognized this period on securities for which credit losses were not previously recognized | (8) | | | — | | | (10) | | | — | | Credit losses recognized this period on securities for which credit losses were not previously recognized | | 2 | | | 2 | |
| Additional credit losses this period on securities previously impaired | Additional credit losses this period on securities previously impaired | (3) | | | — | | | (3) | | | — | | Additional credit losses this period on securities previously impaired | | 4 | | | 0 | |
| Increases due to passage of time on previously recorded credit losses | Increases due to passage of time on previously recorded credit losses | — | | | — | | | — | | | — | | Increases due to passage of time on previously recorded credit losses | | 0 | | | 0 | |
| Accretion of previously recognized impairments due to increases in expected cash flows (for OTTI securities 2019 and prior) | Accretion of previously recognized impairments due to increases in expected cash flows (for OTTI securities 2019 and prior) | — | | | — | | | — | | | — | | Accretion of previously recognized impairments due to increases in expected cash flows (for OTTI securities 2019 and prior) | | 0 | | | 0 | |
| Balance at June 30, | $ | (28) | | | $ | (18) | | | $ | (28) | | | $ | (18) | | |
| Balance at March 31, | | Balance at March 31, | | $ | 34 | | | $ | 17 | |
______________
(1)Represents circumstances where the Company determined in the current period that it intends to sell the security, or it is more likely than not that it will be required to sell the security before recovery of the security’s amortized cost.
Net unrealized investment gains (losses) on AFS fixed maturities are included in the consolidated balance sheets as a component of AOCI.
Changes in net unrealized investment gains (losses) recognized in AOCI include reclassification adjustments to reflect amounts realized in Net income (loss) for the current period that had been part of OCI in earlier periods. The tables that follow below present a roll-forward of net unrealized investment gains (losses) recognized in AOCI, split between amounts related to fixed maturities on which a credit loss has been recognized, and all other.AOCI.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Net Unrealized Gains (Losses) on AFS Fixed Maturities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gains (Losses) on Investments | | DAC | | Policyholders’ Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) |
| (in millions) | | | | | | | | |
| Balance, April 1, 2020 | $ | 5,040 | | | $ | (205) | | | $ | (1,003) | | | $ | (805) | | | $ | 3,027 | |
| Net investment gains (losses) arising during the period | 3,336 | | | — | | | — | | | — | | | 3,336 | |
| Reclassification adjustment: | | | | | | | | | — | |
| Included in Net income (loss) | (167) | | | — | | | — | | | — | | | (167) | |
| Excluded from Net income (loss) | — | | | — | | | — | | | — | | | — | |
| Impact of net unrealized investment gains (losses) on: | | | | | | | | |
|
| DAC | — | | | (289) | | | — | | | — | | | (289) | |
| Deferred income taxes | — | | | — | | | — | | | (437) | | | (437) | |
| Policyholders’ liabilities | — | | | — | | | (799) | | | — | | | (799) | |
| Net unrealized investment gains (losses) excluding credit losses | 8,209 | | | (494) | | | (1,802) | | | (1,242) | | | 4,671 | |
| Net unrealized investment gains (losses) with credit losses | (2) | | | — | | | 1 | | | — | | | (1) | |
| Balance, June 30, 2020 | $ | 8,207 | | | $ | (494) | | | $ | (1,801) | | | $ | (1,242) | | | $ | 4,670 | |
| | | | | | | | | |
| Balance, April 1, 2019 | $ | 1,003 | | | $ | (616) | | | $ | 22 | | | $ | (86) | | | $ | 323 | |
| Net investment gains (losses) arising during the period | 1,623 | | | — | | | — | | | — | | | 1,623 | |
| Reclassification adjustment: | | | | | | | | | — | |
| Included in Net income (loss) | (4) | | | — | | | — | | | — | | | (4) | |
| Excluded from Net income (loss) | — | | | — | | | — | | | — | | | — | |
| Impact of net unrealized investment gains (losses) on: | | | | | | | | | |
| DAC | — | | | 82 | | | — | | | — | | | 82 | |
| Deferred income taxes | — | | | — | | | — | | | (334) | | | (334) | |
| Policyholders’ liabilities | — | | | — | | | (108) | | | — | | | (108) | |
| Net unrealized investment gains (losses) excluding credit losses | 2,622 | | | (534) | | | (86) | | | (420) | | | 1,582 | |
| Net unrealized investment gains (losses) with credit losses (1) | 2 | | | — | | | — | | | — | | | 2 | |
| Balance, June 30, 2019 | $ | 2,624 | | | $ | (534) | | | $ | (86) | | | $ | (420) | | | $ | 1,584 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gains (Losses) on Investments | | DAC | | Policyholders’ Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) |
| (in millions) |
| Balance, January 1, 2021 | $ | 8,230 | | | $ | (466) | | | $ | (1,814) | | | $ | (1,250) | | | $ | 4,700 | |
| Net investment gains (losses) arising during the period | (4,891) | | | — | | | — | | | — | | | (4,891) | |
| Reclassification adjustment: | | | | | | | | | — | |
| Included in Net income (loss) | (176) | | | — | | | — | | | — | | | (176) | |
| Excluded from Net income (loss) | 0 | | | — | | | — | | | — | | | 0 | |
| Other (1) | (31) | | | — | | | — | | | — | | | (31) | |
| Impact of net unrealized investment gains (losses) | 0 | | | 164 | | | 1,001 | | | 826 | | | 1,991 | |
| Net unrealized investment gains (losses) excluding credit losses | 3,132 | | | (302) | | | (813) | | | (424) | | | 1,593 | |
| Net unrealized investment gains (losses) with credit losses | (8) | | | 1 | | | 2 | | | 1 | | | (4) | |
| Balance, March 31, 2021 | $ | 3,124 | | | $ | (301) | | | $ | (811) | | | $ | (423) | | | $ | 1,589 | |
| | | | | | | | | |
| Balance, January 1, 2020 | $ | 3,084 | | | $ | (826) | | | $ | (192) | | | $ | (433) | | | $ | 1,633 | |
| Net investment gains (losses) arising during the period | 2,026 | | | — | | | — | | | — | | | 2,026 | |
| Reclassification adjustment: | | | | | | | | | — | |
| Included in Net income (loss) | (63) | | | — | | | — | | | — | | | (63) | |
| Excluded from Net income (loss) | 0 | | | — | | | — | | | — | | | 0 | |
| Impact of net unrealized investment gains (losses) | 0 | | | 621 | | | (812) | | | (373) | | | (564) | |
| Net unrealized investment gains (losses) excluding credit losses | 5,047 | | | (205) | | | (1,004) | | | (806) | | | 3,032 | |
| Net unrealized investment gains (losses) with credit losses | (7) | | | 0 | | | 1 | | | 1 | | | (5) | |
| Balance, March 31, 2020 | $ | 5,040 | | | $ | (205) | | | $ | (1,003) | | | $ | (805) | | | $ | 3,027 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gains (Losses) on Investments | | DAC | | Policyholders’ Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) |
| (in millions) | | | | | | | | |
| Balance, January 1, 2020 | $ | 3,084 | | | $ | (831) | | | $ | (192) | | | $ | (433) | | | $ | 1,628 | |
| Net investment gains (losses) arising during the period | 5,362 | | | — | | | — | | | — | | | 5,362 | |
| Reclassification adjustment: | | | | | | | | | — | |
| Included in Net income (loss) | (230) | | | — | | | — | | | — | | | (230) | |
| Excluded from Net income (loss) | — | | | — | | | — | | | — | | | — | |
| Impact of net unrealized investment gains (losses) on: | | | | | | | | |
|
| DAC | — | | | 336 | | | — | | | — | | | 336 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY_____________
Notes(1) Effective January 1, 2021, certain preferred stock have been reclassified to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gains (Losses) on Investments | | DAC | | Policyholders’ Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) |
| (in millions) | | | | | | | | |
| Deferred income taxes | — | | | — | | | — | | | (810) | | | (810) | |
| Policyholders’ liabilities | — | | | — | | | (1,611) | | | — | | | (1,611) | |
| Net unrealized investment gains (losses) excluding credit losses | 8,216 | | | (495) | | | (1,803) | | | (1,243) | | | 4,675 | |
| Net unrealized investment gains (losses) with credit losses | (9) | | | 1 | | | 2 | | | 1 | | | (5) | |
| Balance, June 30, 2020 | $ | 8,207 | | | $ | (494) | | | $ | (1,801) | | | $ | (1,242) | | | $ | 4,670 | |
| | | | | | | | | |
| Balance, January 1, 2019 | $ | (577) | | | $ | 39 | | | $ | (55) | | | $ | 125 | | | $ | (468) | |
| Net investment gains (losses) arising during the period | 3,206 | | | — | | | — | | | — | | | 3,206 | |
| Reclassification adjustment: | | | | | | | | | |
| Included in Net income (loss) | (7) | | | — | | | — | | | — | | | (7) | |
| Excluded from Net income (loss) | — | | | — | | | — | | | — | | | — | |
| Impact of net unrealized investment gains (losses) on: | | | | | | | | | |
| DAC | — | | | (573) | | | — | | | — | | | (573) | |
| Deferred income taxes | — | | | — | | | — | | | (545) | | | (545) | |
| Policyholders’ liabilities | — | | | — | | | (31) | | | — | | | (31) | |
| Net unrealized investment gains (losses) excluding credit losses | 2,622 | | | (534) | | | (86) | | | (420) | | | 1,582 | |
| Net unrealized investment gains (losses) with credit losses (1) | 2 | | | — | | | — | | | — | | | 2 | |
| Balance, June 30, 2019 | $ | 2,624 | | | $ | (534) | | | $ | (86) | | | $ | (420) | | | $ | 1,584 | |
______________
(1)Credit losses for 2019 were OTTI losses.other equity investments (see Note 2 Significant Accounting Policies – Investments).
The following tables disclose the fair values and gross unrealized losses of the 6391,510 issues at June 30, 2020as of March 31, 2021 and the 390537 issues atas of December 31, 20192020 that are not deemed to have credit losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position for the specified periods at the dates indicated:
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
AFS Fixed Maturities in an Unrealized Loss Position for Which No Allowance Is Recorded
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | | | 12 Months or Longer | | | | Total | | |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| (in millions) | | | | | | | | | | |
| June 30, 2020: | | | | | | | | | | | |
| Fixed Maturities: | | | | | | | | | | | |
| Corporate | $ | 2,511 | | | $ | 96 | | | $ | 273 | | | $ | 51 | | | $ | 2,784 | | | $ | 147 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Foreign governments | 47 | | | 6 | | | — | | | — | | | 47 | | | 6 | |
| | | | | | | | | | | |
| Asset-backed | 1,349 | | | 37 | | | 73 | | | 4 | | | 1,422 | | | 41 | |
| | | | | | | | | | | |
| Redeemable preferred stock | 121 | | | 8 | | | 11 | | | 2 | | | 132 | | | 10 | |
| Total at June 30, 2020 | $ | 4,028 | | | $ | 147 | | | $ | 357 | | | $ | 57 | | | $ | 4,385 | | | $ | 204 | |
| | | | | | | | | | | |
| December 31, 2019: (1) | | | | | | | | | | | |
| Fixed Maturities: | | | | | | | | | | | |
| Corporate | $ | 2,669 | | | $ | 41 | | | $ | 366 | | | $ | 20 | | | $ | 3,035 | | | $ | 61 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | Less Than 12 Months | | | 12 Months or Longer | | | Total | | | Less Than 12 Months | | 12 Months or Longer | | Total |
| | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| | (in millions) | | | (in millions) |
| March 31, 2021: | | March 31, 2021: | |
| Fixed Maturities: | | Fixed Maturities: | |
| Corporate | | Corporate | $ | 11,338 | | | $ | 568 | | | $ | 466 | | | $ | 29 | | | $ | 11,804 | | | $ | 597 | |
| U.S. Treasury, government and agency | U.S. Treasury, government and agency | 4,245 | | | 305 | | | 2 | | | — | | | 4,247 | | | 305 | | U.S. Treasury, government and agency | 4,970 | | | 174 | | | 0 | | | 0 | | | 4,970 | | | 174 | |
| States and political subdivisions | States and political subdivisions | 123 | | | 3 | | | — | | | — | | | 123 | | | 3 | | States and political subdivisions | 108 | | | 7 | | | 0 | | | 0 | | | 108 | | | 7 | |
| Foreign governments | | Foreign governments | 424 | | | 34 | | | 29 | | | 4 | | | 453 | | | 38 | |
| Residential mortgage-backed | | Residential mortgage-backed | 4 | | | 0 | | | 3 | | | 0 | | | 7 | | | 0 | |
| Asset-backed | | Asset-backed | 649 | | | 2 | | | 17 | | | 0 | | | 666 | | | 2 | |
| Commercial mortgage-backed | | Commercial mortgage-backed | 778 | | | 18 | | | 0 | | | 0 | | | 778 | | | 18 | |
| Redeemable preferred stock (1) | | Redeemable preferred stock (1) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total at March 31, 2021 | | Total at March 31, 2021 | $ | 18,271 | | | $ | 803 | | | $ | 515 | | | $ | 33 | | | $ | 18,786 | | | $ | 836 | |
| | December 31, 2020: | | December 31, 2020: | |
| Fixed Maturities: | | Fixed Maturities: | |
| Corporate | | Corporate | $ | 2,773 | | | $ | 52 | | | $ | 332 | | | $ | 32 | | | $ | 3,105 | | | $ | 84 | |
| U.S. Treasury, government and agency | | U.S. Treasury, government and agency | 881 | | | 5 | | | 0 | | | 0 | | | 881 | | | 5 | |
| | Foreign governments | Foreign governments | 11 | | | — | | | 47 | | | 5 | | | 58 | | | 5 | | Foreign governments | 153 | | | 2 | | | 20 | | | 4 | | | 173 | | | 6 | |
| | Asset-backed | Asset-backed | 319 | | | — | | | 201 | | | 2 | | | 520 | | | 2 | | Asset-backed | 809 | | | 4 | | | 76 | | | 1 | | | 885 | | | 5 | |
| | Redeemable preferred stock | Redeemable preferred stock | 29 | | | — | | | 49 | | | 5 | | | 78 | | | 5 | | Redeemable preferred stock | 53 | | | 1 | | | 11 | | | 2 | | | 64 | | | 3 | |
| Total at December 31, 2019 | $ | 7,396 | | | $ | 349 | | | $ | 665 | | | $ | 32 | | | $ | 8,061 | | | $ | 381 | | |
| Total at December 31, 2020 | | Total at December 31, 2020 | $ | 4,669 | | | $ | 64 | | | $ | 439 | | | $ | 39 | | | $ | 5,108 | | | $ | 103 | |
______________
(1)Amounts represents fixed maturities in an unrealized loss position that are not deemedEffective January 1, 2021, certain preferred stock have been reclassified to be other-than-temporarily impaired for 2019.other equity investments (see Note 2 Significant Accounting Policies – Investments).
The Company’s investments in fixed maturities do not include concentrations of credit risk of any single issuer greater than 10% of the consolidated equity of the Company, other than securities of the U.S. government, U.S. government agencies, and certain securities guaranteed by the U.S. government. The Company maintains a diversified portfolio of corporate securities across industries and issuers and does not have exposure to any single issuer in excess of 0.6%0.7% of total corporate securities. The largest exposures to a single issuer of corporate securities held at June 30, 2020as of March 31, 2021 and December 31, 20192020 were $318$328 million and $279$338 million, respectively, representing 2.1%4.7% and 2.4%2.9% of the consolidated equity of the Company.
Corporate high yield securities, consisting primarily of public high yield bonds, are classified as other than investment grade by the various rating agencies, i.e., a rating below Baa3/BBB- or the National Association of Insurance Commissioners (“NAIC”)NAIC designation of 3 (medium investment grade), 4 or 5 (below investment grade) or 6 (in or near default). At June 30, 2020As of March 31, 2021 and December 31, 2019,2020, respectively, approximately $1.9$2.6 billion and $1.4$2.4 billion, or 3.0%3.8% and 2.3%3.6%, of the $63.6$68.9 billion and $59.3$68.1 billion aggregate amortized cost of fixed maturities held by the Company were considered to be other than investment grade. These securities had gross unrealized losses of $112$48 million and $21$48 million at June 30, 2020as of March 31, 2021 and December 31, 2019,2020, respectively.
At June 30, 2020As of March 31, 2021 and December 31, 2019,2020, respectively, the $57$33 million and $32$39 million of gross unrealized losses of twelve months or more were primarily concentrated in corporate securities, as applicable.securities. In accordance with the policy described in Note 2, the Company concluded that an adjustment to income for OTTI (prior to January 1, 2020) nor an allowance for credit losses (after January 1, 2020) for these securities was not warranted at either June 30, 2020March 31, 2021 or December 31, 2019. At June 30, 20202020. As of March 31, 2021 and December 31, 2019,2020, the Company did not intend to sell the securities nor will it likely be required to dispose of the securities before the anticipated recovery of their remaining amortized cost basis.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Based on the Company’s evaluation both qualitatively and quantitatively of the drivers of the decline in fair value of fixed maturity securities as of June 30, 2020,March 31, 2021, the Company determined that the unrealized loss was primarily due to increases in credit spreads and changes in credit ratings due to the impact of the COVID-19 pandemic on financial markets and assessments of fundamental risks.ratings.
Mortgage Loans on Real Estate
The Company utilizes a PD/LGD model, configured in accordance with the Company’s policies that meet the concepts in the CECL framework, to estimate expected credit losses for mortgage loans as a product of PD, LGD and the exposure at default across various economic scenarios. The PD and LGD are estimated at the loan-level based on loans’ current and forecasted risk characteristics as well as macroeconomic forecasts. The PD is estimated using both macroeconomic conditions as well as individual loan risk characteristics including LTV ratios, DSC ratios, seasoning, collateral type, geography, and underlying credit. The LGD is driven primarily by the type and value of collateral, and secondarily by expected liquidation costs and time to recovery.
The model also incorporates the Company’s reasonable and supportable forecasts of the macroeconomic variables deemed to be correlated to the credit risk of its loans. The length of the reasonable and supportable forecast period is reassessed on a quarterly basis and may be adjusted as appropriate over time to be consistent with macroeconomic conditions and the environment as of the reporting date. Reversion to historical loss information is performed for periods beyond the reasonable and supportable forecast period.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
The components of amortized cost for mortgage loans on the consolidated balance sheets excludes accrued interest amounts because the Company presents accrued interest receivables within Other assets. Accrued interest receivable on commercial and agricultural mortgage loans at June 30, 2020as of March 31, 2021 was $28$30 million and $29 million, respectively. Accrued interest of $1 million was written off for the three and six months ended June 30, 2020 for commercial mortgage loans. There was 0 accrued interest written off for commercial and agricultural mortgage loans for the three and six months ended June 30, 2020.March 31, 2021.
Once mortgage loans are placed on nonaccrual status, the Company reverses accrued interest receivable against interest income. Since the nonaccrual policy results in the timely reversalAs of accrued interest receivable, the Company does not record an allowance for credit losses on accrued interest receivable.
At June 30, 2020,March 31, 2021, the Company had 0 loans for which foreclosure was probable included within the individually assessed mortgage loans, and accordingly had 0 associated allowance for credit losses.
Allowance for Credit Losses on Mortgage Loans
The change in the allowance for credit losses for commercial mortgage loans and agricultural mortgage loans during the three and six months ended June 30,March 31, 2021 and 2020 waswere as follows:
| | | Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 | | | | Three Months Ended March 31, | |
| | | | | | | | 2021 | | 2020 | |
| | (in millions) | | | | (in millions) | |
| Allowance for credit losses on mortgage loans (1): | | | |
| Allowance for credit losses on mortgage loans: | | Allowance for credit losses on mortgage loans: | | | |
| Commercial mortgages: | Commercial mortgages: | | | Commercial mortgages: | | | |
| Balance, beginning of period | Balance, beginning of period | $ | (43) | | | $ | (33) | | | Balance, beginning of period | | $ | 77 | | | $ | 33 | | |
| Current-period provision for expected credit losses | Current-period provision for expected credit losses | (19) | | | (29) | | | Current-period provision for expected credit losses | | (7) | | | 11 | | |
| Write-offs charged against the allowance | Write-offs charged against the allowance | — | | | — | | | Write-offs charged against the allowance | | 0 | | | 0 | | |
| Recoveries of amounts previously written off | Recoveries of amounts previously written off | — | | | — | | | Recoveries of amounts previously written off | | 0 | | | (1) | | |
| Net change in allowance | Net change in allowance | (19) | | | (29) | | | Net change in allowance | | (7) | | | 10 | | |
| Ending Balance, June 30, | $ | (62) | | | $ | (62) | | | |
| Balance, end of period | | Balance, end of period | | $ | 70 | | | $ | 43 | | |
| | Agricultural mortgages: | Agricultural mortgages: | | | Agricultural mortgages: | | | |
| Balance, beginning of period | Balance, beginning of period | $ | (3) | | | $ | (3) | | | Balance, beginning of period | | $ | 4 | | | $ | 3 | | |
| Current-period provision for expected credit losses | Current-period provision for expected credit losses | (1) | | | (1) | | | Current-period provision for expected credit losses | | 0 | | | 0 | | |
| Write-offs charged against the allowance | Write-offs charged against the allowance | — | | | — | | | Write-offs charged against the allowance | | 0 | | | 0 | | |
| Recoveries of amounts previously written off | Recoveries of amounts previously written off | — | | | — | | | Recoveries of amounts previously written off | | 0 | | | 0 | | |
| Net change in allowance | Net change in allowance | (1) | | | (1) | | | Net change in allowance | | 0 | | | 0 | | |
| Ending Balance, June 30, | $ | (4) | | | $ | (4) | | | |
| Balance, end of period | | Balance, end of period | | $ | 4 | | | $ | 3 | | |
| | Total allowance for credit losses | Total allowance for credit losses | $ | (66) | | | $ | (66) | | | Total allowance for credit losses | | $ | 74 | | | $ | 46 | | |
____________
(1) See Note 2 for discussion of the transition balance.
The change in the allowance for credit losses is attributable to:
•increases/decreases in the loan balance due to new originations, maturing mortgages, and loan amortization;
•changes in credit quality; and
•changes in market assumptions primarily related to COVID-19 driven economic changes.
Credit Quality Information
The following tables summarize the Company’s mortgage loans segregated by risk rating exposure at June 30,as of March 31, 2021 and December 31, 2020.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
LTV Ratios (1)(3)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At June 30, 2020 | | | | | | | | | | | | |
| Amortized Cost Basis by Origination Year | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| (in millions) | | | | | | | | | | | | |
| Mortgage loans: | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | |
| 0% - 50% | $ | — | | | $ | — | | | $ | 29 | | | $ | 324 | | | $ | 196 | | | $ | 748 | | | $ | 1,297 | |
| 50% - 70% | 656 | | | 613 | | | 915 | | | 759 | | | 2,501 | | | 1,714 | | | 7,158 | |
| 70% - 90% | 90 | | | 184 | | | 304 | | | 113 | | | 58 | | | 464 | | | 1,213 | |
| 90% plus | — | | | — | | | — | | | 5 | | | — | | | 156 | | | 161 | |
| Total commercial | $ | 746 | | | $ | 797 | | | $ | 1,248 | | | $ | 1,201 | | | $ | 2,755 | | | $ | 3,082 | | | $ | 9,829 | |
| | | | | | | | | | | | | |
| Agricultural: | | | | | | | | | | | | | |
| 0% - 50% | $ | 106 | | | $ | 139 | | | $ | 159 | | | $ | 167 | | | $ | 254 | | | $ | 733 | | | $ | 1,558 | |
| 50% - 70% | 204 | | | 139 | | | 186 | | | 112 | | | 129 | | | 394 | | | 1,164 | |
| 70% - 90% | — | | | — | | | 3 | | | — | | | — | | | 18 | | | 21 | |
| 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total agricultural | $ | 310 | | | $ | 278 | | | $ | 348 | | | $ | 279 | | | $ | 383 | | | $ | 1,145 | | | $ | 2,743 | |
| | | | | | | | | | | | | |
| Total mortgage loans: | | | | | | | | | | | | | |
| 0% - 50% | $ | 106 | | | $ | 139 | | | $ | 188 | | | $ | 491 | | | $ | 450 | | | $ | 1,481 | | | $ | 2,855 | |
| 50% - 70% | 860 | | | 752 | | | 1,101 | | | 871 | | | 2,630 | | | 2,108 | | | 8,322 | |
| 70% - 90% | 90 | | | 184 | | | 307 | | | 113 | | | 58 | | | 482 | | | 1,234 | |
| 90% plus | — | | | — | | | — | | | 5 | | | — | | | 156 | | | 161 | |
| Total mortgage loans | $ | 1,056 | | | $ | 1,075 | | | $ | 1,596 | | | $ | 1,480 | | | $ | 3,138 | | | $ | 4,227 | | | $ | 12,572 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| Amortized Cost Basis by Origination Year |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| (in millions) |
| Mortgage loans: | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | |
| 0% - 50% | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 324 | | | $ | 772 | | | $ | 1,096 | |
| 50% - 70% | 313 | | | 1,294 | | | 364 | | | 803 | | | 657 | | | 3,681 | | | 7,112 | |
| 70% - 90% | 0 | | | 321 | | | 456 | | | 452 | | | 220 | | | 668 | | | 2,117 | |
| 90% plus | 0 | | | 0 | | | 0 | | | 12 | | | 5 | | | 290 | | | 307 | |
| Total commercial | $ | 313 | | | $ | 1,615 | | | $ | 820 | | | $ | 1,267 | | | $ | 1,206 | | | $ | 5,411 | | | $ | 10,632 | |
| | | | | | | | | | | | | |
| Agricultural: | | | | | | | | | | | | | |
| 0% - 50% | $ | 51 | | | $ | 218 | | | $ | 131 | | | $ | 152 | | | $ | 140 | | | $ | 853 | | | $ | 1,545 | |
| 50% - 70% | 41 | | | 275 | | | 120 | | | 158 | | | 101 | | | 444 | | | 1,139 | |
| 70% - 90% | 0 | | | 0 | | | 0 | | | 3 | | | 0 | | | 18 | | | 21 | |
| 90% plus | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total agricultural | $ | 92 | | | $ | 493 | | | $ | 251 | | | $ | 313 | | | $ | 241 | | | $ | 1,315 | | | $ | 2,705 | |
| | | | | | | | | | | | | |
| Total mortgage loans: | | | | | | | | | | | | | |
| 0% - 50% | $ | 51 | | | $ | 218 | | | $ | 131 | | | $ | 152 | | | $ | 464 | | | $ | 1,625 | | | $ | 2,641 | |
| 50% - 70% | 354 | | | 1,569 | | | 484 | | | 961 | | | 758 | | | 4,125 | | | 8,251 | |
| 70% - 90% | 0 | | | 321 | | | 456 | | | 455 | | | 220 | | | 686 | | | 2,138 | |
| 90% plus | 0 | | | 0 | | | 0 | | | 12 | | | 5 | | | 290 | | | 307 | |
| Total mortgage loans | $ | 405 | | | $ | 2,108 | | | $ | 1,071 | | | $ | 1,580 | | | $ | 1,447 | | | $ | 6,726 | | | $ | 13,337 | |
Debt Service Coverage Ratios (2)(3)
| | | At June 30, 2020 | | | March 31, 2021 |
| | Amortized Cost Basis by Origination Year | | | Amortized Cost Basis by Origination Year |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| | (in millions) | | | (in millions) |
| Mortgage loans: | Mortgage loans: | | Mortgage loans: | |
| Commercial: | Commercial: | | Commercial: | |
| Greater than 2.0x | Greater than 2.0x | $ | 621 | | | $ | 373 | | | $ | 800 | | | $ | 377 | | | $ | 2,134 | | | $ | 1,315 | | | $ | 5,620 | | Greater than 2.0x | $ | 226 | | | $ | 1,230 | | | $ | 492 | | | $ | 772 | | | $ | 268 | | | $ | 3,319 | | | $ | 6,307 | |
| 1.8x to 2.0x | 1.8x to 2.0x | 90 | | | 187 | | | 123 | | | 409 | | | 70 | | | 484 | | | 1,363 | | 1.8x to 2.0x | 0 | | | 227 | | | 90 | | | 118 | | | 378 | | | 438 | | | 1,251 | |
| 1.5x to 1.8x | 1.5x to 1.8x | 35 | | | 183 | | | 230 | | | 302 | | | 551 | | | 610 | | | 1,911 | | 1.5x to 1.8x | 0 | | | 98 | | | 138 | | | 187 | | | 424 | | | 758 | | | 1,605 | |
| 1.2x to 1.5x | 1.2x to 1.5x | — | | | 12 | | | 12 | | | 76 | | | — | | | 673 | | | 773 | | 1.2x to 1.5x | 0 | | | 60 | | | 56 | | | 154 | | | 81 | | | 699 | | | 1,050 | |
| 1.0x to 1.2x | 1.0x to 1.2x | — | | | 42 | | | 83 | | | 37 | | | — | | | — | | | 162 | | 1.0x to 1.2x | 87 | | | 0 | | | 44 | | | 0 | | | 0 | | | 124 | | | 255 | |
| Less than 1.0x | Less than 1.0x | — | | | — | | | — | | | — | | | — | | | — | | | — | | Less than 1.0x | 0 | | | 0 | | | 0 | | | 36 | | | 55 | | | 73 | | | 164 | |
| Total commercial | Total commercial | $ | 746 | | | $ | 797 | | | $ | 1,248 | | | $ | 1,201 | | | $ | 2,755 | | | $ | 3,082 | | | $ | 9,829 | | Total commercial | $ | 313 | | | $ | 1,615 | | | $ | 820 | | | $ | 1,267 | | | $ | 1,206 | | | $ | 5,411 | | | $ | 10,632 | |
| | Agricultural | | |
| Agricultural: | | Agricultural: | |
| Greater than 2.0x | Greater than 2.0x | $ | 43 | | | $ | 28 | | | $ | 39 | | | $ | 37 | | | $ | 76 | | | $ | 162 | | | $ | 385 | | Greater than 2.0x | $ | 11 | | | $ | 67 | | | $ | 26 | | | $ | 24 | | | $ | 34 | | | $ | 233 | | | $ | 395 | |
| 1.8x to 2.0x | 1.8x to 2.0x | 11 | | | 36 | | | 15 | | | 17 | | | 21 | | | 91 | | | 191 | | 1.8x to 2.0x | 19 | | | 37 | | | 31 | | | 24 | | | 15 | | | 94 | | | 220 | |
| 1.5x to 1.8x | 1.5x to 1.8x | 75 | | | 39 | | | 46 | | | 43 | | | 52 | | | 232 | | | 487 | | 1.5x to 1.8x | 25 | | | 117 | | | 33 | | | 39 | | | 43 | | | 249 | | | 506 | |
| 1.2x to 1.5x | 1.2x to 1.5x | 110 | | | 126 | | | 148 | | | 110 | | | 158 | | | 349 | | | 1,001 | | 1.2x to 1.5x | 22 | | | 182 | | | 118 | | | 124 | | | 82 | | | 428 | | | 956 | |
| 1.0x to 1.2x | 1.0x to 1.2x | 67 | | | 39 | | | 92 | | | 71 | | | 58 | | | 275 | | | 602 | | 1.0x to 1.2x | 15 | | | 86 | | | 34 | | | 91 | | | 66 | | | 267 | | | 559 | |
| Less than 1.0x | Less than 1.0x | 4 | | | 10 | | | 8 | | | 1 | | | 18 | | | 36 | | | 77 | | Less than 1.0x | 0 | | | 4 | | | 9 | | | 11 | | | 1 | | | 44 | | | 69 | |
| Total agricultural | Total agricultural | $ | 310 | | | $ | 278 | | | $ | 348 | | | $ | 279 | | | $ | 383 | | | $ | 1,145 | | | $ | 2,743 | | Total agricultural | $ | 92 | | | $ | 493 | | | $ | 251 | | | $ | 313 | | | $ | 241 | | | $ | 1,315 | | | $ | 2,705 | |
|
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | At June 30, 2020 | | | March 31, 2021 |
| | Amortized Cost Basis by Origination Year | | | Amortized Cost Basis by Origination Year |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| | (in millions) | | | (in millions) |
| Total mortgage loans | | |
| Total mortgage loans: | | Total mortgage loans: | | | | | | | | | | | | | |
| Greater than 2.0x | Greater than 2.0x | $ | 664 | | | $ | 401 | | | $ | 839 | | | $ | 414 | | | $ | 2,210 | | | $ | 1,477 | | | $ | 6,005 | | Greater than 2.0x | $ | 237 | | | $ | 1,297 | | | $ | 518 | | | $ | 796 | | | $ | 302 | | | $ | 3,552 | | | $ | 6,702 | |
| 1.8x to 2.0x | 1.8x to 2.0x | 101 | | | 223 | | | 138 | | | 426 | | | 91 | | | 575 | | | 1,554 | | 1.8x to 2.0x | 19 | | | 264 | | | 121 | | | 142 | | | 393 | | | 532 | | | 1,471 | |
| 1.5x to 1.8x | 1.5x to 1.8x | 110 | | | 222 | | | 276 | | | 345 | | | 603 | | | 842 | | | 2,398 | | 1.5x to 1.8x | 25 | | | 215 | | | 171 | | | 226 | | | 467 | | | 1,007 | | | 2,111 | |
| 1.2x to 1.5x | 1.2x to 1.5x | 110 | | | 138 | | | 160 | | | 186 | | | 158 | | | 1,022 | | | 1,774 | | 1.2x to 1.5x | 22 | | | 242 | | | 174 | | | 278 | | | 163 | | | 1,127 | | | 2,006 | |
| 1.0x to 1.2x | 1.0x to 1.2x | 67 | | | 81 | | | 175 | | | 108 | | | 58 | | | 275 | | | 764 | | 1.0x to 1.2x | 102 | | | 86 | | | 78 | | | 91 | | | 66 | | | 391 | | | 814 | |
| Less than 1.0x | Less than 1.0x | 4 | | | 10 | | | 8 | | | 1 | | | 18 | | | 36 | | | 77 | | Less than 1.0x | 0 | | | 4 | | | 9 | | | 47 | | | 56 | | | 117 | | | 233 | |
| Total mortgage loans | Total mortgage loans | $ | 1,056 | | | $ | 1,075 | | | $ | 1,596 | | | $ | 1,480 | | | $ | 3,138 | | | $ | 4,227 | | | $ | 12,572 | | Total mortgage loans | $ | 405 | | | $ | 2,108 | | | $ | 1,071 | | | $ | 1,580 | | | $ | 1,447 | | | $ | 6,726 | | | $ | 13,337 | |
_____________
(1)The LTV ratio is derived from current loan balance divided by the fair value of the property. The fair value of the underlying commercial properties is updated annually for each mortgage loan.
(2)The DSC ratio is calculated using the most recently reported operating income results from property operations divided by annual debt service.
LTV Ratios (1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Amortized Cost Basis by Origination Year |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| (in millions) |
| Mortgage loans: | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | |
| 0% - 50% | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 324 | | | $ | 170 | | | $ | 505 | | | $ | 999 | |
| 50% - 70% | 1,294 | | | 357 | | | 803 | | | 656 | | | 2,190 | | | 1,697 | | | 6,997 | |
| 70% - 90% | 321 | | | 457 | | | 452 | | | 219 | | | 203 | | | 538 | | | 2,190 | |
| 90% plus | 0 | | | 0 | | | 12 | | | 5 | | | 0 | | | 288 | | | 305 | |
| Total commercial | $ | 1,615 | | | $ | 814 | | | $ | 1,267 | | | $ | 1,204 | | | $ | 2,563 | | | $ | 3,028 | | | $ | 10,491 | |
| | | | | | | | | | | | | |
| Agricultural: | | | | | | | | | | | | | |
| 0% - 50% | $ | 218 | | | $ | 135 | | | $ | 169 | | | $ | 157 | | | $ | 236 | | | $ | 652 | | | $ | 1,567 | |
| 50% - 70% | 277 | | | 129 | | | 161 | | | 102 | | | 124 | | | 351 | | | 1,144 | |
| 70% - 90% | 0 | | | 0 | | | 3 | | | 0 | | | 0 | | | 18 | | | 21 | |
| 90% plus | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total agricultural | $ | 495 | | | $ | 264 | | | $ | 333 | | | $ | 259 | | | $ | 360 | | | $ | 1,021 | | | $ | 2,732 | |
| | | | | | | | | | | | | |
| Total mortgage loans: | | | | | | | | | | | | | |
| 0% - 50% | $ | 218 | | | $ | 135 | | | $ | 169 | | | $ | 481 | | | $ | 406 | | | $ | 1,157 | | | $ | 2,566 | |
| 50% - 70% | 1,571 | | | 486 | | | 964 | | | 758 | | | 2,314 | | | 2,048 | | | 8,141 | |
| 70% - 90% | 321 | | | 457 | | | 455 | | | 219 | | | 203 | | | 556 | | | 2,211 | |
| 90% plus | 0 | | | 0 | | | 12 | | | 5 | | | 0 | | | 288 | | | 305 | |
| Total mortgage loans | $ | 2,110 | | | $ | 1,078 | | | $ | 1,600 | | | $ | 1,463 | | | $ | 2,923 | | | $ | 4,049 | | | $ | 13,223 | |
(3)
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Debt Service Coverage Ratios (2)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Amortized Cost Basis by Origination Year |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| (in millions) |
| Mortgage loans: | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | |
| Greater than 2.0x | $ | 1,230 | | | $ | 492 | | | $ | 772 | | | $ | 268 | | | $ | 1,942 | | | $ | 1,230 | | | $ | 5,934 | |
| 1.8x to 2.0x | 227 | | | 83 | | | 118 | | | 378 | | | 184 | | | 329 | | | 1,319 | |
| 1.5x to 1.8x | 98 | | | 138 | | | 187 | | | 479 | | | 437 | | | 616 | | | 1,955 | |
| 1.2x to 1.5x | 60 | | | 57 | | | 154 | | | 79 | | | 0 | | | 658 | | | 1,008 | |
| 1.0x to 1.2x | 0 | | | 44 | | | 0 | | | 0 | | | 0 | | | 123 | | | 167 | |
| Less than 1.0x | 0 | | | 0 | | | 36 | | | 0 | | | 0 | | | 72 | | | 108 | |
| Total commercial | $ | 1,615 | | | $ | 814 | | | $ | 1,267 | | | $ | 1,204 | | | $ | 2,563 | | | $ | 3,028 | | | $ | 10,491 | |
| | | | | | | | | | | | | |
| Agricultural: | | | | | | | | | | | | | |
| Greater than 2.0x | $ | 67 | | | $ | 26 | | | $ | 36 | | | $ | 38 | | | $ | 71 | | | $ | 167 | | | $ | 405 | |
| 1.8x to 2.0x | 38 | | | 35 | | | 14 | | | 15 | | | 20 | | | 82 | | | 204 | |
| 1.5x to 1.8x | 117 | | | 38 | | | 41 | | | 45 | | | 52 | | | 209 | | | 502 | |
| 1.2x to 1.5x | 183 | | | 120 | | | 141 | | | 90 | | | 142 | | | 313 | | | 989 | |
| 1.0x to 1.2x | 86 | | | 35 | | | 93 | | | 70 | | | 57 | | | 233 | | | 574 | |
| Less than 1.0x | 4 | | | 10 | | | 8 | | | 1 | | | 18 | | | 17 | | | 58 | |
| Total agricultural | $ | 495 | | | $ | 264 | | | $ | 333 | | | $ | 259 | | | $ | 360 | | | $ | 1,021 | | | $ | 2,732 | |
| | | | | | | | | | | | | |
| Total mortgage loans: | | | | | | | | | | | | | |
| Greater than 2.0x | $ | 1,297 | | | $ | 518 | | | $ | 808 | | | $ | 306 | | | $ | 2,013 | | | $ | 1,397 | | | $ | 6,339 | |
| 1.8x to 2.0x | 265 | | | 118 | | | 132 | | | 393 | | | 204 | | | 411 | | | 1,523 | |
| 1.5x to 1.8x | 215 | | | 176 | | | 228 | | | 524 | | | 489 | | | 825 | | | 2,457 | |
| 1.2x to 1.5x | 243 | | | 177 | | | 295 | | | 169 | | | 142 | | | 971 | | | 1,997 | |
| 1.0x to 1.2x | 86 | | | 79 | | | 93 | | | 70 | | | 57 | | | 356 | | | 741 | |
| Less than 1.0x | 4 | | | 10 | | | 44 | | | 1 | | | 18 | | | 89 | | | 166 | |
| Total mortgage loans | $ | 2,110 | | | $ | 1,078 | | | $ | 1,600 | | | $ | 1,463 | | | $ | 2,923 | | | $ | 4,049 | | | $ | 13,223 | |
_____________
(1)Amounts presented at amortized cost basis.The LTV ratio is derived from current loan balance divided by the fair value of the property. The fair value of the underlying commercial properties is updated annually for each mortgage loan.
(2)The DSC ratio is calculated using the most recently reported operating income results from property operations divided by annual debt service.
The following tables provide information relating to the LTV and DSC ratios for commercial and agricultural mortgage loans at June 30, 2020as of March 31, 2021 and December 31, 2019.2020. The values used in these ratio calculations were developed as part of the periodic review of the commercial and agricultural mortgage loan portfolio, which includes an evaluation of the underlying collateral value.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Mortgage Loans by LTV and DSC Ratios
| | | | DSC Ratio (2) (3) | | | DSC Ratio (2) (3) |
| LTV Ratio (1) (3): | LTV Ratio (1) (3): | Greater than 2.0x | | 1.8x to 2.0x | | 1.5x to 1.8x | | 1.2x to 1.5x | | 1.0x to 1.2x | | Less than 1.0x | | Total | LTV Ratio (1) (3): | Greater than 2.0x | | 1.8x to 2.0x | | 1.5x to 1.8x | | 1.2x to 1.5x | | 1.0x to 1.2x | | Less than 1.0x | | Total |
| | | (in millions) | | | (in millions) |
| June 30, 2020: | | |
| March 31, 2021: | | March 31, 2021: | |
| Mortgage loans: | Mortgage loans: | | Mortgage loans: | |
| Commercial: | Commercial: | | Commercial: | |
| 0% - 50% | 0% - 50% | $ | 1,016 | | | $ | 20 | | | $ | 237 | | | $ | 24 | | | $ | — | | | $ | — | | | $ | 1,297 | | 0% - 50% | $ | 936 | | | $ | 0 | | | $ | 160 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,096 | |
| 50% - 70% | 50% - 70% | 4,208 | | | 1,080 | | | 1,353 | | | 485 | | | 32 | | | — | | | 7,158 | | 50% - 70% | 4,370 | | | 877 | | | 1,156 | | | 597 | | | 112 | | | 0 | | | 7,112 | |
| 70% - 90% | 70% - 90% | 312 | | | 263 | | | 321 | | | 187 | | | 130 | | | — | | | 1,213 | | 70% - 90% | 844 | | | 374 | | | 289 | | | 376 | | | 143 | | | 91 | | | 2,117 | |
| 90% plus | 90% plus | 84 | | | — | | | — | | | 77 | | | — | | | — | | | 161 | | 90% plus | 157 | | | 0 | | | 0 | | | 77 | | | 0 | | | 73 | | | 307 | |
| Total commercial | Total commercial | $ | 5,620 | | | $ | 1,363 | | | $ | 1,911 | | | $ | 773 | | | $ | 162 | | | $ | — | | | $ | 9,829 | | Total commercial | $ | 6,307 | | | $ | 1,251 | | | $ | 1,605 | | | $ | 1,050 | | | $ | 255 | | | $ | 164 | | | $ | 10,632 | |
| | Agricultural: | Agricultural: | | Agricultural: | |
| 0% - 50% | 0% - 50% | $ | 292 | | | $ | 106 | | | $ | 255 | | | $ | 520 | | | $ | 333 | | | $ | 52 | | | $ | 1,558 | | 0% - 50% | $ | 297 | | | $ | 99 | | | $ | 301 | | | $ | 510 | | | $ | 300 | | | $ | 38 | | | $ | 1,545 | |
| 50% - 70% | 50% - 70% | 93 | | | 83 | | | 232 | | | 462 | | | 269 | | | 25 | | | 1,164 | | 50% - 70% | 98 | | | 119 | | | 205 | | | 446 | | | 259 | | | 12 | | | 1,139 | |
| 70% - 90% | 70% - 90% | — | | | 2 | | | — | | | 19 | | | — | | | — | | | 21 | | 70% - 90% | 0 | | | 2 | | | 0 | | | 0 | | | 0 | | | 19 | | | 21 | |
| 90% plus | 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | | 90% plus | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total agricultural | Total agricultural | $ | 385 | | | $ | 191 | | | $ | 487 | | | $ | 1,001 | | | $ | 602 | | | $ | 77 | | | $ | 2,743 | | Total agricultural | $ | 395 | | | $ | 220 | | | $ | 506 | | | $ | 956 | | | $ | 559 | | | $ | 69 | | | $ | 2,705 | |
| | Total mortgage loans: | Total mortgage loans: | | Total mortgage loans: | |
| 0% - 50% | 0% - 50% | $ | 1,308 | | | $ | 126 | | | $ | 492 | | | $ | 544 | | | $ | 333 | | | $ | 52 | | | $ | 2,855 | | 0% - 50% | $ | 1,233 | | | $ | 99 | | | $ | 461 | | | $ | 510 | | | $ | 300 | | | $ | 38 | | | $ | 2,641 | |
| 50% - 70% | 50% - 70% | 4,301 | | | 1,163 | | | 1,585 | | | 947 | | | 301 | | | 25 | | | 8,322 | | 50% - 70% | 4,468 | | | 996 | | | 1,361 | | | 1,043 | | | 371 | | | 12 | | | 8,251 | |
| 70% - 90% | 70% - 90% | 312 | | | 265 | | | 321 | | | 206 | | | 130 | | | — | | | 1,234 | | 70% - 90% | 844 | | | 376 | | | 289 | | | 376 | | | 143 | | | 110 | | | 2,138 | |
| 90% plus | 90% plus | 84 | | | — | | | — | | | 77 | | | — | | | — | | | 161 | | 90% plus | 157 | | | 0 | | | 0 | | | 77 | | | 0 | | | 73 | | | 307 | |
| Total mortgage loans | Total mortgage loans | $ | 6,005 | | | $ | 1,554 | | | $ | 2,398 | | | $ | 1,774 | | | $ | 764 | | | $ | 77 | | | $ | 12,572 | | Total mortgage loans | $ | 6,702 | | | $ | 1,471 | | | $ | 2,111 | | | $ | 2,006 | | | $ | 814 | | | $ | 233 | | | $ | 13,337 | |
| | December 31, 2020: | | December 31, 2020: | |
| Mortgage loans: | | Mortgage loans: | |
| Commercial: | | Commercial: | |
| 0% - 50% | | 0% - 50% | $ | 839 | | | $ | 0 | | | $ | 160 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 999 | |
| 50% - 70% | | 50% - 70% | 4,095 | | | 870 | | | 1,452 | | | 555 | | | 25 | | | 0 | | | 6,997 | |
| 70% - 90% | | 70% - 90% | 844 | | | 449 | | | 343 | | | 376 | | | 142 | | | 36 | | | 2,190 | |
| 90% plus | | 90% plus | 156 | | | 0 | | | 0 | | | 77 | | | 0 | | | 72 | | | 305 | |
| Total commercial | | Total commercial | $ | 5,934 | | | $ | 1,319 | | | $ | 1,955 | | | $ | 1,008 | | | $ | 167 | | | $ | 108 | | | $ | 10,491 | |
| | Agricultural: | | Agricultural: | |
| 0% - 50% | | 0% - 50% | $ | 297 | | | $ | 108 | | | $ | 291 | | | $ | 520 | | | $ | 317 | | | $ | 34 | | | $ | 1,567 | |
| 50% - 70% | | 50% - 70% | 108 | | | 94 | | | 211 | | | 450 | | | 257 | | | 24 | | | 1,144 | |
| 70% - 90% | | 70% - 90% | 0 | | | 2 | | | 0 | | | 19 | | | 0 | | | 0 | | | 21 | |
| 90% plus | | 90% plus | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total agricultural | | Total agricultural | $ | 405 | | | $ | 204 | | | $ | 502 | | | $ | 989 | | | $ | 574 | | | $ | 58 | | | $ | 2,732 | |
|
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | DSC Ratio (2) (3) | | | DSC Ratio (2) (3) |
| LTV Ratio (1) (3): | LTV Ratio (1) (3): | Greater than 2.0x | | 1.8x to 2.0x | | 1.5x to 1.8x | | 1.2x to 1.5x | | 1.0x to 1.2x | | Less than 1.0x | | Total | LTV Ratio (1) (3): | Greater than 2.0x | | 1.8x to 2.0x | | 1.5x to 1.8x | | 1.2x to 1.5x | | 1.0x to 1.2x | | Less than 1.0x | | Total |
| | (in millions) | | |
| December 31, 2019: | | |
| Mortgage loans: | | |
| Commercial: | | |
| 0% - 50% | $ | 887 | | | $ | 38 | | | $ | 214 | | | $ | 24 | | | $ | — | | | $ | — | | | $ | 1,163 | | |
| 50% - 70% | 4,097 | | | 1,195 | | | 1,118 | | | 795 | | | 242 | | | — | | | 7,447 | | |
| 70% - 90% | 251 | | | 98 | | | 214 | | | 154 | | | 46 | | | — | | | 763 | | |
| 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
| Total commercial | $ | 5,235 | | | $ | 1,331 | | | $ | 1,546 | | | $ | 973 | | | $ | 288 | | | $ | — | | | $ | 9,373 | | |
| | Agricultural: | | |
| 0% - 50% | $ | 322 | | | $ | 104 | | | $ | 241 | | | $ | 545 | | | $ | 321 | | | $ | 50 | | | $ | 1,583 | | |
| 50% - 70% | 82 | | | 87 | | | 236 | | | 426 | | | 251 | | | 33 | | | 1,115 | | |
| 70% - 90% | — | | | — | | | — | | | 19 | | | — | | | — | | | 19 | | |
| 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
| Total agricultural | $ | 404 | | | $ | 191 | | | $ | 477 | | | $ | 990 | | | $ | 572 | | | $ | 83 | | | $ | 2,717 | | |
| | | | | | | | | | | | | | | | (in millions) |
| Total mortgage loans: | Total mortgage loans: | | Total mortgage loans: | |
| 0% - 50% | 0% - 50% | $ | 1,209 | | | $ | 142 | | | $ | 455 | | | $ | 569 | | | $ | 321 | | | $ | 50 | | | $ | 2,746 | | 0% - 50% | $ | 1,136 | | | $ | 108 | | | $ | 451 | | | $ | 520 | | | $ | 317 | | | $ | 34 | | | $ | 2,566 | |
| 50% - 70% | 50% - 70% | 4,179 | | | 1,282 | | | 1,354 | | | 1,221 | | | 493 | | | 33 | | | 8,562 | | 50% - 70% | 4,203 | | | 964 | | | 1,663 | | | 1,005 | | | 282 | | | 24 | | | 8,141 | |
| 70% - 90% | 70% - 90% | 251 | | | 98 | | | 214 | | | 173 | | | 46 | | | — | | | 782 | | 70% - 90% | 844 | | | 451 | | | 343 | | | 395 | | | 142 | | | 36 | | | 2,211 | |
| 90% plus | 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | | 90% plus | 156 | | | 0 | | | 0 | | | 77 | | | 0 | | | 72 | | | 305 | |
| Total mortgage loans | Total mortgage loans | $ | 5,639 | | | $ | 1,522 | | | $ | 2,023 | | | $ | 1,963 | | | $ | 860 | | | $ | 83 | | | $ | 12,090 | | Total mortgage loans | $ | 6,339 | | | $ | 1,523 | | | $ | 2,457 | | | $ | 1,997 | | | $ | 741 | | | $ | 166 | | | $ | 13,223 | |
______________
(1)The LTV ratio is derived from current loan balance divided by the fair value of the property. The fair value of the underlying commercial properties is updated annually for each mortgage loan.
(2)The DSC ratio is calculated using the most recently reported operating income results from property operations divided by annual debt service.
(3)Amounts presented at amortized cost basis.
Past-Due and Nonaccrual Mortgage Loan Status
The following table provides information relating to the aging analysis of past-due mortgage loans at June 30, 2020as of March 31, 2021 and December 31, 2019,2020, respectively:
Age Analysis of Past Due Mortgage Loans (1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accruing Loans | | | | | | | | | | | | Non-accruing Loans | | Total Loans | | Non-accruing Loans with No Allowance | | Interest Income on Non-accruing Loans(2) |
| Past Due | | | | | | | | Current | | Total | | | | | | | | |
| 30-59 Days | | 60-89 Days | | 90 Days or More | | Total | | | | | | | | | | | | |
| (in millions) | | | | | | | | | | | | | | | | | | |
| June 30, 2020: | | | | | | | | | | | | | | | | | | | |
| Mortgage loans: | | | | | | | | | | | | | | | | | | | |
| Commercial | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,754 | | | $ | 9,754 | | | $ | 75 | | | $ | 9,829 | | | $ | 75 | | | $ | 1 | |
| Agricultural | 67 | | | 9 | | | 49 | | | 125 | | | 2,618 | | | 2,743 | | | — | | | 2,743 | | | — | | | — | |
| Total | $ | 67 | | | $ | 9 | | | $ | 49 | | | $ | 125 | | | $ | 12,372 | | | $ | 12,497 | | | $ | 75 | | | $ | 12,572 | | | $ | 75 | | | $ | 1 | |
| December 31, 2019: | | | | | | | | | | | | | | | | | | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | Accruing Loans | | | Non-accruing Loans | | Total Loans | | Non-accruing Loans with No Allowance | | Interest Income on Non-accruing Loans(2) | | Accruing Loans | | Non-accruing Loans | | Total Loans | | Non-accruing Loans with No Allowance | | Interest Income on Non-accruing Loans |
| | Past Due | | | Current | | Total | | | | Past Due | | Current | Non-accruing Loans with No Allowance | | Interest Income on Non-accruing Loans |
| | 30-59 Days | | 60-89 Days | | 90 Days or More | | Total | | | Interest Income on Non-accruing Loans(2) | | 30-59 Days | | 60-89 Days | | 90 Days or More | | Total | |
| | (in millions) | | | (in millions) |
| March 31, 2021: | | March 31, 2021: | |
| Mortgage loans: | Mortgage loans: | | Mortgage loans: | |
| Commercial | Commercial | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,373 | | | $ | 9,373 | | | $ | — | | | $ | 9,373 | | | $ | — | | | $ | — | | Commercial | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 10,632 | | | $ | 10,632 | | | $ | 0 | | | $ | 10,632 | | | $ | 0 | | | $ | 0 | |
| Agricultural | Agricultural | 57 | | | 1 | | | 66 | | | 124 | | | 2,593 | | | 2,717 | | | — | | | 2,717 | | | — | | | — | | Agricultural | 10 | | | 4 | | | 80 | | | 94 | | | 2,611 | | | 2,705 | | | 0 | | | 2,705 | | | 0 | | | 0 | |
| Total | Total | $ | 57 | | | $ | 1 | | | $ | 66 | | | $ | 124 | | | $ | 11,966 | | | $ | 12,090 | | | $ | — | | | $ | 12,090 | | | $ | — | | | $ | — | | Total | $ | 10 | | | $ | 4 | | | $ | 80 | | | $ | 94 | | | $ | 13,243 | | | $ | 13,337 | | | $ | 0 | | | $ | 13,337 | | | $ | 0 | | | $ | 0 | |
| December 31, 2020: | | December 31, 2020: | | | | | | | | | | | | | | | | | | | |
| Mortgage loans: | | Mortgage loans: | |
| Commercial | | Commercial | $ | 162 | | | $ | 0 | | | $ | 0 | | | $ | 162 | | | $ | 10,329 | | | $ | 10,491 | | | $ | 0 | | | $ | 10,491 | | | $ | 0 | | | $ | 0 | |
| Agricultural | | Agricultural | 76 | | | 7 | | | 29 | | | 112 | | | 2,620 | | | 2,732 | | | 0 | | | 2,732 | | | 0 | | | 0 | |
| Total | | Total | $ | 238 | | | $ | 7 | | | $ | 29 | | | $ | 274 | | | $ | 12,949 | | | $ | 13,223 | | | $ | 0 | | | $ | 13,223 | | | $ | 0 | | | $ | 0 | |
_______________
(1)Amounts presented at amortized cost basis.
(2) Amounts for 2020 represent results for both the three and six months ended June 30, 2020.
At June 30, 2020As of March 31, 2021 and December 31, 2019,2020, the carrying values of problem mortgage loans that had been classified as non-accrual loans were $75$0 million and $0 million, respectively.
Troubled Debt Restructuring
The Company invests in commercial and agriculturalThere were no mortgage loans included in the balance sheet as Mortgage loansloan on real estate and privately negotiatedor fixed maturities included in the balance sheet as Fixed maturities AFS. Under certain circumstances, modifications are granted to these contracts. Each modification is evaluated as to whether a troubled debt restructuring has occurred. A modification is a troubled debt restructuring when the borrower is in financial difficulty and the creditor makes concessions. Generally, the types of concessions may include reducing the face amount or maturity amount of the debt as originally stated, reducing the contractual interest rate, extending the maturity date at an interest rate lower than current market interest rates and/or reducing accrued interest. The Company considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific credit allowance recorded in connection with the troubled debt restructuring. A credit allowance may have been recorded prior to the quarter when the loan is modified in a troubled debt restructuring. Accordingly, the carrying value (net of the allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment. At June 30, 2020, the Company did not have any commercial or agricultural mortgage loans accounted for as troubled debt restructurings. At June 30, 2020,a TDR during the Company had 4 new privately negotiated fixed maturity troubled debt restructurings withthree months ended March 31, 2021 and 2020.
Equity Securities
The table below presents a pre-modification cost basisbreakdown of $42 millionunrealized and post-modification carrying valuerealized gains and (losses) on equity securities during the three months ended March 31, 2021.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Unrealized and Realized Gains (Losses) from Equity Securities (1)
| | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | | | | | | | |
| (in millions) |
| Net investment gains (losses) recognized during the period on securities held at the end of the period | $ | 17 | | | | | | | | | |
| Net investment gains (losses) recognized on securities sold during the period | (6) | | | | | | | | | |
| Unrealized and realized gains (losses) on equity securities | 11 | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
______________
(1) Effective January 1, 2021, certain preferred stock have subsequent payment defaults nor additional commitmentsbeen reclassified to lend. The 4 privately negotiated fixed maturity troubled debt restructurings are 0.04% of the Company’s total invested assets.other equity investments (see Note 2 Significant Accounting Policies – Investments).
Trading Securities
At June 30, 2020As of March 31, 2021 and December 31, 2019,2020, respectively, the fair value of the Company’s trading securities was $6.1$4.7 billion and $6.6$5.3 billion. At June 30, 2020As of March 31, 2021 and December 31, 2019,2020, respectively, trading securities included the General Account’s investment in Separate Accounts, which had carrying values of $38$41 million and $58$43 million.
Net unrealized and realized gains (losses) on trading securities are included in Net investment income (loss) in the Consolidated Statements of Income (Loss). The table below shows a breakdown of Netnet investment income (loss) from trading securities during the three and six months ended June 30, 2020March 31, 2021 and 2019:
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
2020:Net Investment Income (Loss) from Trading Securities
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | | 2021 | | 2020 | |
| | (in millions) | | | | (in millions) |
| Net investment gains (losses) recognized during the period on securities held at the end of the period | Net investment gains (losses) recognized during the period on securities held at the end of the period | $ | 250 | | | $ | 150 | | | $ | 87 | | | $ | 424 | | | Net investment gains (losses) recognized during the period on securities held at the end of the period | | $ | (49) | | | $ | (163) | | |
| Net investment gains (losses) recognized on securities sold during the period | Net investment gains (losses) recognized on securities sold during the period | 14 | | | 1 | | | 17 | | | (23) | | | Net investment gains (losses) recognized on securities sold during the period | | 22 | | | 3 | | |
| Unrealized and realized gains (losses) on trading securities | Unrealized and realized gains (losses) on trading securities | 264 | | | 151 | | | 104 | | | 401 | | | Unrealized and realized gains (losses) on trading securities | | (27) | | | (160) | | |
| Interest and dividend income from trading securities | Interest and dividend income from trading securities | 45 | | | 71 | | | 94 | | | 161 | | | Interest and dividend income from trading securities | | 36 | | | 49 | | |
| Net investment income (loss) from trading securities | Net investment income (loss) from trading securities | $ | 309 | | | $ | 222 | | | $ | 198 | | | $ | 562 | | | Net investment income (loss) from trading securities | | $ | 9 | | | $ | (111) | | |
4) DERIVATIVES
The Company uses derivatives as part of its overall asset/liability risk management primarily to reduce exposures to equity market and interest rate risks. Derivative hedging strategies are designed to reduce these risks from an economic perspective and are all executed within the framework of a “Derivative Use Plan” approved by applicable states’ insurance law. Derivatives are generally not accounted for using hedge accounting, with the exception of Treasury Inflation-Protected Securities (“TIPS”),TIPS, which is discussed further below. Operation of these hedging programs is based on models involving numerous estimates and assumptions, including, among others, mortality, lapse, surrender and withdrawal rates, election rates, fund performance, market volatility and interest rates. A wide range of derivative contracts are used in these hedging programs, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, bond and bond-index total return swaps, swaptions, variance swaps and equity options, credit and foreign exchange derivatives, as well as bond and repo transactions to support the hedging. The derivative contracts are collectively managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in capital markets. In addition, as part of its hedging strategy, the Company targets an asset level for all variable annuity products at or above a CTE98 level under most economic scenarios (Conditional Tail Expectation, or “CTE”,(CTE is a statistical measure of tail risk which quantifies the total asset requirement to sustain a loss if an event outside a given probability level has occurred. CTE98 denotes the financial resources a company would need to cover the average of the worst 2% of scenarios.)
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Derivatives Utilized to Hedge Exposure to Variable Annuities with Guarantee Features
The Company has issued and continues to offer variable annuity products with GMxB features. The risk associated with the GMDB feature is that under-performance of the financial markets could result in GMDB benefits, in the event of death, being higher than what accumulated policyholders’ account balances would support. The risk associated with the GMIB feature is that under-performance of the financial markets could result in the present value of GMIB, in the event of annuitization, being higher than what accumulated policyholders’ account balances would support, taking into account the relationship between current annuity purchase rates and the GMIB guaranteed annuity purchase rates. The risk associated with products that have a GMxB derivative features liability is that under-performance of the financial markets could result in the GMxB derivative features’ benefits being higher than what accumulated policyholders’ account balances would support.
For GMxB features, the Company retains certain risks including basis, credit spread and some volatility risk and risk associated with actual experience versus expected actuarial assumptions for mortality, lapse and surrender, withdrawal and policyholder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMxB features that result from financial markets movements. A portion of exposure to realized equity volatility is hedged using equity options and variance swaps and a portion of exposure to credit risk is hedged using total return swaps on fixed income indices. Additionally, the Company is party to total return swaps for which the reference U.S. Treasury securities are contemporaneously purchased from the market and sold to the swap counterparty. As these transactions result in a transfer of control of the U.S. Treasury securities to the swap counterparty, the Company derecognizes these securities with consequent gain or loss from the sale. The Company has also purchased reinsurance contracts to mitigate the risks associated with GMDB features and the impact of potential market fluctuations on future policyholder elections of GMIB features contained in certain annuity contracts issued by the Company. The reinsurance of the GMIB features is accounted for as a derivative.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
The Company has in place an economic hedge program using interest rate swaps and U.S. Treasury futures to partially protect the overall profitability of future variable annuity sales against declining interest rates.
Derivatives Utilized to Hedge Crediting Rate Exposure on SCS, SIO, MSO and IUL Products/Investment Options
The Company hedges crediting rates in the Structured Capital Strategies (“SCS”)SCS variable annuity, Structured Investment OptionSIO in the EQUI-VEST variable annuity series, (“SIO”), Market Stabilizer Option (“MSO”)MSO in the variable life insurance products and Indexed Universal Life (“IUL”)IUL insurance products. These products permit the contract owner to participate in the performance of an index, Exchange Traded Funds (“ETF”)ETF or commodity price movement up to a cap for a set period of time. They also contain a protection feature, in which the Company will absorb, up to a certain percentage, the loss of value in an index, ETF or commodity price, which varies by product segment.
In order to support the returns associated with these features, the Company enters into derivative contracts whose payouts, in combination with fixed income investments, emulate those of the index, ETF or commodity price, subject to caps and buffers, thereby substantially reducing any exposure to market-related earnings volatility.
Derivatives Used to Hedge Equity Market Risks Associated with the General Account’s Seed Money Investments in Retail Mutual Funds
The Company’s General Account seed money investments in retail mutual funds expose us to market risk, including equity market risk which is partially hedged through equity-index futures contracts to minimize such risk.
Derivatives Used to Hedge Universal Life Products with Secondary Guarantee (“ULSG”)ULSG Policy
The Company implemented a hedge program using fixed income total return swaps to mitigate the interest rate exposure in the ULSG policy statutory liability.
Derivatives Used for General Account Investment Portfolio
The Company maintains a strategy in its General Account investment portfolio to replicate the credit exposure of fixed maturity securities otherwise permissible for investment under its investment guidelines through the sale of credit default swaps (“CDS”).CDS. Under the terms of these swaps, the Company receives quarterly fixed premiums that, together with any initial amount paid or received at trade inception, replicate the credit spread otherwise currently obtainable by purchasing the referenced entity’s bonds of similar maturity. These credit derivatives generally have remaining terms of five years or less and are recorded at fair value with changes in fair value, including the yield component that emerges from initial amounts paid or received, reported in Netnet derivative gains (losses).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
The Company manages its credit exposure taking into consideration both cash and derivatives based positions and selects the reference entities in its replicated credit exposures in a manner consistent with its selection of fixed maturities. In addition, the Company generally transacts the sale of CDS in single name reference entities of investment grade credit quality and with counterparties subject to collateral posting requirements. If there is an event of default by the reference entity or other such credit event as defined under the terms of the swap contract, the Company is obligated to perform under the credit derivative and, at the counterparty’sits option, either pay the referenced amount of the contract less an auction-determined recovery amount or pay the referenced amount of the contract and receive in return the defaulted or similar security of the reference entity for recovery by sale at the contract settlement auction. The Company purchased CDS to mitigate its exposure to a reference entity through cash positions. These positions do not replicate credit spreads.
To date, there have been no events of default or circumstances indicative of a deterioration in the credit quality of the named referenced entities to require or suggest that the Company will have to perform under these CDS.the CDS that it sold. The maximum potential amount of future payments the Company could be required to make under thesethe credit derivatives sold is limited to the par value of the referenced securities which is the dollar or euro-equivalent of the derivative’s notional amount. The Standard North American CDS Contract (“SNAC”) or Standard European Corporate Contract (“STEC”) under which the Company executes these CDS sales transactions does not contain recourse provisions for recovery of amounts paid under the credit derivative.
The Company purchased 30-year TIPS and other sovereign bonds, both inflation-linked and non-inflation linked, as General Account investments and enters into asset or cross-currency basis swaps, to result in payment of the given bond’s coupons and principal at maturity in the bond’s specified currency to the swap counterparty in return for fixed dollar amounts. These swaps, when considered in combination with the bonds, together result in a net position that is intended to replicate a dollar-denominated fixed-coupon cash bond with a yield higher than a term-equivalent U.S. Treasury bond.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
The tables below present quantitative disclosures about the Company’s derivative instruments, including those embedded in other contracts required to be accounted for as derivative instruments:
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Derivative Instruments by Category
| | | At June 30, 2020 | | | Six Months Ended June 30, 2020 | | March 31, 2021 | | Three Months Ended March 31, 2021 |
| | | | | Fair Value | | | | Six Months Ended June 30, 2020 | | Fair Value | | Three Months Ended March 31, 2021 |
| | | Notional
Amount | | Derivative Assets | | Derivative Liabilities | | Net Derivative Gains (Losses) (2) | | Notional
Amount | | Derivative Assets | | Derivative
Liabilities | | Net Derivative
Gains (Losses) (2) |
| | (in millions) | | | (in millions) |
| Derivative instruments: | Derivative instruments: | | Derivative instruments: | |
| Freestanding derivatives (1): | Freestanding derivatives (1): | | Freestanding derivatives (1): | |
| Equity contracts: | Equity contracts: | | Equity contracts: | |
| Futures | Futures | $ | 3,848 | | | $ | — | | | $ | — | | | $ | (126) | | Futures | $ | 4,802 | | | $ | 0 | | | $ | 0 | | | $ | (293) | |
| Swaps | Swaps | 17,760 | | | 77 | | | 79 | | | 963 | | Swaps | 19,254 | | | 5 | | | 2 | | | (1,270) | |
| Options | Options | 36,469 | | | 4,333 | | | 2,442 | | | (1,387) | | Options | 43,102 | | | 9,755 | | | 4,240 | | | 1,143 | |
| Interest rate contracts: | Interest rate contracts: | | Interest rate contracts: | |
| Swaps | Swaps | 24,771 | | | 2,089 | | | 432 | | | 3,658 | | Swaps | 13,919 | | | 2 | | | 2,141 | | | (2,916) | |
| Futures | Futures | 23,565 | | | — | | | — | | | 2,072 | | Futures | 14,759 | | | 0 | | | 0 | | | (947) | |
| Swaptions | Swaptions | — | | | — | | | — | | | 9 | | Swaptions | 0 | | | 0 | | | 0 | | | 0 | |
| Credit contracts: | Credit contracts: | | Credit contracts: | |
| Credit default swaps | Credit default swaps | 1,252 | | | 10 | | | 4 | | | (7) | | Credit default swaps | 951 | | | 6 | | | 3 | | | 1 | |
| Other freestanding contracts: | Other freestanding contracts: | | Other freestanding contracts: | |
| Foreign currency contracts | Foreign currency contracts | 347 | | | — | | | — | | | (3) | | Foreign currency contracts | 524 | | | 0 | | | 1 | | | 0 | |
| Margin | Margin | — | | | 51 | | | 77 | | | — | | Margin | 0 | | | 40 | | | 0 | | | 0 | |
| Collateral | Collateral | — | | | 14 | | | 3,288 | | | — | | Collateral | 0 | | | 1,605 | | | 3,876 | | | 0 | |
| | Embedded derivatives: | Embedded derivatives: | | Embedded derivatives: | |
| GMIB reinsurance contracts (3) | GMIB reinsurance contracts (3) | — | | | 3,433 | | | — | | | 1,026 | | GMIB reinsurance contracts (3) | 0 | | | 2,133 | | | 0 | | | (724) | |
| GMxB derivative features liability (4) | GMxB derivative features liability (4) | — | | | — | | | 12,382 | | | (3,946) | | GMxB derivative features liability (4) | 0 | | | 0 | | | 7,681 | | | 3,357 | |
| SCS, SIO, MSO and IUL indexed features (5) | SCS, SIO, MSO and IUL indexed features (5) | — | | | — | | | 1,690 | | | 1,377 | | SCS, SIO, MSO and IUL indexed features (5) | 0 | | | 0 | | | 5,169 | | | (1,126) | |
| Total derivative instruments | Total derivative instruments | $ | 108,012 | | | $ | 10,007 | | | $ | 20,394 | | | Total derivative instruments | $ | 97,311 | | | $ | 13,546 | | | $ | 23,113 | | |
| | Net derivative gains (losses) (6) | Net derivative gains (losses) (6) |
| |
| |
| | $ | 3,636 | | Net derivative gains (losses) (6) |
| |
| |
| | $ | (2,775) | |
______________
(1)Reported in Otherother invested assets in the consolidated balance sheets.
(2)Reported in Netnet derivative gains (losses) in the consolidated statements of income (loss).
(3)Reported in GMIB reinsurance contract asset in the consolidated balance sheets.
(4)Reported in Futurefuture policy benefits and other policyholders’ liabilities in the consolidated balance sheets.
(5)Reported in Policyholders’policyholders’ account balances in the consolidated balance sheets.
(6)Investment fees of $6$3 million are reported in Netnet derivative gains (losses) in the consolidated statements of income (loss).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Derivative Instruments by Category
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2019 | | | | | | Six Months Ended June 30, 2019 |
| | | Fair Value | | | | |
| Notional
Amount | | Derivative Assets | | Derivative
Liabilities
| | Net Derivative
Gains (Losses) (2)
|
| (in millions) | | | | | | |
Derivative instruments: | | | | | | | |
Freestanding derivatives (1): | | | | | | | |
Equity contracts: | | | | | | | |
Futures | $ | 3,510 | | | $ | — | | | $ | — | | | $ | (930) | |
Swaps | 17,064 | | | 9 | | | 279 | | | (1,260) | |
Options | 47,766 | | | 5,080 | | | 1,749 | | | 1,276 | |
Interest rate contracts: | | | | | | | |
Swaps | 23,700 | | | 467 | | | 523 | | | 1,597 | |
Futures | 20,424 | | | — | | | — | | | 25 | |
Swaptions | 3,201 | | | 16 | | | — | | | 7 | |
Credit contracts: | | | | | | | |
Credit default swaps | 1,232 | | | 18 | | | — | | | 13 | |
Other freestanding contracts: | | | | | | | |
Foreign currency contracts | 501 | | | 3 | | | — | | | (27) | |
Margin | — | | | 140 | | | — | | | — | |
Collateral | — | | | 72 | | | 3,001 | | | — | |
| | | | | | | |
Embedded derivatives: | | | | | | | |
GMIB reinsurance contracts (3) | — | | | 2,466 | | | — | | | 217 | |
GMxB derivative features liability (4) | — | | | — | | | 8,246 | | | (1,116) | |
SCS, SIO, MSO and IUL indexed features (5) | — | | | — | | | 3,150 | | | (1,535) | |
Total derivative instruments | $ | 117,398 | | | $ | 8,271 | | | $ | 16,948 | | | |
| | | | | | | |
Net derivative gains (losses) |
| |
| |
| | $ | (1,733) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | Three Months Ended March 31, 2020 |
| | | | Fair Value | |
| | Notional
Amount | | Derivative Assets | | Derivative Liabilities | | Net Derivative Gains (Losses) (2) |
| (in millions) |
| Derivative instruments: | | | | | | | |
| Freestanding derivatives (1): | | | | | | | |
| Equity contracts: | | | | | | | |
| Futures | $ | 4,267 | | | $ | 0 | | | $ | 0 | | | $ | 258 | |
| Swaps | 22,404 | | | 6 | | | 0 | | | 3,763 | |
| Options | 35,786 | | | 8,383 | | | 3,715 | | | (3,843) | |
| Interest rate contracts: | | | | | | | |
| Swaps | 23,773 | | | 551 | | | 653 | | | 3,578 | |
| Futures | 18,161 | | | 0 | | | 0 | | | 1,993 | |
| Swaptions | 0 | | | 0 | | | 0 | | | 9 | |
| Credit contracts: | | | | | | | |
| Credit default swaps | 919 | | | 8 | | | 1 | | | (13) | |
| Other freestanding contracts: | | | | | | | |
| Foreign currency contracts | 347 | | | 0 | | | 0 | | | (3) | |
| Margin | 0 | | | 26 | | | 66 | | | 0 | |
| Collateral | 0 | | | 212 | | | 3,835 | | | 0 | |
| | | | | | | |
| Embedded derivatives: | | | | | | | |
| GMIB reinsurance contracts (3) | 0 | | | 2,859 | | | 0 | | | 892 | |
| GMxB derivative features liability (4) | 0 | | | 0 | | | 10,936 | | | (1,166) | |
| SCS, SIO, MSO and IUL indexed features (5) | 0 | | | 0 | | | 4,378 | | | 4,067 | |
| Total derivative instruments | $ | 105,657 | | | $ | 12,045 | | | $ | 23,584 | | | |
| | | | | | | |
| Net derivative gains (losses) |
| |
| |
| | $ | 9,535 | |
______________
(1)Reported in Otherother invested assets in the consolidated balance sheets.
(2)Reported in Netnet derivative gains (losses) in the consolidated statements of income (loss).
(3)Reported in GMIB reinsurance contract asset in the consolidated balance sheets.
(4)Reported in Futurefuture policy benefits and other policyholders’ liabilities in the consolidated balance sheets.
(5)Reported in Policyholders’policyholders’ account balances in the consolidated balance sheets.
(6)Investment fees of $3 million are reported in net derivative gains (losses) in the consolidated statements of income (loss).
Equity-Based and Treasury Futures Contracts Margin
All outstanding equity-based and treasury futures contracts at June 30, 2020as of March 31, 2021 and December 31, 20192020 are exchange-traded and net settled daily in cash. At June 30, 2020As of March 31, 2021 and December 31, 2019,2020, respectively, the Company had open exchange-traded futures positions on: (i) the S&P 500, Nasdaq, Russell 2000 and Emerging Market indices, having initial margin requirements of $264$219 million and $58$135 million, (ii) the 2-year, 5-year and 10-year U.S. Treasury Notes on U.S. Treasury bonds and ultra-long bonds, having initial margin requirements of $404$123 million and $165$263 million, and (iii) the Euro Stoxx, FTSE 100, Topix, ASX 200 and European, Australasia, and Far East (“EAFE”)EAFE indices as well as corresponding currency futures on the Euro/U.S. dollar, Pound/U.S. dollar, Australian dollar/U.S. dollar, and Yen/U.S. dollar, having initial margin requirements of $43$29 million and $60$35 million.
Collateral Arrangements
The Company generally has executed a Credit Support Annex (“CSA”)CSA under the International Swaps and Derivatives AssociationISDA Master Agreement (“ISDA Master Agreement”) it maintains with each of its over-the-counter (“OTC”)OTC derivative counterparties that requires both posting and accepting collateral either in the form of cash or high-quality securities, such as U.S. Treasury securities, U.S. government and government agency securities and investment grade corporate bonds. The Company nets the fair value of all derivative financial instruments with counterparties for which an
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
an ISDA Master Agreement and related CSA have been executed. At June 30, 2020As of March 31, 2021 and December 31, 2019,2020, respectively, the Company held $3.3$3.9 billion and $3.0$3.8 billion in cash and securities collateral delivered by trade counterparties, representing the fair value of the related derivative agreements. The unrestricted cash collateral is reported in Otherother invested assets. The Company posted collateral of $14$1.6 billion and $212 million and $72 million at June 30, 2020as of March 31, 2021 and December 31, 2019,2020, respectively, in the normal operation of its collateral arrangements.
The following tabletables presents information about the Company’s offsetting of financial assets and liabilities and derivative instruments at June 30,as of March 31, 2021 and December 31, 2020:
Offsetting of Financial Assets and Liabilities and Derivative Instruments
At June 30, 2020As of March 31, 2021
| | | Gross Amount Recognized | | Gross Amount Offset in the Balance Sheets | | Net Amount Presented in the Balance Sheets | | Gross Amount not Offset in the Balance Sheets (1) | | Net Amount | | Gross Amount Recognized | | Gross Amount Offset in the Balance Sheets | | Net Amount Presented in the Balance Sheets | | Gross Amount not Offset in the Balance Sheets (1) | | Net Amount |
| | (in millions) | | | | | | | (in millions) | | | | |
| Assets: | Assets: | | Assets: | |
| Derivative assets | Derivative assets | $ | 6,573 | | | $ | 6,134 | | | $ | 439 | | | $ | (118) | | | $ | 321 | | Derivative assets | $ | 11,413 | | | $ | 10,238 | | | $ | 1,175 | | | $ | 0 | | | $ | 1,175 | |
| Other financial assets | Other financial assets | 1,523 | | | — | | | 1,523 | | | — | | | 1,523 | | Other financial assets | 1,373 | | | 0 | | | 1,373 | | | 0 | | | 1,373 | |
| Other invested assets | Other invested assets | $ | 8,096 | | | $ | 6,134 | | | $ | 1,962 | | | $ | (118) | | | $ | 1,844 | | Other invested assets | $ | 12,786 | | | $ | 10,238 | | | $ | 2,548 | | | $ | 0 | | | $ | 2,548 | |
| | Liabilities: | Liabilities: | | Liabilities: | |
| Derivative liabilities | Derivative liabilities | $ | 6,203 | | | $ | 6,134 | | | $ | 69 | | | $ | — | | | $ | 69 | | Derivative liabilities | $ | 10,262 | | | $ | 10,238 | | | $ | 24 | | | $ | 0 | | | $ | 24 | |
| Other financial liabilities | Other financial liabilities | 1,462 | | | — | | | 1,462 | | | — | | | 1,462 | | Other financial liabilities | 1,870 | | | 0 | | | 1,870 | | | 0 | | | 1,870 | |
| Other liabilities | Other liabilities | $ | 7,665 | | | $ | 6,134 | | | $ | 1,531 | | | $ | — | | | $ | 1,531 | | Other liabilities | $ | 12,132 | | | $ | 10,238 | | | $ | 1,894 | | | $ | 0 | | | $ | 1,894 | |
|
______________
(1) Financial instrument/sinstruments sent (held).
The following table presents information about the Company’s offsettingAs of financial assets and liabilities and derivative instruments at December 31, 2019.2020
Offsetting of Financial Assets and Liabilities and Derivative Instruments
At December 31, 2019
| | | Gross Amount Recognized | | Gross Amount Offset in the Balance Sheets | | Net Amount Presented in the Balance Sheets | | Gross Amount not Offset in the Balance Sheets (1) | | Net Amount | | Gross Amount Recognized | | Gross Amount Offset in the Balance Sheets | | Net Amount Presented in the Balance Sheets | | Gross Amount not Offset in the Balance Sheets (1) | | Net Amount |
| | (in millions) | | | (in millions) |
| Assets: | Assets: | | Assets: | |
| Derivative assets | Derivative assets | $ | 5,804 | | | $ | 5,429 | | | $ | 375 | | | $ | (77) | | | $ | 298 | | Derivative assets | $ | 9,186 | | | $ | 8,206 | | | $ | 980 | | | $ | (53) | | | $ | 927 | |
| Other financial instruments | Other financial instruments | 1,781 | | | — | | | 1,781 | | | — | | | 1,781 | | Other financial instruments | 1,403 | | | 0 | | | 1,403 | | | 0 | | | 1,403 | |
| Other invested assets | Other invested assets | $ | 7,585 | | | $ | 5,429 | | | $ | 2,156 | | | $ | (77) | | | $ | 2,079 | | Other invested assets | $ | 10,589 | | | $ | 8,206 | | | $ | 2,383 | | | $ | (53) | | | $ | 2,330 | |
| | Liabilities: | Liabilities: | | Liabilities: | |
| Derivative liabilities | Derivative liabilities | $ | 5,474 | | | $ | 5,429 | | | $ | 45 | | | $ | — | | | $ | 45 | | Derivative liabilities | $ | 8,218 | | | $ | 8,206 | | | $ | 12 | | | $ | 0 | | | $ | 12 | |
| Other financial liabilities | Other financial liabilities | 1,723 | | | — | | | 1,723 | | | — | | | 1,723 | | Other financial liabilities | 1,568 | | | 0 | | | 1,568 | | | 0 | | | 1,568 | |
| Other liabilities | Other liabilities | $ | 7,197 | | | $ | 5,429 | | | $ | 1,768 | | | $ | — | | | $ | 1,768 | | Other liabilities | $ | 9,786 | | | $ | 8,206 | | | $ | 1,580 | | | $ | 0 | | | $ | 1,580 | |
______________
(1)Financial instruments sent (held).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
5) CLOSED BLOCK
As a result of demutualization, the Company’s Closed Block was established in 1992 for the benefit of certain individual participating policies that were in force on that date. Assets, liabilities and earnings of the Closed Block are specifically identified to support its participating policyholders.
Assets allocated to the Closed Block inure solely to the benefit of the Closed Block policyholders and will not revert to the benefit of the Company. No reallocation, transfer, borrowing or lending of assets can be made between the Closed Block and other portions of the Company’s General Account, any of its Separate Accounts or any affiliate of the Company without the approval of the New York State Department of Financial Services (the “NYDFS”). Closed
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the General Account. For more information on the Closed Block, see Note 5 to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.2020
Summarized financial information for the Company’s Closed Block is as follows:
| | | | | June 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| | (in millions) | | | (in millions) |
| Closed Block Liabilities: | Closed Block Liabilities: | | Closed Block Liabilities: | |
| Future policy benefits, policyholders’ account balances and other | Future policy benefits, policyholders’ account balances and other | $ | 6,327 | | | $ | 6,478 | | Future policy benefits, policyholders’ account balances and other | $ | 6,133 | | | $ | 6,201 | |
| Policyholder dividend obligation | Policyholder dividend obligation | 150 | | | 2 | | Policyholder dividend obligation | 28 | | | 160 | |
| Other liabilities | Other liabilities | 100 | | | 38 | | Other liabilities | 63 | | | 39 | |
| Total Closed Block liabilities | Total Closed Block liabilities | 6,577 | | | 6,518 | | Total Closed Block liabilities | 6,224 | | | 6,400 | |
| | Assets Designated to the Closed Block: | Assets Designated to the Closed Block: | | Assets Designated to the Closed Block: | |
| Fixed maturities available-for-sale, at fair value (amortized cost of $3,490 and $3,558) (allowance for credit losses of $0 at June 30, 2020) | 3,838 | | | 3,754 | | |
| Mortgage loans on real estate (net of allowance for credit losses of $7 at June 30, 2020) | 1,774 | | | 1,759 | | |
| Fixed maturities AFS, at fair value (amortized cost of $3,381 and $3,359) (allowance for credit losses of $0) | | Fixed maturities AFS, at fair value (amortized cost of $3,381 and $3,359) (allowance for credit losses of $0) | 3,623 | | | 3,718 | |
| Mortgage loans on real estate (net of allowance for credit losses of $6 and $6) | | Mortgage loans on real estate (net of allowance for credit losses of $6 and $6) | 1,761 | | | 1,773 | |
| Policy loans | Policy loans | 668 | | | 706 | | Policy loans | 636 | | | 648 | |
| Cash and other invested assets | Cash and other invested assets | 44 | | | 82 | | Cash and other invested assets | 19 | | | 28 | |
| Other assets | Other assets | 183 | | | 145 | | Other assets | 128 | | | 169 | |
| Total assets designated to the Closed Block | Total assets designated to the Closed Block | 6,507 | | | 6,446 | | Total assets designated to the Closed Block | 6,167 | | | 6,336 | |
| | Excess of Closed Block liabilities over assets designated to the Closed Block | Excess of Closed Block liabilities over assets designated to the Closed Block | 70 | | | 72 | | Excess of Closed Block liabilities over assets designated to the Closed Block | 57 | | | 64 | |
| Amounts included in accumulated other comprehensive income (loss): | | |
| Net unrealized investment gains (losses), net of policyholders’ dividend obligation: $150 and $2; and net of income tax: $42 and $41 | 167 | | | 164 | | |
| Amounts included in AOCI: | | Amounts included in AOCI: | |
| Net unrealized investment gains (losses), net of policyholders’ dividend obligation: $28 and $160; and net of income tax: $(45) and $(42) | | Net unrealized investment gains (losses), net of policyholders’ dividend obligation: $28 and $160; and net of income tax: $(45) and $(42) | 179 | | | 167 | |
| Maximum future earnings to be recognized from Closed Block assets and liabilities | Maximum future earnings to be recognized from Closed Block assets and liabilities | $ | 237 | | | $ | 236 | | Maximum future earnings to be recognized from Closed Block assets and liabilities | $ | 236 | | | $ | 231 | |
The Company’s Closed Block revenues and expenses were as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| | 2020 | | 2019 | 2020 | | 2019 | | | | 2021 | | 2020 | |
| | (in millions) | | | | (in millions) |
| Revenues: | Revenues: | | | Revenues: | | | |
| Premiums and other income | Premiums and other income | $ | 40 | | | $ | 46 | | $ | 82 | | | $ | 94 | | | Premiums and other income | | $ | 39 | | | $ | 42 | | |
| Net investment income (loss) | Net investment income (loss) | 63 | | | 72 | | 129 | | | 139 | | | Net investment income (loss) | | 60 | | | 66 | | |
| Investment gains (losses), net | Investment gains (losses), net | (2) | | | — | | (2) | | | (1) | | | Investment gains (losses), net | | 0 | | | 0 | | |
| Total revenues | Total revenues | 101 | | | 118 | | 209 | | | 232 | | | Total revenues | | 99 | | | 108 | | |
| | Benefits and Other Deductions: | | Benefits and Other Deductions: | | | |
| Policyholders’ benefits and dividends | | Policyholders’ benefits and dividends | | 106 | | | 103 | | |
| Other operating costs and expenses | | Other operating costs and expenses | | 1 | | | 0 | | |
| Total benefits and other deductions | | Total benefits and other deductions | | 107 | | | 103 | | |
| Net income (loss), before income taxes | | Net income (loss), before income taxes | | (8) | | | 5 | | |
| Income tax (expense) benefit | | Income tax (expense) benefit | | (1) | | | — | | |
| Net income (loss) | | Net income (loss) | | $ | (9) | | | $ | 5 | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | 2020 | | 2019 | | |
| (in millions) | | | | | | | |
| Benefits and Other Deductions: | | | | | | | | |
| Policyholders’ benefits and dividends | 103 | | | 114 | | 206 | | | 235 | | | |
| Other operating costs and expenses | 1 | | | — | | 1 | | | 1 | | | |
| Total benefits and other deductions | 104 | | | 114 | | 207 | | | 236 | | | |
| Net income (loss), before income taxes | (3) | | | 4 | | 2 | | | (4) | | | |
| Income tax (expense) benefit | (1) | | | (1) | | (1) | | | (2) | | | |
| Net income (loss) | $ | (4) | | | $ | 3 | | $ | 1 | | | $ | (6) | | | |
| | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 | | |
| (in millions) |
| Balance, beginning of year | $ | 160 | | | $ | 2 | | | |
| Unrealized investment gains (losses) | (132) | | | 0 | | | |
| Balance, end of year | $ | 28 | | | $ | 2 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
6) INSURANCE LIABILITIES
Variable Annuity Contracts – GMDB, GMIB, GIB and GWBL and Other Features
The Company has certain variable annuity contracts with GMDB, GMIB, GIB and GWBL and other features in-force that guarantee one of the following:
•Return of Premium: the benefit is the greater of current account value or premiums paid (adjusted for withdrawals);
•Ratchet: the benefit is the greatest of current account value, premiums paid (adjusted for withdrawals), or the highest account value on any anniversary up to contractually specified ages (adjusted for withdrawals);
•Roll-Up: the benefit is the greater of current account value or premiums paid (adjusted for withdrawals) accumulated at contractually specified interest rates up to specified ages;
•Combo: the benefit is the greater of the ratchet benefit or the roll-up benefit, which may include either a five year or an annual reset; or
•Withdrawal: the withdrawal is guaranteed up to a maximum amount per year for life.
Liabilities for Variable Annuity Contracts with GMDB and GMIB Features without No-Lapse GuaranteeNLG Rider (“NLG”) Feature
The change in the liabilities for variable annuity contracts with GMDB and GMIB features and without a NLG feature are summarized in the tables below. The amounts for the direct contracts (before reinsurance ceded) and assumed contracts are reflected in the consolidated balance sheets in Futurefuture policy benefits and other policyholders’ liabilities. The amounts for the ceded contracts are reflected in the consolidated balance sheets in Amountsamounts due from reinsurers. The amounts for the ceded IB are reflected in the consolidated balance sheets in GMIB reinsurance contract asset, at fair value.
Change in Liability for Variable Annuity Contracts with GMDB and GMIB Features and No NLG Feature
For the Three and Six Months Ended June 30,March 31, 2021 and 2020 and 2019
| | | | | | | | | | | | | | | | | | | | | | | |
| GMDB | | | | GMIB | | |
| Direct | | Ceded | | Direct | | Ceded |
| (in millions) | | | | | | |
| Balance at April 1, 2020 | $ | 5,047 | | | $ | (105) | | | $ | 6,297 | | | $ | (3,305) | |
| Paid guarantee benefits | (140) | | | 4 | | | (103) | | | 17 | |
| Other changes in reserve | 102 | | | 3 | | | (43) | | | (145) | |
| Balance at June 30, 2020 | $ | 5,009 | | | $ | (98) | | | $ | 6,151 | | | $ | (3,433) | |
| | | | | | | |
| Balance at April 1, 2019 | $ | 4,665 | | | $ | (103) | | | $ | 3,740 | | | $ | (2,009) | |
| Paid guarantee benefits | (108) | | | 5 | | | (56) | | | 14 | |
| Other changes in reserve | 153 | | | (2) | | | 75 | | | (201) | |
| Balance at June 30, 2019 | $ | 4,710 | | | $ | (100) | | | $ | 3,759 | | | $ | (2,196) | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | GMDB | | | GMIB | | | GMDB | | GMIB |
| | Direct | | Ceded | | Direct | | Ceded | | Direct | | Ceded | | Direct | | Ceded |
| | (in millions) | | | (in millions) |
| | Balance at January 1, 2020 | $ | 4,779 | | | $ | (98) | | | $ | 4,688 | | | $ | (2,466) | | |
| Balance, January 1, 2021 | | Balance, January 1, 2021 | $ | 5,093 | | | $ | (84) | | | $ | 6,025 | | | $ | (2,859) | |
| Paid guarantee benefits | Paid guarantee benefits | (251) | | | 9 | | | (177) | | | 37 | | Paid guarantee benefits | (133) | | | 4 | | | (91) | | | 13 | |
| Other changes in reserve | Other changes in reserve | 481 | | | (9) | | | 1,640 | | | (1,004) | | Other changes in reserve | 123 | | | (1) | | | 32 | | | 713 | |
| Balance at June 30, 2020 | $ | 5,009 | | | $ | (98) | | | $ | 6,151 | | | $ | (3,433) | | |
| Balance, March 31, 2021 | | Balance, March 31, 2021 | $ | 5,083 | | | $ | (81) | | | $ | 5,966 | | | $ | (2,133) | |
| | Balance at January 1, 2019 | $ | 4,654 | | | $ | (107) | | | $ | 3,741 | | | $ | (1,991) | | |
| Balance, January 1, 2020 | | Balance, January 1, 2020 | $ | 4,775 | | | $ | (99) | | | $ | 4,671 | | | $ | (2,466) | |
| Paid guarantee benefits | Paid guarantee benefits | (226) | | | 9 | | | (112) | | | 35 | | Paid guarantee benefits | (111) | | | 5 | | | (74) | | | 20 | |
| Other changes in reserve | Other changes in reserve | 282 | | | (2) | | | 130 | | | (240) | | Other changes in reserve | 377 | | | (11) | | | 1,675 | | | (859) | |
| Balance at June 30, 2019 | $ | 4,710 | | | $ | (100) | | | $ | 3,759 | | | $ | (2,196) | | |
| Balance, March 31, 2020 | | Balance, March 31, 2020 | $ | 5,041 | | | $ | (105) | | | $ | 6,272 | | | $ | (3,305) | |
Liabilities for Embedded and Freestanding Insurance Related Derivatives
The liability for the GMxB derivative features, the liability for SCS, SIO, MSO and IUL indexed features and the asset and liability for the GMIB reinsurance contracts are considered embedded or freestanding insurance derivatives and
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
are reported at fair value. For the fair value of the assets and liabilities associated with these embedded or freestanding insurance derivatives, see Note 7.7 Fair Value Disclosures.
Account Values and Net Amount at Risk
Account Values and Net Amount at Risk (“NAR”)NAR for direct variable annuity contracts in force with GMDB and GMIB features as of June 30, 2020March 31, 2021 are presented in the following tables by guarantee type. For contracts with the GMDB feature, the NAR in the event of death is the amount by which the GMDB feature exceeds the related Account Values. For contracts with the GMIB feature, the NAR in the event of annuitization is the amount by which the present value of the GMIB benefits exceed the related Account Values, taking into account the relationship between current annuity purchase rates and the GMIB guaranteed annuity purchase rates. Since variable annuity contracts with GMDB features may also offer GMIB guarantees in the same contract, the GMDB and GMIB amounts listed are not mutually exclusive.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Direct Variable Annuity Contracts with GMDB and GMIB Features
at June 30, 2020as of March 31, 2021
| | | Guarantee Type | | | Guarantee Type |
| | Return of Premium | | Ratchet | | Roll-Up | | Combo | | Total | | Return of Premium | | Ratchet | | Roll-Up | | Combo | | Total |
| | (in millions, except age and interest rate) | | | (in millions, except age and interest rate) |
| Variable annuity contracts with GMDB features | Variable annuity contracts with GMDB features | | Variable annuity contracts with GMDB features | |
| Account Values invested in: | Account Values invested in: | | Account Values invested in: | |
| General Account | General Account | $ | 14,904 | | | $ | 90 | | | $ | 57 | | | $ | 174 | | | $ | 15,225 | | General Account | $ | 15,647 | | $ | 86 | | $ | 53 | | $ | 164 | | $ | 15,950 |
| Separate Accounts | Separate Accounts | 46,313 | | | 8,576 | | | 2,914 | | | 30,252 | | | 88,055 | | Separate Accounts | 55,734 | | 9,712 | | 3,349 | | 34,329 | | 103,124 |
| Total Account Values | Total Account Values | $ | 61,217 | | | $ | 8,666 | | | $ | 2,971 | | | $ | 30,426 | | | $ | 103,280 | | Total Account Values | $ | 71,381 | | $ | 9,798 | | $ | 3,402 | | $ | 34,493 | | $ | 119,074 |
| | Net Amount at Risk, gross | $ | 167 | | | $ | 207 | | | $ | 1,990 | | | $ | 20,398 | | | $ | 22,762 | | |
| Net Amount at Risk, net of amounts reinsured | $ | 167 | | | $ | 201 | | | $ | 1,414 | | | $ | 20,398 | | | $ | 22,180 | | |
| NAR, gross | | NAR, gross | $ | 96 | | $ | 35 | | $ | 1,509 | | $ | 16,402 | | $ | 18,042 |
| NAR, net of amounts reinsured | | NAR, net of amounts reinsured | $ | 96 | | $ | 33 | | $ | 1,057 | | $ | 16,402 | | $ | 17,588 |
| | | | | | | | | | | | | | | | | | | | |
| Average attained age of policyholders (in years) | Average attained age of policyholders (in years) | 51.2 | | | 68.0 | | | 74.6 | | | 69.8 | | | 55.1 | | Average attained age of policyholders (in years) | 51.4 | | 68.5 | | 75.0 | | 70.4 | | 55.3 |
| Percentage of policyholders over age 70 | Percentage of policyholders over age 70 | 10.9 | % | | 47.1 | % | | 69.3 | % | | 52.4 | % | | 19.8 | % | Percentage of policyholders over age 70 | 11.4% | | 49.1% | | 70.8% | | 55.0% | | 20.4% |
| Range of contractually specified interest rates | Range of contractually specified interest rates | N/A | | N/A | | 3% - 6% | | 3% - 6.5% | | 3% - 6.5% | Range of contractually specified interest rates | N/A | | N/A | | 3% - 6% | | 3% - 6.5% | | 3% - 6.5% |
| | Variable annuity contracts with GMIB features | Variable annuity contracts with GMIB features | | Variable annuity contracts with GMIB features | |
| Account Values invested in: | Account Values invested in: | | Account Values invested in: | |
| General Account | General Account | $ | — | | | $ | — | | | $ | 18 | | | $ | 223 | | | $ | 241 | | General Account | $ | 0 | | $ | 0 | | $ | 16 | | $ | 212 | | $ | 228 |
| Separate Accounts | Separate Accounts | — | | | — | | | 22,463 | | | 32,329 | | | 54,792 | | Separate Accounts | 0 | | 0 | | 25,451 | | 36,802 | | 62,253 |
| Total Account Values | Total Account Values | $ | — | | | $ | — | | | $ | 22,481 | | | $ | 32,552 | | | $ | 55,033 | | Total Account Values | $ | 0 | | $ | 0 | | $ | 25,467 | | $ | 37,014 | | $ | 62,481 |
| | Net Amount at Risk, gross | $ | — | | | $ | — | | | $ | 1,189 | | | $ | 15,384 | | | $ | 16,573 | | |
| Net Amount at Risk, net of amounts reinsured | $ | — | | | $ | — | | | $ | 376 | | | $ | 13,872 | | | $ | 14,248 | | |
| NAR, gross | | NAR, gross | $ | 0 | | $ | 0 | | $ | 680 | | $ | 8,598 | | $ | 9,278 |
| NAR, net of amounts reinsured | | NAR, net of amounts reinsured | $ | 0 | | $ | 0 | | $ | 219 | | $ | 7,835 | | $ | 8,054 |
| | | | | | | | | | | | | | | | | | | | |
| Average attained age of policyholders (in years) | Average attained age of policyholders (in years) | N/A | | N/A | | 63.8 | | | 69.8 | | | 67.6 | | Average attained age of policyholders (in years) | N/A | | N/A | | 64.4 | | 70.3 | | 68.1 |
| Weighted average years remaining until annuitization | Weighted average years remaining until annuitization | N/A | | N/A | | 5.9 | | | 0.7 | | | 2.6 | | Weighted average years remaining until annuitization | N/A | | N/A | | 5.6 | | 0.6 | | 2.4 |
| Range of contractually specified interest rates | Range of contractually specified interest rates | N/A | | N/A | | 3% - 6% | | 3% - 6.5% | | 3% - 6.5% | Range of contractually specified interest rates | N/A | | N/A | | 3% - 6% | | 3% - 6.5% | | 3% - 6.5% |
For more information about the reinsurance programs of the Company’s GMDB and GMIB exposure, see “Reinsurance” in Note 10 toof the Company’s consolidated financial statements included in the Annual Report on2020 Form 10-K for the year ended December 31, 2019.10-K.
Separate Accounts Investments by Investment Category Underlying Variable Annuity Contracts with GMDB and GMIB Features
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
The total Account Values of variable annuity contracts with GMDB and GMIB features include amounts allocated to the guaranteed interest option, which is part of the General Account and variable investment options that invest through Separate Accounts in variable insurance trusts. The following table presents the aggregate fair value of assets, by major investment category, held by Separate Accounts that support variable annuity contracts with GMDB and GMIB features. The investment performance of the assets impacts the related Account Values and, consequently, the NAR associated with the GMDB and GMIB benefits and guarantees. Because the Company’s variable annuity contracts offer both GMDB and GMIB features, GMDB and GMIB amounts are not mutually exclusive.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Investment in Variable Insurance Trust Mutual Funds
| | | | | | June 30, 2020 | | | December 31, 2019 | | | | March 31, 2021 | | December 31, 2020 |
| Mutual Fund Type | Mutual Fund Type | | GMDB | | GMIB | | GMDB | | GMIB | Mutual Fund Type | | GMDB | | GMIB | | GMDB | | GMIB |
| | | | (in millions) | | | | (in millions) |
| Equity | Equity | | $ | 39,126 | | | $ | 16,011 | | | $ | 42,489 | | | $ | 17,941 | | Equity | | $ | 48,656 | | | $ | 19,245 | | | $ | 46,850 | | | $ | 18,771 | |
| Fixed income | Fixed income | | 5,297 | | | 2,682 | | | 5,263 | | | 2,699 | | Fixed income | | 5,362 | | | 2,584 | | | 5,506 | | | 2,701 | |
| Balanced | Balanced | | 42,696 | | | 35,835 | | | 45,871 | | | 38,445 | | Balanced | | 48,011 | | | 40,152 | | | 47,053 | | | 39,439 | |
| Other | Other | | 936 | | | 264 | | | 865 | | | 263 | | Other | | 1,095 | | | 272 | | | 1,111 | | | 275 | |
| Total | Total | | $ | 88,055 | | | $ | 54,792 | | | $ | 94,488 | | | $ | 59,348 | | Total | | $ | 103,124 | | | $ | 62,253 | | | $ | 100,520 | | | $ | 61,186 | |
Hedging Programs for GMDB, GMIB, GIB and Other Features
The Company has a program intended to hedge certain risks associated first with the GMDB feature and with the GMIB feature of the Accumulator series of variable annuity products. The program has also been extended to cover other guaranteed benefits as they have been made available. This program utilizes derivative contracts, such as exchange-traded equity, currency and interest rate futures contracts, total return and/or equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options, that collectively are managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in the capital markets. At the present time, this program hedges certain economic risks on products sold from 2001 forward, to the extent such risks are not externally reinsured.
These programs do not qualify for hedge accounting treatment. Therefore, gains (losses) on the derivatives contracts used in these programs, including current period changes in fair value, are recognized in Netnet derivative gains (losses) in the period in which they occur, and may contribute to income (loss) volatility.
Variable and Interest-Sensitive Life Insurance Policies - NLG
The NLG feature contained in variable and interest-sensitive life insurance policies keeps them in force in situations where the policy value is not sufficient to cover monthly charges then due. The NLG remains in effect so long as the policy meets a contractually specified premium funding test and certain other requirements.
The change in the NLG liabilities, reflected in Futurefuture policy benefits and other policyholders’ liabilities in the consolidated balance sheets, is summarized in the table below.
| | | 2020 | | | 2019 | | |
| | Direct Liability | | Reinsurance Ceded | | Net | | Direct Liability | | Reinsurance Ceded | | Net | | | Direct Liability | | Reinsurance Ceded | | Net |
| | (in millions) | | | | (in millions) |
| | Balance, January 1, 2021 | | Balance, January 1, 2021 | | $ | 1,016 | | | $ | (883) | | | $ | 133 | |
| Paid guarantee benefits | | Paid guarantee benefits | | (15) | | | 0 | | | (15) | |
| Other changes in reserves | | Other changes in reserves | | 44 | | | (18) | | | 26 | |
| Balance, March 31, 2021 | | Balance, March 31, 2021 | | $ | 1,045 | | | $ | (901) | | | $ | 144 | |
| | Balance, January 1, 2020 | | Balance, January 1, 2020 | | $ | 894 | | | $ | (808) | | | $ | 86 | |
| Paid guarantee benefits | | Paid guarantee benefits | | (13) | | | 0 | | | (13) | |
| Other changes in reserves | | Other changes in reserves | | 39 | | | (19) | | | 20 | |
| Balance, March 31, 2020 | | Balance, March 31, 2020 | | $ | 920 | | | $ | (827) | | | $ | 93 | |
| | Balance at April 1, | $ | 920 | | | $ | (827) | | | $ | 93 | | | $ | 801 | | | $ | (744) | | | $ | 57 | | |
| Paid guarantee benefits | (13) | | | — | | | (13) | | | (3) | | | — | | | (3) | | |
| Other changes in reserves | 35 | | | (14) | | | 21 | | | 21 | | | (11) | | | 10 | | |
| Balance at June 30, | $ | 942 | | | $ | (841) | | | $ | 101 | | | $ | 819 | | | $ | (755) | | | $ | 64 | | |
| | Balance at January 1, | $ | 893 | | | $ | (807) | | | $ | 86 | | | $ | 787 | | | $ | (733) | | | $ | 54 | | |
| Paid guarantee benefits | (26) | | | — | | | (26) | | | (10) | | | — | | | (10) | | |
| Other changes in reserves | 75 | | | (34) | | | 41 | | | 42 | | | (22) | | | 20 | | |
| Balance at June 30, | $ | 942 | | | $ | (841) | | | $ | 101 | | | $ | 819 | | | $ | (755) | | | $ | 64 | | |
|
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
7) FAIR VALUE DISCLOSURES
U.S. GAAP establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value, and identifies three levels of inputs that may be used to measure fair value:
Level 1 Unadjusted quoted prices for identical instruments in active markets. Level 1 fair values generally are supported by market transactions that occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, and inputs to model-derived valuations that are directly observable or can be corroborated by observable market data.
Level 3 Unobservable inputs supported by little or no market activity and often requiring significant management judgment or estimation, such as an entity’s own assumptions about the cash flows or other significant components of value that market participants would use in pricing the asset or liability.
The Company uses unadjusted quoted market prices to measure fair value for those instruments that are actively traded in financial markets. In cases where quoted market prices are not available, fair values are measured using present value or other valuation techniques. The fair value determinations are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such adjustments do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value cannot be substantiated by direct comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument.
Management is responsible for the determination of the value of investments carried at fair value and the supporting methodologies and assumptions. Under the terms of various service agreements, the Company often utilizes independent valuation service providers to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual securities. These independent valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested. As further described below with respect to specific asset classes, these inputs include, but are not limited to, market prices for recent trades and transactions in comparable securities, benchmark yields, interest rate yield curves, credit spreads, quoted prices for similar securities, and other market-observable information, as applicable. Specific attributes of the security being valued also are considered, including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other security- or issuer-specific information. When insufficient market observable information is available upon which to measure fair value, the Company either will request brokers knowledgeable about these securities to provide a non-binding quote or will employ internal valuation models. Fair values received from independent valuation service providers and brokers and those internally modeled or otherwise estimated are assessed for reasonableness.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair value measurements are required on a non-recurring basis for certain assets only when an impairment or other events occur. As of March 31, 2021 and December 31, 2020, no assets or liabilities were required to be measured at fair value on a non-recurring basis.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below. At June 30, 2020 and December 31, 2019, no assets were required to be measured at fair value on a non-recurring basis. Fair value measurements are required on a non-recurring basis for certain assets, including goodwill and mortgage loans on real estate, only when an impairment or other event occurs. When such fair value measurements are recorded, they must be classified and disclosed within the fair value hierarchy.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Fair Value Measurements at June 30,as of March 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| | (in millions) |
| Assets: | | | | | | | |
| Investments: | | | | | | | |
| Fixed maturities, AFS: | | | | | | | |
| Corporate (1) | $ | 0 | | | $ | 46,909 | | | $ | 1,242 | | | $ | 48,151 | |
| U.S. Treasury, government and agency | 0 | | | 15,839 | | | 0 | | | 15,839 | |
| States and political subdivisions | 0 | | | 545 | | | 38 | | | 583 | |
| Foreign governments | 0 | | | 1,073 | | | 0 | | | 1,073 | |
| Residential mortgage-backed (2) | 0 | | | 120 | | | 0 | | | 120 | |
| Asset-backed (3) | 0 | | | 4,659 | | | 65 | | | 4,724 | |
| Commercial mortgage-backed | 0 | | | 1,486 | | | 4 | | | 1,490 | |
| Redeemable preferred stock | 0 | | | 52 | | | 0 | | | 52 | |
| Total fixed maturities, AFS | 0 | | | 70,683 | | | 1,349 | | | 72,032 | |
| Other equity investments | 400 | | | 372 | | | 2 | | | 774 | |
| Trading securities | 198 | | | 4,464 | | | 0 | | | 4,662 | |
| Other invested assets: | | | | | | | |
| Short-term investments | 0 | | | 69 | | | 0 | | | 69 | |
| Assets of consolidated VIEs/VOEs | 0 | | | 0 | | | 10 | | | 10 | |
| Swaps | 0 | | | (2,136) | | | 0 | | | (2,136) | |
| Credit default swaps | 0 | | | 3 | | | 0 | | | 3 | |
| Options | 0 | | | 5,515 | | | 0 | | | 5,515 | |
| Total other invested assets | 0 | | | 3,451 | |
| 10 | |
| 3,461 | |
| Cash equivalents | 1,545 | | | 1,045 | | | 0 | | | 2,590 | |
| GMIB reinsurance contracts asset | 0 | | | 0 | | | 2,133 | | | 2,133 | |
| Separate Accounts assets (4) | 134,115 | | | 2,390 | | | 0 | | | 136,505 | |
| Total Assets | $ | 136,258 | | | $ | 82,405 | | | $ | 3,494 | | | $ | 222,157 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| GMxB derivative features’ liability | $ | 0 | | | $ | 0 | | | $ | 7,681 | | | $ | 7,681 | |
| SCS, SIO, MSO and IUL indexed features’ liability | 0 | | | 5,169 | | | 0 | | | 5,169 | |
| Total Liabilities | $ | 0 | | | $ | 5,169 | | | $ | 7,681 | | | $ | 12,850 | |
______________
(1)Corporate fixed maturities includes both public and private issues.
(2)Includes publicly traded agency pass-through securities and collateralized obligations.
(3)Includes credit-tranched securities collateralized by sub-prime mortgages, credit risk transfer securities and other asset types.
(4)Separate Accounts assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate. As of March 31, 2021 the fair value of such investments was $365 million.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Fair Value Measurements as of December 31, 2020
| | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | (in millions) | | | (in millions) |
| Assets: | Assets: | | Assets: | |
| Investments: | Investments: | | Investments: | |
| Fixed maturities, AFS: | Fixed maturities, AFS: | | Fixed maturities, AFS: | |
| Corporate (1) | Corporate (1) | $ | — | | | $ | 47,978 | | | $ | 1,652 | | | $ | 49,630 | | Corporate (1) | $ | 0 | | | $ | 51,415 | | | $ | 1,687 | | | $ | 53,102 | |
| U.S. Treasury, government and agency | U.S. Treasury, government and agency | — | | | 17,193 | | | — | | | 17,193 | | U.S. Treasury, government and agency | 0 | | | 15,943 | | | 0 | | | 15,943 | |
| States and political subdivisions | States and political subdivisions | — | | | 672 | | | 40 | | | 712 | | States and political subdivisions | 0 | | | 535 | | | 39 | | | 574 | |
| Foreign governments | Foreign governments | — | | | 833 | | | — | | | 833 | | Foreign governments | 0 | | | 1,103 | | | 0 | | | 1,103 | |
| Residential mortgage-backed (2) | Residential mortgage-backed (2) | — | | | 158 | | | — | | | 158 | | Residential mortgage-backed (2) | 0 | | | 131 | | | 0 | | | 131 | |
| Asset-backed (3) | Asset-backed (3) | — | | | 2,039 | | | — | | | 2,039 | | Asset-backed (3) | 0 | | | 3,636 | | | 20 | | | 3,656 | |
| Commercial mortgage-backed | Commercial mortgage-backed | — | | | 879 | | | — | | | 879 | | Commercial mortgage-backed | 0 | | | 1,203 | | | 0 | | | 1,203 | |
| Redeemable preferred stock | Redeemable preferred stock | 315 | | | 63 | | | — | | | 378 | | Redeemable preferred stock | 402 | | | 239 | | | 0 | | | 641 | |
| Total fixed maturities, AFS | Total fixed maturities, AFS | 315 | | | 69,815 | | | 1,692 | | | 71,822 | | Total fixed maturities, AFS | 402 | | | 74,205 | | | 1,746 | | | 76,353 | |
| Other equity investments | Other equity investments | 12 | | | — | | | 1 | | | 13 | | Other equity investments | 13 | | | 0 | | | 2 | | | 15 | |
| Trading securities | Trading securities | 282 | | | 5,859 | | | — | | | 6,141 | | Trading securities | 285 | | | 5,055 | | | 0 | | | 5,340 | |
| Other invested assets: | Other invested assets: | | Other invested assets: | |
| Short-term investments | Short-term investments | — | | | 227 | | | — | | | 227 | | Short-term investments | 0 | | | 82 | | | 1 | | | 83 | |
| Assets of consolidated VIEs/VOEs | Assets of consolidated VIEs/VOEs | — | | | — | | | 15 | | | 15 | | Assets of consolidated VIEs/VOEs | 0 | | | 0 | | | 12 | | | 12 | |
| Swaps | Swaps | — | | | 1,655 | | | — | | | 1,655 | | Swaps | 0 | | | (96) | | | 0 | | | (96) | |
| Credit default swaps | Credit default swaps | — | | | 6 | | | — | | | 6 | | Credit default swaps | 0 | | | 7 | | | 0 | | | 7 | |
| Options | Options | — | | | 1,891 | | | — | | | 1,891 | | Options | 0 | | | 4,668 | | | 0 | | | 4,668 | |
| Total other invested assets | Total other invested assets | — | | | 3,779 | |
| 15 | |
| 3,794 | | Total other invested assets | 0 | | | 4,661 | | | 13 | | | 4,674 | |
| Cash equivalents | Cash equivalents | 3,784 | | | — | | | — | | | 3,784 | | Cash equivalents | 1,183 | | | 287 | | | 0 | | | 1,470 | |
| GMIB reinsurance contracts asset | GMIB reinsurance contracts asset | — | | | — | | | 3,433 | | | 3,433 | | GMIB reinsurance contracts asset | 0 | | | 0 | | | 2,859 | | | 2,859 | |
| Separate Accounts assets (4) | Separate Accounts assets (4) | 113,420 | | | 2,792 | | | — | | | 116,212 | | Separate Accounts assets (4) | 130,106 | | | 2,668 | | | 1 | | | 132,775 | |
| Total Assets | Total Assets | $ | 117,813 | | | $ | 82,245 | | | $ | 5,141 | | | $ | 205,199 | | Total Assets | $ | 131,989 | | | $ | 86,876 | | | $ | 4,621 | | | $ | 223,486 | |
| | Liabilities: | Liabilities: | | Liabilities: | |
| GMxB derivative features’ liability | GMxB derivative features’ liability | $ | — | | | $ | — | | | $ | 12,382 | | | $ | 12,382 | | GMxB derivative features’ liability | $ | 0 | | | $ | 0 | | | $ | 10,936 | | | $ | 10,936 | |
| SCS, SIO, MSO and IUL indexed features’ liability | SCS, SIO, MSO and IUL indexed features’ liability | — | | | 1,690 | | | — | | | 1,690 | | SCS, SIO, MSO and IUL indexed features’ liability | 0 | | | 4,378 | | | 0 | | | 4,378 | |
| Total Liabilities | Total Liabilities | $ | — | | | $ | 1,690 | | | $ | 12,382 | | | $ | 14,072 | | Total Liabilities | $ | 0 | | | $ | 4,378 | | | $ | 10,936 | | | $ | 15,314 | |
______________
(1)Corporate fixed maturities includes both public and private issues.
(2)Includes publicly traded agency pass-through securities and collateralized obligations.
(3)Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans.
(4)Separate Accounts assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate and commercial mortgages. At June 30, 2020 the fair valueAs of such investments was $363 million.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Fair Value Measurements at December 31, 2019
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| | (in millions) | | | | | | |
| Assets: | | | | | | | |
| Investments: | | | | | | | |
| Fixed maturities, AFS: | | | | | | | |
| Corporate (1) | $ | — | | | $ | 43,218 | | | $ | 1,246 | | | $ | 44,464 | |
| U.S. Treasury, government and agency | — | | | 15,231 | | | — | | | 15,231 | |
| States and political subdivisions | — | | | 610 | | | 39 | | | 649 | |
| Foreign governments | — | | | 490 | | | — | | | 490 | |
| Residential mortgage-backed (2) | — | | | 173 | | | — | | | 173 | |
| Asset-backed (3) | — | | | 744 | | | 100 | | | 844 | |
| Redeemable preferred stock | 237 | | | 274 | | | — | | | 511 | |
| Total fixed maturities, AFS | 237 | | | 60,740 | | | 1,385 | | | 62,362 | |
| Other equity investments | 13 | | | — | | | — | | | 13 | |
| Trading securities | 321 | | | 6,277 | | | — | | | 6,598 | |
| Other invested assets: | | | | | | | |
| Short-term investments | — | | | 468 | | | — | | | 468 | |
| Assets of consolidated VIEs/VOEs | — | | | — | | | 16 | | | 16 | |
| Swaps | — | | | (326) | | | — | | | (326) | |
| Credit default swaps | — | | | 18 | | | — | | | 18 | |
| Options | — | | | 3,331 | | | — | | | 3,331 | |
| Total other invested assets | — | | | 3,491 | | | 16 | | | 3,507 | |
| Cash equivalents | 1,155 | | | — | | | — | | | 1,155 | |
| GMIB reinsurance contracts asset | — | | | — | | | 2,466 | | | 2,466 | |
| Separate Accounts assets (4) | 121,184 | | | 2,878 | | | — | | | 124,062 | |
| Total Assets | $ | 122,910 | | | $ | 73,386 | | | $ | 3,867 | | | $ | 200,163 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| GMxB derivative features’ liability | $ | — | | | $ | — | | | $ | 8,246 | | | $ | 8,246 | |
| SCS, SIO, MSO and IUL indexed features’ liability | — | | | 3,150 | | | — | | | 3,150 | |
| Total Liabilities | $ | — | | | $ | 3,150 | | | $ | 8,246 | | | $ | 11,396 | |
______________
(1)Corporate fixed maturities includes both public and private issues.
(2)Includes publicly traded agency pass-through securities and collateralized obligations.
(3)Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans.
(4)Separate Accounts assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate and commercial mortgages. At December 31, 20192020 the fair value of such investments was $356 million.
Public Fixed Maturities
The fair values of the Company’s public fixed maturities are generally based on prices obtained from independent valuation service providers and for which the Company maintains a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. Although each security generally is priced by multiple independent valuation service providers, the Company ultimately uses the price received from the independent valuation service provider highest in the vendor hierarchy based on the respective asset type, with limited exception. To validate reasonableness, prices also are internally reviewed by those with relevant expertise through comparison with directly observed recent market trades. Consistent with the fair value hierarchy, public fixed maturities validated in this manner generally are reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Private Fixed Maturities
The fair values of the Company’s private fixed maturities are determined from prices obtained from independent valuation service providers. Prices not obtained from an independent valuation service provider are determined by using a discounted cash flow model or a market comparable company valuation technique. In certain cases, these models use observable inputs with a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions, taking into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Generally, these securities have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model or a market comparable company valuation technique may also incorporate unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the fair value measurement of a security, a Level 3 classification generally is made.
Freestanding Derivative Positions
The net fair value of the Company’s freestanding derivative positions as disclosed in Note 4 are generally based on prices obtained either from independent valuation service providers or derived by applying market inputs from recognized vendors into industry standard pricing models. The majority of these derivative contracts are traded in the OTC derivative market and are classified in Level 2. The fair values of derivative assets and liabilities traded in the OTC market are determined using quantitative models that require use of the contractual terms of the derivative instruments and multiple market inputs, including interest rates, prices, and indices to generate continuous yield or pricing curves, including overnight index swap (“OIS”) curves, and volatility factors, which then are applied to value the positions. The predominance of market inputs is actively quoted and can be validated through external sources or reliably interpolated if less observable.
Level Classifications of the Company’s Financial Instruments
Financial Instruments Classified as Level 1
Investments classified as Level 1 primarily include redeemable preferred stock, trading securities, cash equivalents and Separate Accounts assets. Fair value measurements classified as Level 1 include exchange-traded prices of fixed maturities, equity securities and derivative contracts, and net asset values for transacting subscriptions and redemptions of mutual fund shares held by Separate Accounts. Cash equivalents classified as Level 1 include money market accounts, overnight commercial paper and highly liquid debt instruments purchased with an original maturity of three months or less and are carried at cost as a proxy for fair value measurement due to their short-term nature.
Financial Instruments Classified as Level 2
Investments classified as Level 2 are measured at fair value on a recurring basis and primarily include U.S. government and agency securities and certain corporate debt securities, such as public and private fixed maturities. As market quotes generally are not readily available or accessible for these securities, their fair value measures are determined utilizing relevant information generated by market transactions involving comparable securities and often are based on model pricing techniques that effectively discount prospective cash flows to present value using appropriate sector-adjusted credit spreads commensurate with the security’s duration, also taking into consideration issuer-specific credit quality and liquidity.
Observable inputs generally used to measure the fair value of securities classified as Level 2 include benchmark yields, reported secondary trades, issuer spreads, benchmark securities and other reference data. Additional observable inputs are used when available, and as may be appropriate, for certain security types, such as prepayment, default, and collateral information for the purpose of measuring the fair value of mortgage- and asset-backed securities. The Company’s AAA-rated mortgage- and asset-backed securities are classified as Level 2 for which the observability of market inputs to their pricing models is supported by sufficient, albeit more recently contracted, market activity in these sectors.
Certain Company products, such as the SCS, and EQUI-VEST variable annuity products, IUL and the MSO fund available in some life contracts offer investment options which permit the contract owner to participate in the performance of an index, ETF or commodity price. These investment options, which depending on the product and on the index selected can currently have one, three, five or six year terms, provide for participation in the performance of specified indices, ETF or commodity price movement up to a segment-specific declared maximum rate. Under certain conditions that vary by product, e.g., holding these segments for the full term, these segments also shield policyholders from some or
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
from some or all negative investment performance associated with these indices, ETF or commodity prices. These investment options have defined formulaic liability amounts, and the current values of the option component of these segment reserves are accounted forclassified as Level 2 embedded derivatives. The fair values of these embedded derivatives are based on data obtained from independent valuation service providers.
Financial Instruments Classified as Level 3
The Company’s investments classified as Level 3 primarily include corporate debt securities, such as private fixed maturities and asset-backed securities. Determinations to classify fair value measures within Level 3 of the valuation hierarchy generally are based upon the significance of the unobservable factors to the overall fair value measurement. Included in the Level 3 classification are fixed maturities with indicative pricing obtained from brokers that otherwise could not be corroborated to market observable data.
The Company also issues certain benefits on its variable annuity products that are accounted for as derivatives and are also considered Level 3. The GMIBNLG feature allows the policyholder to receive guaranteed minimum lifetime annuity payments based on predetermined annuity purchase rates applied to the contract’s benefit base if and when the contract account value is depleted and the NLG feature is activated. The GMWB feature allows the policyholder to withdraw at minimum, over the life of the contract, an amount based on the contract’s benefit base. The GWBL feature allows the policyholder to withdraw, each year for the life of the contract, a specified annual percentage of an amount based on the contract’s benefit base. The GMAB feature increases the contract account value at the end of a specified period to a GMAB base. The GIB feature provides a lifetime annuity based on predetermined annuity purchase rates if and when the contract account value is depleted. This lifetime annuity is based on predetermined annuity purchase rates applied to a GIB base.
Level 3 also includes the GMIB reinsurance contract assets which are accounted for as derivative contracts. The GMIB reinsurance contract asset and liabilities’ fair value reflects the present value of reinsurance premiums, andnet of recoveries, and risk margins over a range of market consistent economic scenarios while GMxB derivative features liability reflects the present value of expected future payments (benefits) less fees, adjusted for risk margins and nonperformance risk, attributable to GMxB derivative features’ liability over a range of market-consistent economic scenarios.
The valuations of the GMIB reinsurance contract asset and GMxB derivative features liability incorporate significant non-observable assumptions related to policyholder behavior, risk margins and projections of equity Separate Accounts funds. The credit risks of the counterparty and of the Company are considered in determining the fair values of its GMIB reinsurance contract asset and GMxB derivative features liability positions, respectively, after taking into account the effects of collateral arrangements. Incremental adjustment to the swap curve for non-performance risk is made to the fair values of the GMIB reinsurance contract asset and liabilities and GMIBNLG feature to reflect the claims-paying ratings of counterparties and the Company. Equity and fixed income volatilities were modeled to reflect current market volatilities. Due to the unique, long duration of the GMIBNLG feature, adjustments were made to the equity volatilities to remove the illiquidity bias associated with the longer tenors and risk margins were applied to the non-capital markets inputs to the GMIBNLG valuations.
After giving consideration to collateral arrangements, the Company reduced the fair value of its GMIB reinsurance contract asset by $302$131 million and $175$160 million at June 30, 2020as of March 31, 2021 and December 31, 2019,2020, respectively, to recognize incremental counterparty non-performance risk.
Lapse rates are adjusted at the contract level based on a comparison of the actuarial calculated guaranteed values and the current policyholder account value, which include other factors such as considering surrender charges. Generally, lapse rates are assumed to be lower in periods when a surrender charge applies. A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in the money contracts are less likely to lapse. For valuing the embedded derivative, lapse rates vary throughout the period over which cash flows are projected.
The Company’s consolidated VIEs/VOEs hold investments that are classified as Level 3, primarily corporate bonds that are vendor priced with no ratings available, bank loans, non-agency collateralized mortgage obligations and asset-backed securities.
Transfers of Financial Instruments Between Levels 2 and 3
During the sixthree months ended June 30, 2020,March 31, 2021, AFS fixed maturities with fair values of $103$549 million were transferred out of Level 3 and into Level 2 principally due to the availability of trading activity and/or market observable inputs to
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
measure and validate their fair values. In addition, AFS fixed maturities with fair value of $219$2 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 2.1%8.0% of total equity at June 30, 2020.as of March 31, 2021.
During the sixthree months ended June 30, 2019,March 31, 2020, AFS fixed maturities with fair values of $73$126 million were transferred out of Level 3 and into Level 2 principally due to the availability of trading activity and/or market observable inputs to measure and validate their fair values. In addition, AFS fixed maturities with fair value of $14$0 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 0.6%0.7% of total equity at June 30, 2019.as of March 31, 2020.
The tables below present reconciliations for all Level 3 assets and liabilities for the three and six months ended June 30,March 31, 2021 and 2020, and 2019, respectively.
Level 3 Instruments - Fair Value Measurements
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| Corporate | | State and Political Subdivisions | | | | | | Asset-backed | | |
| (in millions) | | | | | | | | | | |
| Balance, April 1, 2020 | $ | 1,174 | | | $ | 36 | | | | | | | $ | 40 | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | 1 | | | — | | | | | | | — | | | |
| Investment gains (losses), net | (11) | | | — | | | | | | | — | | | |
| Subtotal | (10) | | | — | | | | | | | — | | | |
| Other comprehensive income (loss) | 6 | | | 5 | | | | | | | 8 | | | |
| Purchases | 284 | | | — | | | | | | | (48) | | | |
| Sales | (44) | | | (1) | | | | | | | — | | | |
| Transfers into Level 3 (1) | 219 | | | — | | | | | | | — | | | |
| Transfers out of Level 3 (1) | 23 | | | — | | | | | | | — | | | |
| Balance, June 30, 2020 | $ | 1,652 | | | $ | 40 | | | | | | | $ | — | | | |
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| Balance, April 1, 2019 | $ | 1,169 | | | $ | 39 | | | | | | | $ | 534 | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | 2 | | | — | | | | | | | — | | | |
| Investment gains (losses), net | — | | | — | | | | | | | — | | | |
| Subtotal | 2 | | | — | | | | | | | — | | | |
| Other comprehensive income (loss) | 1 | | | 1 | | | | | | | 1 | | | |
| Purchases | 151 | | | — | | | | | | | (1) | | | |
| Sales | (26) | | | (1) | | | | | | | — | | | |
| Transfers into Level 3 (1) | (3) | | | — | | | | | | | — | | | |
| Transfers out of Level 3 (1) | (4) | | | — | | | | | | | — | | | |
| Balance, June 30, 2019 | $ | 1,290 | | | $ | 39 | | | | | | | $ | 534 | | | |
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| Corporate | | State and Political Subdivisions | | | | Commercial Mortgage- backed | | Asset-backed | | |
| (in millions) |
| Balance, January 1, 2021 | $ | 1,687 | | | $ | 39 | | | | | $ | 0 | | | $ | 20 | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | 1 | | | 0 | | | | | 0 | | | 0 | | | |
| Investment gains (losses), net | (6) | | | 0 | | | | | 0 | | | 0 | | | |
| Subtotal | (5) | | | 0 | | | | | 0 | | | 0 | | | |
| Other comprehensive income (loss) | 9 | | | (1) | | | | | 0 | | | 0 | | | |
| Purchases | 165 | | | 0 | | | | | 4 | | | 50 | | | |
| Sales | (67) | | | 0 | | | | | 0 | | | (5) | | | |
| Transfers into Level 3 (1) | 2 | | | 0 | | | | | 0 | | | 0 | | | |
| Transfers out of Level 3 (1) | (549) | | | 0 | | | | | 0 | | | 0 | | | |
| Balance, March 31, 2021 | $ | 1,242 | | | $ | 38 | | | | | $ | 4 | | | $ | 65 | | | |
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| Balance, January 1, 2020 | $ | 1,246 | | | $ | 39 | | | | | $ | 0 | | | $ | 100 | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | 1 | | | 0 | | | | | 0 | | | 0 | | | |
| Investment gains (losses), net | (2) | | | 0 | | | | | 0 | | | 0 | | | |
| Subtotal | (1) | | | 0 | | | | | 0 | | | 0 | | | |
| Other comprehensive income (loss) | (60) | | | (3) | | | | | 0 | | | (8) | | | |
| Purchases | 61 | | | 0 | | | | | 0 | | | 48 | | | |
| Sales | (46) | | | 0 | | | | | 0 | | | 0 | | | |
| Transfers into Level 3 (1) | 0 | | | 0 | | | | | 0 | | | 0 | | | |
| Transfers out of Level 3 (1) | (26) | | | 0 | | | | | 0 | | | (100) | | | |
| Balance, March 31, 2020 | $ | 1,174 | | | $ | 36 | | | | | $ | 0 | | | $ | 40 | | | |
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(1)Transfers into/out of the Level 3 classification are reflected at beginning-of-period fair values.
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| Corporate | | State and Political Subdivisions | | | | | | Asset-backed | | |
| (in millions) | | | | | | | | | | |
| Balance, January 1, 2020 | $ | 1,246 | | | $ | 39 | | | | | | | $ | 100 | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | 2 | | | — | | | | | | | — | | | |
| Investment gains (losses), net | (13) | | | — | | | | | | | — | | | |
| Subtotal | (11) | | | — | | | | | | | — | | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
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| Corporate | | State and Political Subdivisions | | | | | | Asset-backed | | |
| (in millions) | | | | | | | | | | |
| Other comprehensive income (loss) | (54) | | | 2 | | | | | | | — | | | |
| Purchases | 345 | | | — | | | | | | | — | | | |
| Sales | (90) | | | (1) | | | | | | | — | | | |
| Transfers into Level 3 (1) | 219 | | | — | | | | | | | — | | | |
| Transfers out of Level 3 (1) | (3) | | | — | | | | | | | (100) | | | |
| Balance, June 30, 2020 | $ | 1,652 | | | $ | 40 | | | | | | | $ | — | | | |
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| Balance, January 1, 2019 | $ | 1,174 | | | $ | 38 | | | | | | | $ | 519 | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | 3 | | | — | | | | | | | — | | | |
| Investment gains (losses), net | — | | | — | | | | | | | — | | | |
| Subtotal | 3 | | | — | | | | | | | — | | | |
| Other comprehensive income (loss) | 10 | | | 2 | | | | | | | 5 | | | |
| Purchases | 221 | | | — | | | | | | | 10 | | | |
| Sales | (59) | | | (1) | | | | | | | — | | | |
| Transfers into Level 3 (1) | 14 | | | — | | | | | | | — | | | |
| Transfers out of Level 3 (1) | (73) | | | — | | | | | | | — | | | |
| Balance, June 30, 2019 | $ | 1,290 | | | $ | 39 | | | | | | | $ | 534 | | | |
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(1)Transfers into/out of the Level 3 classification are reflected at beginning-of-period fair values.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | Other Equity Investments | | GMIB Reinsurance Contract Asset | | Separate Accounts Assets | | GMxB Derivative Features Liability | | | Other Equity Investments | | GMIB Reinsurance Contract Asset | | Separate Accounts Assets | | GMxB Derivative Features Liability | |
| | (in millions) | | | (in millions) | |
| Balance, April 1, 2020 | $ | 15 | | | $ | 3,305 | | | $ | — | | | $ | (9,509) | | | |
| Balance, January 1, 2021 | | Balance, January 1, 2021 | $ | 15 | | | $ | 2,859 | | | $ | 1 | | | $ | (10,936) | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | Realized and unrealized gains (losses), included in Net income (loss) as: | | | Realized and unrealized gains (losses), included in Net income (loss) as: | | |
| Investment gains (losses), net | Investment gains (losses), net | — | | | — | | | — | | | — | | | Investment gains (losses), net | 0 | | | 0 | | | 0 | | | 0 | | |
| Net derivative gains (losses), excluding non-performance risk | — | | | (139) | | | — | | | (370) | | | |
| Non-performance risk (1) | — | | | 272 | | | — | | | (2,411) | | | |
| Net derivative gains (losses) (1) | | Net derivative gains (losses) (1) | 0 | | | (724) | | | 0 | | | 3,357 | | |
| | Total realized and unrealized gains (losses) | Total realized and unrealized gains (losses) | — | | | 133 | | | — | | | (2,781) | | | Total realized and unrealized gains (losses) | 0 | |
| (724) | |
| 0 | |
| 3,357 | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | |
| | Purchases (2) | Purchases (2) | 1 | | | 12 | | | — | | | (107) | | | Purchases (2) | 0 | | | 12 | | | 0 | | | (117) | | |
| Sales (3) | Sales (3) | — | | | (17) | | | — | | | 15 | | | Sales (3) | (1) | | | (14) | | | 0 | | | 15 | | |
| Settlements | Settlements | — | | | — | | | — | | | — | | | Settlements | 0 | | | 0 | | | 0 | | | 0 | | |
| Change in estimate (4) | Change in estimate (4) | — | | | — | | | — | | | — | | | Change in estimate (4) | 0 | | | 0 | | | 0 | | | 0 | | |
| Activity related to consolidated VIEs/VOEs | Activity related to consolidated VIEs/VOEs | — | | | — | | | — | | | — | | | Activity related to consolidated VIEs/VOEs | (2) | | | 0 | | | 0 | | | 0 | | |
| Transfers into Level 3 (5) | Transfers into Level 3 (5) | — | | | — | | | — | | | — | | | Transfers into Level 3 (5) | 0 | | | 0 | | | 0 | | | 0 | | |
| Transfers out of Level 3 (5) | Transfers out of Level 3 (5) | — | | | — | | | — | | | — | | | Transfers out of Level 3 (5) | 0 | | | 0 | | | (1) | | | 0 | | |
| Balance, June 30, 2020 | $ | 16 | | | $ | 3,433 | | | $ | — | | | $ | (12,382) | | | |
| Balance, March 31, 2021 | | Balance, March 31, 2021 | $ | 12 | | | $ | 2,133 | | | $ | 0 | | | $ | (7,681) | | |
| | Balance, April 1, 2019 | $ | 18 | | | $ | 2,009 | | | $ | 23 | | | $ | (5,944) | | | |
| Balance, January 1, 2020 | | Balance, January 1, 2020 | $ | 16 | | | $ | 2,466 | | | $ | 0 | | | $ | (8,316) | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | Realized and unrealized gains (losses), included in Net income (loss) as: | | | Realized and unrealized gains (losses), included in Net income (loss) as: | | |
| Investment gains (losses), net | Investment gains (losses), net | — | | | — | | | — | | | — | | | Investment gains (losses), net | 0 | | | 0 | | | 0 | | | 0 | | |
| Net derivative gains (losses), excluding non-performance risk | — | | | 178 | | | — | | | (707) | | | |
| Non-performance risk (1) | — | | | 12 | | | — | | | — | | | |
| Net derivative gains (losses) | | Net derivative gains (losses) | 0 | | | 892 | | | 0 | | | (1,166) | | |
| | Total realized and unrealized gains (losses) | Total realized and unrealized gains (losses) | — | | | 190 | | | — | | | (707) | | | Total realized and unrealized gains (losses) | 0 | | | 892 | | | 0 | | | (1,166) | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | |
| | Purchases (2) | Purchases (2) | — | | | 11 | | | 3 | | | (103) | | | Purchases (2) | 0 | | | 11 | | | 0 | | | (108) | | |
| Sales (3) | Sales (3) | — | | | (14) | | | — | | | 5 | | | Sales (3) | 0 | | | (19) | | | 0 | | | 10 | | |
| Settlements | Settlements | — | | | — | | | (2) | | | — | | | Settlements | 0 | | | 0 | | | 0 | | | 0 | | |
| Change in estimate (4) | | Change in estimate (4) | 0 | | | (45) | | | 0 | | | 0 | | |
| Activity related to consolidated VIEs/VOEs | Activity related to consolidated VIEs/VOEs | (2) | | | — | | | — | | | — | | | Activity related to consolidated VIEs/VOEs | (1) | | | 0 | | | 0 | | | 0 | | |
| Transfers into Level 3 (5) | Transfers into Level 3 (5) | — | | | — | | | — | | | — | | | Transfers into Level 3 (5) | 0 | | | 0 | | | 0 | | | 0 | | |
| Transfers out of Level 3 (5) | Transfers out of Level 3 (5) | — | | | — | | | — | | | — | | | Transfers out of Level 3 (5) | 0 | | | 0 | | | 0 | | | 0 | | |
| Balance, June 30, 2019 | $ | 16 | | | $ | 2,196 | | | $ | 24 | | | $ | (6,749) | | | |
| Balance, March 31, 2020 | | Balance, March 31, 2020 | $ | 15 | | | $ | 3,305 | | | $ | 0 | | | $ | (9,580) | | |
|
______________
(1)The Company’s non-performance risk is recorded through Net derivative gains (losses).
(2)Forimpact of $84 million for GMxB Derivative Features Liability and $(16) million for the GMIB reinsurance contract asset and GMxB derivative features liability, represents attributed fee.
(3)ForReinsurance Contract Asset during the GMIB reinsurance contract asset, represents recoveries from reinsurers and for GMxB derivative features liability, represents benefits paid.
(4)For the GMIB reinsurance contract asset, represents a transfer from amounts due from reinsurers.
(5)Transfers into/out of the Level 3 classification are reflected at beginning-of-period fair values.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
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| Other Equity Investments | | GMIB Reinsurance Contract Asset | | Separate Accounts Assets | | GMxB Derivative Features Liability | | |
| (in millions) | | | | | | | | |
| Balance, January 1, 2020 | $ | 16 | | | $ | 2,466 | | | $ | — | | | $ | (8,246) | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | |
| Investment gains (losses), net | — | | | — | | | — | | | — | | | |
| Net derivative gains (losses), excluding non-performance risk | — | | | 1,082 | | | — | | | (4,440) | | | |
| Non-performance risk (1) | — | | | (56) | | | — | | | 494 | | | |
| Total realized and unrealized gains (losses) | — | |
| 1,026 | |
| — | |
| (3,946) | | | |
| Other comprehensive income (loss) | — | | | | | | | | | |
| Purchases (2) | 1 | | | 23 | | | — | | | (215) | | | |
| Sales (3) | — | | | (37) | | | — | | | 25 | | | |
| Settlements | — | | | — | | | — | | | — | | | |
| Change in estimate (4) | — | | | (45) | | | — | | | — | | | |
| Activity related to consolidated VIEs/VOEs | (1) | | | — | | | — | | | — | | | |
| Transfers into Level 3 (5) | — | | | — | | | — | | | — | | | |
| Transfers out of Level 3 (5) | — | | | — | | | — | | | — | | | |
| Balance, June 30, 2020 | $ | 16 | | | $ | 3,433 | | | $ | — | | | $ | (12,382) | | | |
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| Balance, January 1, 2019 | $ | 48 | | | $ | 1,991 | | | $ | 21 | | | $ | (5,431) | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | |
| Investment gains (losses), net | — | | | — | | | — | | | — | | | |
| Net derivative gains (losses), excluding non-performance risk | — | | | 165 | | | — | | | (656) | | | |
| Non-performance risk (1) | — | | | 52 | | | — | | | (460) | | | |
| Total realized and unrealized gains (losses) | — | | | 217 | | | — | | | (1,116) | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | |
| Purchases (2) | — | | | 23 | | | 8 | | | (210) | | | |
| Sales (3) | — | | | (35) | | | — | | | 8 | | | |
| Settlements | — | | | — | | | (3) | | | — | | | |
| Activity related to consolidated VIEs/VOEs | (3) | | | — | | | — | | | — | | | |
Transfers into Level 3 (5) | — | | | — | | | — | | | — | | | |
| Transfers out of Level 3 (5) | (29) | | | — | | | (1) | | | — | | | |
| Balance, June 30, 2019 | $ | 16 | | | $ | 2,196 | | | $ | 25 | | | $ | (6,749) | | | |
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______________
(1)The Company’s non-performance riskthree months ended March 31, 2021, respectively, is recorded through Net derivative gains (losses).
(2)For the GMIB reinsurance contract asset and GMxB derivative features liability, represents attributed fee.
(3)For the GMIB reinsurance contract asset, represents recoveries from reinsurers and for GMxB derivative features liability, represents benefits paid.
(4)For the GMIB reinsurance contract asset, represents a transfer from amounts due from reinsurers.
(5)Transfers into/out of the Level 3 classification are reflected at beginning-of-period fair values.
The table below details changes in unrealized gains (losses) for the sixthree months ended June 30,March 31, 2021 and 2020 and 2019 by category for Level 3 assets and liabilities still held at June 30,as of March 31, 2021 and 2020, and 2019, respectively.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Change in Unrealized Gains (Losses) for Level 3 Instruments
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| | | | Net Income (Loss) | | |
| | | | Net Derivative Gains (Losses) | | OCI |
| | | (in millions) | | |
| Held at June 30, 2020: | | | | | |
| Change in unrealized gains (losses): | | | | | |
| Fixed maturities, AFS: | | | | | |
| Corporate | | | $ | — | | | $ | (54) | |
| State and political subdivisions | | | — | | | 2 | |
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| Total fixed maturities, AFS | | | — | | | (52) | |
| GMIB reinsurance contracts | | | 1,026 | | | — | |
| | | | | |
| GMxB derivative features liability | | | (3,946) | | | — | |
| Total | | | $ | (2,920) | | | $ | (52) | |
| | | | | |
| Held at June 30, 2019: | | | | | |
| Change in unrealized gains (losses): | | | | | |
| Fixed maturities, AFS: | | | | | |
| Corporate | | | $ | — | | | $ | 10 | |
| State and political subdivisions | | | — | | | 2 | |
| | | | | |
| Asset-backed | | | — | | | 5 | |
| Total fixed maturities, AFS | | | — | | | 17 | |
| GMIB reinsurance contracts | | | 217 | | | — | |
| | | | | |
| GMxB derivative features liability | | | (1,116) | | | — | |
| Total | | | $ | (899) | | | $ | 17 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | |
| | | | Net Income (Loss) | | |
| | | | Net Derivative Gains (Losses) | | OCI |
| | | (in millions) |
| Held at March 31, 2021: | | | | | |
| Change in unrealized gains (losses): | | | | | |
| Fixed maturities, AFS: | | | | | |
| Corporate | | | $ | 0 | | | $ | 9 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | |
| | | | Net Income (Loss) | | |
| | | | Net Derivative Gains (Losses) | | OCI |
| | | (in millions) |
| State and political subdivisions | | | 0 | | | (1) | |
| | | | | |
| | | | | |
| Total fixed maturities, AFS | | | 0 | | | 8 | |
| GMIB reinsurance contracts | | | (724) | | | 0 | |
| | | | | |
| GMxB derivative features liability | | | 3,357 | | | 0 | |
| Total | | | $ | 2,633 | | | $ | 8 | |
| | | | | |
| Held at March 31, 2020: | | | | | |
| Change in unrealized gains (losses): | | | | | |
| Fixed maturities, AFS: | | | | | |
| Corporate | | | $ | 0 | | | $ | (60) | |
| State and political subdivisions | | | 0 | | | (3) | |
| | | | | |
| Asset-backed | | | 0 | | | (8) | |
| Total fixed maturities, AFS | | | 0 | | | (71) | |
| GMIB reinsurance contracts | | | 892 | | | 0 | |
| Separate Account assets | | | 0 | | | 0 | |
| GMxB derivative features liability | | | (1,166) | | | 0 | |
| Total | | | $ | (274) | | | $ | (71) | |
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Quantitative and Qualitative Information about Level 3 Fair Value Measurements
The following tables disclose quantitative information about Level 3 fair value measurements by category for assets and liabilities at June 30, 2020as of March 31, 2021 and December 31, 2019,2020, respectively.
Quantitative Information about Level 3 Fair Value Measurements at June 30, 2020as of March 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair
Value
| | Valuation Technique | | Significant
Unobservable Input
| | Range | | Weighted Average (2) |
| (in millions) | | | | | | | | |
| Assets: | | | | | | | | | |
| Investments: | | | | | | | | | |
| Fixed maturities, AFS: | | | | | | | | | |
| Corporate | $ | 23734 | | | Matrix pricing
model | | Spread over Benchmark | | 020 - 580245 bps | | 34155 bps
|
| 1,062771 | | | Market
comparable
companies | | EBITDA multiples
Discount rate
Cash flow multiples | | 3.7x4.0x - 33.6x32.3x
6.2%6.0% - 23.4%16.7%
0.9x - 25.0x1.6x -25.0x
| | 14.0x11.4x
10.2%8.5%
11.1x6.7x
|
GMIB reinsurance contract assetOther equity investments | 3,433 2 | | | | Discounted cash flowMarket comparable companies | | Non-performance risk
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity
Mortality Rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 61 - 115Revenue multiple | | 559.6x - 144 bps17.2x
0.8%-10%
0%-8%
0%-49%
14%-34%
0.01%-0.18%
0.07%-0.54%
0.42%-42.20% | | 73 bps16.0x
1.55%
1.11%
6.20%
24%
All ages 2.76% |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair
Value
| | Valuation Technique | | Significant
Unobservable Input
| | Range | | Weighted Average (2) |
| (in millions) | | |
| GMIB reinsurance contract asset | 2,133 | | | Discounted cash flow | | Lapse rates
Withdrawal Rates
GMIB Utilization Rates
Non-performance risk
Volatility rates - Equity
Mortality: Ages 0-40
Ages 41-60
Ages 61-115
| | 0.6%-16%
0%-2%
0%-61%
52 - 88 bps
11%-28%
0.01%-0.18%
0.07%-0.54%
0.42%-42.20%
| | 1.93%
0.89%
5.27%
56 bps
23.8%
2.94%
(same for all ages)
(same for all ages)
|
| Liabilities: | | | | | | | | | |
| GMIBNLG | 12,0817,625 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Annuitization rates
Mortality Rates (1):Mortality: Ages 0-40
Ages 0 - 4041-60
Ages 41 - 6061-115
Ages 61 - 115 | | 166.0102.0 bps
0.8%-19.9%1.1%-25.7%
0.3%-11%0.4%-2%
0%-100%
0.01%-0.19%
0.06%-0.53%
0.41%-41.39%
| |
2.59%3.44%
1.17%0.95%
6.19%5.18%
1.66%
(same for all ages)
All ages 1.38%(same for all ages)
|
| GWBL/GMWB | 167134 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal ratesRates
Utilization ratesRates
Volatility rates - Equity
Non-performance risk
| | 166.0 bps
0.8%-10%-16%
0%-7%-8%
100% once starting
14%-34%11%-28%
102.0 bps
| | 1.93%
1.55%0.89%
1.11%
24%
24.08%
|
| GIB | 124 (76) | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal ratesRates
Utilization ratesRates
Volatility rates - Equity | | 166.0 bps
1.2%-19.9%Non-performance risk
0%-8%
0%-100%
14%-34% | |
1.55%0.8%-15.6%
1.11%0%-2%
6.20%0%-100%
11%-28%
102.0 bps
| |
1.93%
0.89%
5.27%
24%
|
| GMAB | 10 (2) | | | Discounted cash flow | | Non-performance risk
Lapse rates
Volatility rates - Equity
Non-performance risk
| | 166.00.8%-16%
11%-28%
102.0 bps
1%-10%
14%-34% | |
1.55%
24%
|
______________
(1)Mortality rates vary by age and demographic characteristic such as gender. Mortality rate assumptions are based on a combination of company and industry experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuating the embedded derivatives.
(2)For Lapses, Withdrawals,lapses, withdrawals, and Utilizationsutilizations the rates were weighted by counts, for Mortalitymortality weighted average rates are shown for all ages combined and for Withdrawalswithdrawals the weighted averages were based on an estimated split of partial withdrawal and dollar-for-dollar withdrawals.
Quantitative Information about Level 3 Fair Value Measurements atas of December 31, 20192020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | Weighted Average |
| (in millions) | | | | | | | | |
| Assets: | | | | | | | | | |
| Investments: | | | | | | | | | |
| Fixed maturities, AFS: | | | | | | | | | |
| Corporate | $ | 5128 | | | Matrix pricing model | | Spread over benchmark | | 6545 - 580195 bps | | 186152 bps |
| 1,0251,148 | | | Market comparable companies | | EBITDA multiples
Discount rate
Cash flow multiples | | 3.3x3.5x - 56.7x33.1x
3.9%5.6% - 16.5%28.4%
0.8x - 48.1x1.9x -25.0x | | 14.3x10.8x
10.0%8.6%
10.7x6.8x |
| Other equity investments | 2 | | | Market comparable companies | | Revenue multiple | | 9.7x - 26.4x | | 18.5x |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| GMIB reinsurance contract asset | 2,4662,859 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115 | | 5543 - 10985 bps
0.8% - 10%0.6%-16%
0.0% - 8.0%0%-2%
0.0% - 49.0%0%-61%
9.0% - 30.0%7%-32%
0.01% - 0.18%-0.18%
0.07% - 0.54%-0.54%
0.42% - 42.20%-42.20% | | 50 bps
1.69%
0.91%
5.82%
24%
2.80%
(same for all ages)
(same for all ages) |
| Liabilities: | | | | | | | | | |
| GMIBNLG | 8,12810,713 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Annuitization rates
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115 | | 12496.0 bps
0.8% - 19.9%1.1%-25.7%
0.3% - 11.0%0.4%-2%
0.0% - 100.0%0%-100%
- 0.19%-0.19%
0.06% - 0.53%-0.53%
0.41% - 41.39%-41.39% | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
3.19%
0.93%
5.51%
1.56%
(same for all ages)
(same for all ages)(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| GWBL/GMWB | 109190 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity | | 12496.0 bps
0.8% - 10.0%-16%
0.0% - 7.0%0%-8%
100% afteronce starting
9.0% - 30.0%7%-32% | |
1.69%
0.91%
24% |
| GIB | 531 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity | | 12496.0 bps
1.2% - 19.9%0.8%-15.6%
0.0% - 8.0%0%-2%
0.0% - 100.0%0%-100%
9.0% - 30.0%7%-32% | |
1.69%
0.91%
5.82%
24% |
| GMAB | 42 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Volatility rates - Equity | | 1.0% - 10.0%96.0 bps
9.0% - 30.0%0.8%-16%
7%-32% | |
1.69%
24% |
| | | | | | | | | |
______________
(1)Mortality rates vary by age and demographic characteristic such as gender. Mortality rate assumptions are based on a combination of company and industry experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuating the embedded derivatives.
Level 3 Financial Instruments for which Quantitative Inputs are Not Available
Certain Privately Placed Debt Securities with Limited Trading Activity
Excluded from the tables above at June 30, 2020as of March 31, 2021 and December 31, 2019,2020, respectively, are approximately $409$556 million and $325$586 million of Level 3 fair value measurements of investments for which the underlying quantitative inputs are not developed by the Company and are not readily available. These investments primarily consist of certain privately placed debt securities with limited trading activity, including residential mortgage- and asset-backed instruments, and their fair values generally reflect unadjusted prices obtained from independent valuation service providers and indicative, non-binding quotes obtained from third-party broker-dealers recognized as market participants. Significant increases or decreases in the fair value amounts received from these pricing sources may result in the Company’s reporting significantly higher or lower fair value measurements for these Level 3 investments.
•The fair value of private placement securities is determined by application of a matrix pricing model or a market comparable company value technique. The significant unobservable input to the matrix pricing model valuation technique is the spread over the industry-specific benchmark yield curve. Generally, an increase or decrease in spreads would lead to directionally inverse movement in the fair value measurements of these securities. The significant unobservable input to the market comparable company valuation technique is the discount rate. Generally, a significant increase (decrease) in the discount rate would result in significantly lower (higher) fair value measurements of these securities.
•Residential mortgage-backed securities classified as Level 3 primarily consist of non-agency paper with low trading activity. Included in the tables above at June 30, 2020as of March 31, 2021 and December 31, 2019,2020, there were no Level 3 securities that were determined by application of a matrix pricing model and for which the spread over the U.S. Treasury curve is the most significant unobservable input to the pricing result. Generally, a change in spreads would lead to directionally inverse movement in the fair value measurements of these securities.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
•Asset-backed securities classified as Level 3 primarily consist of non-agency mortgage loan trust certificates, including subprime and Alt-A paper, credit tenant loans,risk transfer securities, and equipment financings. Included in the tables above at June 30, 2020as of March 31, 2021 and December 31, 2019,2020, there were no securities that were determined by the application of matrix-pricing for which the spread over the U.S. Treasury curve is the most significant unobservable input to the pricing result. Significant increases (decreases) in spreads would have resulted in significantly lower (higher) fair value measurements.
GMIB Reinsurance Contract Asset and GMxB Derivative Features Liability
Significant unobservable inputs with respect to the fair value measurement of the Level 3 GMIB reinsurance contract asset and the Level 3 liabilities identified in the table above are developed using the Company data.
The significant unobservable inputs used in the fair value measurement of the Company’s GMIB reinsurance contract asset are lapse rates, withdrawal rates and GMIB utilization rates. Significant increases in GMIB utilization rates or decreases in lapse or withdrawal rates in isolation would tend to increase the GMIB reinsurance contract asset.
Fair value measurement of the GMIB reinsurance contract asset and liabilities includes dynamic lapse and GMIB utilization assumptions whereby projected contractual lapses and GMIB utilization reflect the projected net amount of
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
risks of the contract. As the net amount of risk of a contract increases, the assumed lapse rate decreases and the GMIB utilization increases. Increases in volatility would increase the asset and liabilities.
The significant unobservable inputs used in the fair value measurement of the Company’s GMIBNLG liability are lapse rates, withdrawal rates, GMIB utilization rates, adjustment for Non-performancenon-performance risk and NLG forfeiture rates. NLG forfeiture rates are caused by excess withdrawals above the annual GMIB accrual rate that cause the NLG to expire. Significant decreases in lapse rates, NLG forfeiture rates, adjustment for non-performance risk and GMIB utilization rates would tend to increase the GMIBNLG liability, while decreases in withdrawal rates and volatility rates would tend to decrease the GMIBNLG liability.
The significant unobservable inputs used in the fair value measurement of the Company’s GMWB and GWBL liability are lapse rates and withdrawal rates. Significant increases in withdrawal rates or decreases in lapse rates in isolation would tend to increase these liabilities. Increases in volatility would increase these liabilities.
Carrying Value of Financial Instruments Not Otherwise Disclosed in Note 3 and Note 4
The carrying values and fair values at June 30, 2020as of March 31, 2021 and December 31, 20192020 for financial instruments not otherwise disclosed in Note 3 and Note 4 are presented in the table below.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Carrying Values and Fair Values for Financial Instruments Not Otherwise Disclosed
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Value | | Fair Value | | | | | | |
| | | | Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) | | | | | | | | |
| June 30, 2020: | | | | | | | | | |
| Mortgage loans on real estate | $ | 12,506 | | | $ | — | | | $ | — | | | $ | 12,572 | | | $ | 12,572 | |
| Policy loans | $ | 3,225 | | | $ | — | | | $ | — | | | $ | 4,390 | | | $ | 4,390 | |
| Loans to affiliates | $ | 1,200 | | | $ | — | | | $ | 1,245 | | | $ | — | | | $ | 1,245 | |
| Policyholders’ liabilities: Investment contracts | $ | 2,047 | | | $ | — | | | $ | — | | | $ | 2,293 | | | $ | 2,293 | |
| FHLBNY funding agreements (1) | $ | 6,700 | | | $ | — | | | $ | 6,793 | | | $ | — | | | $ | 6,793 | |
| Separate Accounts liabilities | $ | 8,445 | | | $ | — | | | $ | — | | | $ | 8,445 | | | $ | 8,445 | |
| | | | | | | | | |
| December 31, 2019: | | | | | | | | | |
| Mortgage loans on real estate | $ | 12,090 | | | $ | — | | | $ | — | | | $ | 12,317 | | | $ | 12,317 | |
| Policy loans | $ | 3,270 | | | $ | — | | | $ | — | | | $ | 4,199 | | | $ | 4,199 | |
| Loans to affiliates | $ | 1,200 | | | $ | — | | | $ | 1,224 | | | $ | — | | | $ | 1,224 | |
| Policyholders’ liabilities: Investment contracts | $ | 1,922 | | | $ | — | | | $ | — | | | $ | 2,029 | | | $ | 2,029 | |
| FHLBNY funding agreements (1) | $ | 6,909 | | | $ | — | | | $ | 6,957 | | | $ | — | | | $ | 6,957 | |
| Separate Accounts liabilities | $ | 9,041 | | | $ | — | | | $ | — | | | $ | 9,041 | | | $ | 9,041 | |
______________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Value | | Fair Value |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) |
| March 31, 2021: | | | | | | | | | |
| Mortgage loans on real estate | $ | 13,263 | | | $ | 0 | | | $ | 0 | | | $ | 13,514 | | | $ | 13,514 | |
| Policy loans | $ | 3,603 | | | $ | 0 | | | $ | 0 | | | $ | 4,575 | | | $ | 4,575 | |
| Loans to affiliates | $ | 900 | | | $ | 0 | | | $ | 927 | | | $ | 0 | | | $ | 927 | |
| Policyholders’ liabilities: Investment contracts | $ | 2,030 | | | $ | 0 | | | $ | 0 | | | $ | 2,143 | | | $ | 2,143 | |
| FHLB funding agreements | $ | 10,223 | | | $ | 0 | | | $ | 10,284 | | | $ | 0 | | | $ | 10,284 | |
| FABN funding agreements | $ | 3,132 | | | $ | 0 | | | $ | 3,087 | | | $ | 0 | | | $ | 3,087 | |
| Separate Accounts liabilities | $ | 10,658 | | | $ | 0 | | | $ | 0 | | | $ | 10,658 | | | $ | 10,658 | |
| | | | | | | | | |
| December 31, 2020: | | | | | | | | | |
| Mortgage loans on real estate | $ | 13,142 | | | $ | 0 | | | $ | 0 | | | $ | 13,474 | | | $ | 13,474 | |
| Policy loans | $ | 3,635 | | | $ | 0 | | | $ | 0 | | | $ | 4,794 | | | $ | 4,794 | |
| Loans to affiliates | $ | 900 | | | $ | 0 | | | $ | 938 | | | $ | 0 | | | $ | 938 | |
| Policyholders’ liabilities: Investment contracts | $ | 2,069 | | | $ | 0 | | | $ | 0 | | | $ | 2,275 | | | $ | 2,275 | |
| FHLB funding agreements | $ | 6,897 | | | $ | 0 | | | $ | 6,990 | | | $ | 0 | | | $ | 6,990 | |
| FABN funding agreements | $ | 1,939 | | | $ | 0 | | | $ | 1,971 | | | $ | 0 | | | $ | 1,971 | |
| Separate Accounts liabilities | $ | 10,081 | | | $ | 0 | | | $ | 0 | | | $ | 10,081 | | | $ | 10,081 | |
(1)Federal Home Loan Bank of New York (“FHLBNY”)
Mortgage Loans on Real Estate
Fair values for commercial and agricultural mortgage loans on real estate are measured by discounting future contractual cash flows to be received on the mortgage loan using interest rates at which loans with similar characteristics and credit quality would be made. The discount rate is derived based on the appropriate U.S. Treasury rate with a like term to the remaining term of the loan to which a spread reflective of the risk premium associated with the specific loan is added. Fair values for mortgage loans anticipated to be foreclosed and problem mortgage loans are limited to the fair value of the underlying collateral, if lower.
Policy Loans
The fair value of policy loans is calculated by discounting expected cash flows based upon the U.S. Treasury yield curve and historical loan repayment patterns.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Loans to Affiliates
The fair value of loans to affiliates is calculated by matrix or model pricing. The matrix pricing approach to fair value is a discounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment.
FHLB Funding Agreements
The fair values of the Company’s FHLB funding agreements are determined by discounted cash flow analysis based on the indicative funding agreement rates published by the FHLB.
FABN Funding Agreements
The fair values of the Company’s FABN funding agreements are determined by Bloomberg’s evaluated pricing service, which uses direct observations or observed comparables.
Policyholder Liabilities - Investment Contracts and Separate Accounts Liabilities
The fair values for deferred annuities and certain annuities, which are included in Policyholders’ account balances and liabilities for investment contracts with fund investments in Separate Accounts are estimated using projected cash
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
flows discounted at rates reflecting current market rates. Significant unobservable inputs reflected in the cash flows include lapse rates and withdrawal rates. Incremental adjustments may be made to the fair value to reflect non-performance risk. Certain other products such as the Company’s association plans contracts, supplementary contracts not involving life contingencies, (“SCNILC”), Access Accounts and Escrow Shield Plus product reserves are held at book value.
Financial Instruments Exempt from Fair Value Disclosure or Otherwise Not Required to be Disclosed
Exempt from Fair Value Disclosure Requirements
Certain financial instruments are exempt from the requirements for fair value disclosure, such as insurance liabilities other than financial guarantees and investment contracts, limited partnerships accounted for under the equity method and pension and other postretirement obligations.
Otherwise Not Required to be Included in the Table Above
The Company’s investment in Corporate Owned Life Insurance (“COLI”)COLI policies are recorded at their cash surrender value and are therefore not required to be included in the table above. See Note 2 to the Company’s consolidated financial statements included in the Annual Report on Form 10-KNotes to Consolidated Financial Statements for the year ended December 31, 2019 for further descriptiondetails of the Company’s accounting policy related to its investmentinvestments in COLI policies.
8) LOANS TO AFFILIATES
Loans Issued to Holdings
In April 2018, Equitable Financial made a $800 million loan to Holdings. The loan has an interest rate of 3.69% and matures in April 2021. In December 2018 and in December 2019, Holdings repaid $200 million and $300 million in principal, respectively. At June 30, 2020, the amount outstanding was $300 million.
In November 2019, Equitable Financial made a $900 million loan to Holdings. The loan has an interest rate of one-month LIBOR plus 1.33%. The loan matures on November 24, 2024. At June 30, 2020, the amount outstanding was $900 million.
9) INCOME TAXES
Income tax expense for the three and six months ended June 30,March 31, 2021 and 2020 and 2019 was computed using an estimated annual effective tax rate (“ETR”), with discrete items recognized in the period in which they occur. The estimated ETR is revised, as necessary, at the end of successive interim reporting periods.
10)9) RELATED PARTY TRANSACTIONS
The Company did not enter into any new significant transactions with related parties during the sixthree months ended June 30, 2020.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
11)10) EQUITY
AOCI represents cumulative gains (losses) on items that are not reflected in Netnet income (loss). The balances as of June 30,March 31, 2021 and December 31, 2020 and 2019 follow:
| | | | June 30, | | | March 31, | | December 31, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | (in millions) | | | (in millions) |
| Unrealized gains (losses) on investments | Unrealized gains (losses) on investments | $ | 4,680 | | | $ | 1,571 | | | Unrealized gains (losses) on investments | $ | 1,486 | | | $ | 4,600 | | |
| Defined benefit pension plans | Defined benefit pension plans | (4) | | | (7) | | | Defined benefit pension plans | (5) | | | (5) | | |
| Accumulated other comprehensive income (loss) attributable to Equitable Financial | Accumulated other comprehensive income (loss) attributable to Equitable Financial | $ | 4,676 | | | $ | 1,564 | | | Accumulated other comprehensive income (loss) attributable to Equitable Financial | $ | 1,481 | | | $ | 4,595 | | |
The components of OCI, net of taxes for the three and six months ended June 30,March 31, 2021 and 2020, and 2019, follow:
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | | 2021 | | 2020 | |
| | (in millions) | | | | (in millions) |
| Change in net unrealized gains (losses) on investments: | Change in net unrealized gains (losses) on investments: | | | Change in net unrealized gains (losses) on investments: | | | |
| Net unrealized gains (losses) arising during the period | Net unrealized gains (losses) arising during the period | $ | 2,633 | | | $ | 1,283 | | | $ | 4,229 | | | $ | 2,526 | | | Net unrealized gains (losses) arising during the period | | $ | (3,868) | | | $ | 1,596 | | |
| (Gains) losses reclassified into net income (loss) during the period (1) | (Gains) losses reclassified into net income (loss) during the period (1) | (134) | | | (4) | | | (182) | | | 2 | | | (Gains) losses reclassified into net income (loss) during the period (1) | | (164) | | | (48) | | |
| Net unrealized gains (losses) on investments | Net unrealized gains (losses) on investments | 2,499 | | | 1,279 | | | 4,047 | | | 2,528 | | | Net unrealized gains (losses) on investments | | (4,032) | | | 1,548 | | |
| Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other | Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other | (930) | | | 12 | | | (964) | | | (473) | | | Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other | | 918 | | | (38) | | |
| Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of $417, $341, $820 and $541) | 1,569 | | | 1,291 | | | 3,083 | | | 2,055 | | | |
| Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of, $(828) and $403) | | Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of, $(828) and $403) | | (3,114) | | | 1,510 | | |
| | Other comprehensive income (loss), attributable to Equitable Financial | Other comprehensive income (loss), attributable to Equitable Financial | $ | 1,570 | | | $ | 1,291 | | | $ | 3,084 | | | $ | 2,055 | | | Other comprehensive income (loss), attributable to Equitable Financial | | $ | (3,114) | | | $ | 1,510 | | |
____________
(1)See “Reclassification adjustments” in Note 3. Reclassification amounts presented net of income tax expense (benefit) of $(35) million, $0 million, $(48)$44 million and $1$13 million,for the three and six months ended June 30,March 31, 2021 and 2020, and 2019, respectively.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Investment gains and losses reclassified from AOCI to Netnet income (loss) primarily consist of realized gains (losses) on sales and credit losses of AFS securities and are included in Totaltotal investment gains (losses), net on the consolidated statements of income (loss). Amounts reclassified from AOCI to Netnet income (loss) as related to defined benefit plans primarily consist of amortization of net (gains) losses and net prior service cost (credit) recognized as a component of net periodic cost and reported in Compensationcompensation and benefits in the consolidated statements of income (loss). Amounts presented in the table above are net of tax.
12)11) REDEEMABLE NONCONTROLLING INTEREST
The changes in the components of redeemable noncontrolling interests are presented in the table that follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | (in millions) | | | | (in millions) |
| Balance, beginning of period | Balance, beginning of period | $ | 32 | | | $ | 48 | | | $ | 39 | | | $ | 39 | | Balance, beginning of period | | $ | 41 | | | $ | 39 | | |
| Net earnings (loss) attributable to redeemable noncontrolling interests | Net earnings (loss) attributable to redeemable noncontrolling interests | 2 | | | 1 | | | (3) | | | 3 | | Net earnings (loss) attributable to redeemable noncontrolling interests | | 0 | | | (5) | | |
| Purchase/change of redeemable noncontrolling interests | Purchase/change of redeemable noncontrolling interests | 2 | | | (7) | | | — | | | — | | Purchase/change of redeemable noncontrolling interests | | 7 | | | (2) | | |
| Balance, end of period | Balance, end of period | $ | 36 | | | $ | 42 | | | $ | 36 | | | $ | 42 | | Balance, end of period | | $ | 48 | | | $ | 32 | | |
13)12) COMMITMENTS AND CONTINGENT LIABILITIES
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Litigation
Litigation, regulatory and other loss contingencies arise in the ordinary course of the Company’s activities as a diversified financial services firm. The Company is a defendant in a number of litigation matters arising from the conduct of its business. In some of these matters, claimants seek to recover very large or indeterminate amounts, including compensatory, punitive, treble and exemplary damages. Modern pleading practice permits considerable variation in the assertion of monetary damages and other relief. Claimants are not always required to specify the monetary damages they seek, or they may be required only to state an amount sufficient to meet a court’s jurisdictional requirements. Moreover, some jurisdictions allow claimants to allege monetary damages that far exceed any reasonably possible verdict. The variability in pleading requirements and past experience demonstrates that the monetary and other relief that may be requested in a lawsuit or claim often bears little relevance to the merits or potential value of a claim. Litigation against the Company includes a variety of claims including, among other things, insurers’ sales practices, alleged agent misconduct, alleged failure to properly supervise agents, contract administration, product design, features and accompanying disclosure, cost of insurance increases, payments of death benefits and the reporting and escheatment of unclaimed property, alleged breach of fiduciary duties, alleged mismanagement of client funds and other matters.
As with other financial services companies, the Company periodically receives informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the Company or the financial services industry. It is the practice of the Company to cooperate fully in these matters.
The outcome of a litigation or regulatory matter is difficult to predict, and the amount or range of potential losses associated with these or other loss contingencies requires significant management judgment. It is not possible to predict the ultimate outcome or to provide reasonably possible losses or ranges of losses for all pending regulatory matters, litigation and other loss contingencies. While it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company’s financial position, based on information currently known, management believes that neither the outcome of pending litigation and regulatory matters, nor potential liabilities associated with other loss contingencies, are likely to have such an effect. However, given the large and indeterminate amounts sought in certain litigation and the inherent unpredictability of all such matters, it is possible that an adverse outcome in certain of the Company’s litigation or regulatory matters, or liabilities arising from other loss contingencies, could, from time to time, have a material adverse effect upon the Company’s results of operations or cash flows in a particular quarterly or annual period.
For some matters, the Company is able to estimate a possible range of loss. For such matters in which a loss is probable, an accrual has been made. For matters where the Company believes a loss is reasonably possible, but not probable, no accrual is required. For matters for which an accrual has been made, but there remains a reasonably possible range of loss in excess of the amounts accrued or for matters where no accrual is required, the Company develops an estimate of the unaccrued amounts of the reasonably possible range of losses. As of June 30, 2020,March 31, 2021, the
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Company estimates the aggregate range of reasonably possible losses, in excess of any amounts accrued for these matters as of such date, to be up to approximately $100$150 million.
For other matters, the Company is currently not able to estimate the reasonably possible loss or range of loss. The Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from plaintiffs and other parties, investigation of factual allegations, rulings by a court on motions or appeals, analysis by experts and the progress of settlement discussions. On a quarterly and annual basis, the Company reviews relevant information with respect to litigation and regulatory contingencies and updates the Company’s accruals, disclosures and reasonably possible losses or ranges of loss based on such reviews.
In August 2015, a lawsuit was filed in Connecticut Superior Court, Judicial Division of New Haven entitled Richard T. O’Donnell, on behalf of himself and all others similarly situated v. AXA Equitable Life Insurance Company. This lawsuit is a putative class action on behalf of all persons who purchased variable annuities from Equitable Financial, which were subsequently subjected to the volatility management strategy and who suffered injury as a result thereof. Plaintiff asserts a claim for breach of contract alleging that Equitable Financial implemented the volatility management strategy in violation of applicable law. Plaintiff seeks an award of damages individually and on a classwide basis, and costs and disbursements, including attorneys’ fees, expert witness fees and other costs. In November 2015, the Connecticut Federal District Court transferred this action to the United States District Court for the Southern District of New York. In March 2017, the Southern District of New York granted Equitable Financial’s motion to dismiss the complaint. In April 2017, the plaintiff filed a notice of appeal. In April 2018, the United States Court of Appeals for
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
the Second Circuit reversed the trial court’s decision with instructions to remand the case to Connecticut state court. In September 2018, the Second Circuit issued its mandate, following Equitable Financial’s notification to the court that it would not file a petition for writ of certiorari. The case was transferred in December 2018 to the Connecticut Superior Court, Judicial District of Stamford. In December 2018, Equitable Financial sought dismissal of the complaint by filing a motion to strike, which the court granted in August 2019. Plaintiff filed an Amended Class Action Complaint in September 2019. Equitable Financial filed a motion for entry of judgment in October 2019. On August 3, 2020, the court granted Equitable Financial’s motion for entry of judgment. In August 2020, Plaintiff filed a notice of appeal. We are vigorously defending this matter.
In February 2016, a lawsuit was filed in the United States District Court for the Southern District of New York entitled Brach Family Foundation, Inc. v. AXA Equitable Life Insurance Company. This lawsuit is a putative class action brought on behalf of all owners of universal life (“UL”)UL policies subject to Equitable Financial’s COI rate increase. In early 2016, Equitable Financial raised COI rates for certain UL policies issued between 2004 and 2007, which had both issue ages 70 and above and a current face value amount of $1 million and above. A second putative class action was filed in Arizona in 2017 and consolidated with the Brach matter. The current consolidated amended class action complaint alleges the following claims: breach of contract; misrepresentations by Equitable Financial in violation of Section 4226 of the New York Insurance Law; violations of New York General Business Law Section 349; and violations of the California Unfair Competition Law, and the California Elder Abuse Statute. Plaintiffs seek;seek: (a) compensatory damages, costs, and, pre- and post-judgment interest; (b) with respect to their claim concerning Section 4226, a penalty in the amount of premiums paid by the plaintiffs and the putative class; and (c) injunctive relief and attorneys’ fees in connection with their statutory claims. FiveIn August 2020, the federal district court issued a decision granting in part Brach Plaintiffs’ motion for class certification. The court certified nationwide breach of contract and Section 4226 classes, and a New York State Section 349 class. Equitable Financial has commenced settlement discussions with the Brach class action plaintiffs through a non-binding mediation process. No assurances can be given about the outcome of that mediation process. Separately, a substantial number of policy owners have opted out of the Brach class action and are not participating in that mediation process. Most have not yet filed suit. Others filed suit previously. They include 5 other federal actions challenging the COI rate increase that are also pending against Equitable Financial and have been coordinated with the Brach action for the purposes of pre-trial activities. They contain allegations similar to those in the Brach action as well as additional allegations for violations of various states’ consumer protection statutes and common law fraud. ThreeNaN actions are also pending against Equitable Financial in New York state court. Equitable Financial is vigorously defending each of these matters.
Obligations under Funding Agreements
Federal Home Loan Bank
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
As a member of the FHLBNY,FHLB, Equitable Financial has access to collateralized borrowings. It also may issue funding agreements to the FHLBNY.FHLB. Both the collateralized borrowings and funding agreements would require Equitable Financial to pledge qualified mortgage-backed assets and/or government securities as collateral. Equitable Financial issues short-term funding agreements to the FHLBNYFHLB and uses the funds for asset, liability, and cash management purposes. Equitable Financial issues long-term funding agreements to the FHLBNYFHLB and uses the funds for spread lending purposes.
Entering into FHLBNYFHLB membership, borrowings and funding agreements requires the ownership of FHLBNYFHLB stock and the pledge of assets as collateral. Equitable Financial has purchased FHLBNYFHLB stock of $313$472 million and pledged collateral with a carrying value of $8.6$6.7 billion as of June 30, 2020.March 31, 2021.
Funding agreements are reported in Policyholders’policyholders’ account balances in the consolidated balance sheets. For other instruments used for asset/liability and cash management purposes, see “Derivative and offsetting assets and liabilities” included in Note 4. The table below summarizes the Company’s activity of funding agreements with the FHLBNY.FHLB.
Change in FHLBNYFHLB Funding Agreements during the SixThree Months Ended June 30, 2020March 31, 2021
| | | Outstanding Balance at December 31, 2019 | | Issued During the Period | | Repaid During the Period | | Long-term Agreements Maturing Within One Year | | Long-term Agreements Maturing Within Five Year | | Outstanding Balance at June 30, 2020 | | Outstanding Balance at December 31, 2020 | | Issued During the Period | | Repaid During the Period | | Long-term Agreements Maturing Within One Year | | Long-term Agreements Maturing Within Five Years | | Outstanding Balance at March 31, 2021 |
| | (in millions) | | | (in millions) |
| Short-term funding agreements: | Short-term funding agreements: | | Short-term funding agreements: | |
| Due in one year or less | Due in one year or less | $ | 4,608 | | | $ | 22,950 | | | $ | 23,158 | | | $ | 490 | | | $ | — | | | $ | 4,890 | | Due in one year or less | $ | 5,634 | | | $ | 16,050 | | | $ | 12,724 | | | $ | 173 | | | $ | 0 | | | $ | 9,133 | |
| Long-term funding agreements: | Long-term funding agreements: | | Long-term funding agreements: | |
| Due in years two through five | Due in years two through five | 1,646 | | | — | | | — | | | (490) | | | 112 | | | 1,268 | | Due in years two through five | 722 | | | 0 | | | 0 | | | (173) | | | 0 | | | 549 | |
| Due in more than five years | Due in more than five years | 646 | | | — | | | — | | | — | | | (112) | | | 534 | | Due in more than five years | 534 | | | 0 | | | 0 | | | 0 | | | 0 | | | 534 | |
| Total long-term funding agreements | Total long-term funding agreements | 2,292 | | | — | | | — | | | (490) | | | — | | | 1,802 | | Total long-term funding agreements | 1,256 | | | 0 | | | 0 | | | (173) | | | 0 | | | 1,083 | |
| Total funding agreements (1) | Total funding agreements (1) | $ | 6,900 | | | $ | 22,950 | | | $ | 23,158 | | | $ | — | | | $ | — | | | $ | 6,692 | | Total funding agreements (1) | $ | 6,890 | | | $ | 16,050 | | | $ | 12,724 | | | $ | 0 | | | $ | 0 | | | $ | 10,216 | |
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EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
____________
(1)The $8$6 million and $9$7 million difference between the funding agreements carrying value shown in fair value table for June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, reflects the remaining amortization of a hedge implemented and closed, which locked in the funding agreements borrowing rates.
Funding Agreement-Backed Notes Program
Under the FABN, Equitable Financial may issue funding agreements to a Delaware special purpose statutory trust (the “Trust”) in exchange for the proceeds from issuances of fixed and floating rate medium-term marketable notes issued by the Trust from time to time (the “Trust notes”). The funding agreements have matching interest and maturity payment terms to the applicable Trust notes. The maximum aggregate principal amount of Trust notes permitted to be outstanding at any one time is $5 billion. Funding agreements issued to the Trust are reported in policyholders’ account balances in the consolidated balance sheets. The table below summarizes the Company’s activity of funding agreements under the FABN.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Change in FABN Funding Agreements during the Three Months Ended March 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding Balance at December 31, 2020 | | Issued During the Period | | Repaid During the Period | | Long-term Agreements Maturing Within One Year | | Long-term Agreements Maturing Within Five Years | | Outstanding Balance at March 31, 2021 |
| (in millions) |
| Short-term funding agreements: | | | | | | | | | | | |
| Due in one year or less | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Long-term funding agreements: | | | | | | | | | | | |
| Due in years two through five | 1,150 | | | 450 | | | 0 | | | 0 | | | 0 | | | 1,600 | |
| Due in more than five years | 800 | | | 750 | | | 0 | | | 0 | | | 0 | | | 1,550 | |
| Total long-term funding agreements | 1,950 | | | 1,200 | | | 0 | | | 0 | | | 0 | | | 3,150 | |
| Total funding agreements (1) | $ | 1,950 | | | $ | 1,200 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 3,150 | |
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(1) The $18 million and $11 million difference between the funding agreements notional value shown and carrying value table as of March 31, 2021 and December 31, 2020, respectively, reflects the remaining amortization of the issuance cost of the funding agreements.
Guarantees and Other Commitments
The Company provides certain guarantees or commitments to affiliates and others. At June 30, 2020,As of March 31, 2021, these arrangements include commitments by the Company to provide equity financing of $1.2 billion (including $219$283 million with affiliates) to certain limited partnerships and real estate joint ventures under certain conditions. Management believes the Company will not incur material losses as a result of these commitments.
The Company had $17 million of undrawn letters of credit related to reinsurance as of March 31, 2021. The Company had $456 million of commitments under existing mortgage loan agreements as of March 31, 2021.
The Company is the obligor under certain structured settlement agreements it had entered into with unaffiliated insurance companies and beneficiaries. To satisfy its obligations under these agreements, the Company owns single premium annuities issued by previously wholly-owned life insurance subsidiaries. The Company has directed payment under these annuities to be made directly to the beneficiaries under the structured settlement agreements. A contingent liability exists with respect to these agreements should the previously wholly-owned subsidiaries be unable to meet their obligations. Management believes the need for the Company to satisfy those obligations is remote.
The Company had $17 million of undrawn letters of credit related to reinsurance at June 30, 2020. The Company had $481 million of commitments under existing mortgage loan agreements at June 30, 2020.
Pursuant to certain assumption agreements (the “Assumption Agreements”), AXA Financial legally assumed primary liability from Equitable Financial for all current and future liabilities of Equitable Financial under certain employee benefit plans that provide participants with medical, life insurance and deferred compensation benefits as well as under the AXA Equitable Retirement plan, a frozen qualified pension plan. Equitable Financial remains secondarily liable for its obligations under these plans and would recognize such liabilities in the event AXA Financial does not perform under the terms of the Assumption Agreements. On October 1, 2018, AXA Financial merged with and into its direct parent, Holdings, with Holdings continuing as the surviving entity.
13) REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS
The Company identified certain errors primarily related to the calculation of actuarially determined insurance contract assets and liabilities that impacted previously issued consolidated financial statements. Management evaluated these adjustments and concluded they were not material to any previously reported quarterly or annual financial statements. In order to improve the consistency and comparability of the financial statements, management revised the financial statements and related disclosures to correct these errors as shown below.
Management assessed the materiality of this change within prior period financial statements based upon SEC Staff Accounting Bulletin Number 99, Materiality, which is since codified in ASC 250, Accounting Changes and Error Corrections. The prior period comparative financial statements that are presented herein have been revised.
The following tables present line items for prior period financial statements that have been affected by the revision. For these line items, the tables detail the amounts as previously reported, the impact upon those line items due to the revision, and the amounts as currently revised within the financial statements.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Balance Sheets: | | | | | | | | | |
| Assets: | | | | | | | | | |
| Investments: | | | | | | | | | |
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| Other invested assets | 1,595 | | | | | | | 12 | | | 1,607 | |
| Total investments | 90,613 | | | | | | | 12 | | | 90,625 | |
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| Deferred policy acquisition costs | 4,068 | | | | | | | (85) | | | 3,983 | |
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| Total Assets | $ | 218,841 | | | | | | | $ | (73) | | | $ | 218,768 | |
| Liabilities: | | | | | | | | | |
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| Future policy benefits and other policyholders’ liabilities | 37,830 | | | | | | | 32 | | | 37,862 | |
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| Current and deferred income taxes | 1,637 | | | | | | | (22) | | | 1,615 | |
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| Total Liabilities | $ | 199,928 | | | | | | | $ | 10 | | | $ | 199,938 | |
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| EQUITY | | | | | | | | | |
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| Retained earnings | 7,953 | | | | | | | (83) | | | 7,870 | |
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| Total equity attributable to Equitable Financial | 18,872 | | | | | | | (83) | | | 18,789 | |
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| Total Equity | 18,881 | | | | | | | (83) | | | 18,798 | |
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| Total Liabilities, Redeemable Noncontrolling interest and Equity | $ | 218,841 | | | | | | | $ | (73) | | | $ | 218,768 | |
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| | Three Months Ended March 31, 2020 |
| | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statements of Income (Loss) | | | | | | | | | | |
| REVENUES: | | | | | | | | | | |
| Policy charges and fee income | | 904 | | | | | | | 1 | | | 905 | |
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| Net derivative gains (losses) | | 9,533 | | | | | | | (1) | | | 9,532 | |
| Net investment income (loss) | | 591 | | | | | | | 13 | | | 604 | |
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| Other income | | 17 | | | | | | | (2) | | | 15 | |
| Total revenues | | 11,588 | | | | | | | 11 | | | 11,599 | |
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| BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | |
| Policyholders' benefits | | 2,597 | | | | | | | 29 | | | 2,626 | |
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| Amortization of deferred policy acquisition costs | | 1,058 | | | | | | | (36) | | | 1,022 | |
| Other operating costs and expenses | | 213 | | | | | | | 1 | | | 214 | |
| Total benefits and deductions | | 4,398 | | | | | | | (6) | | | 4,392 | |
| Income (loss) from continuing operations, before income taxes | | 7,190 | | | | | | | 17 | | | 7,207 | |
| Income tax (expense) benefit from continuing operations | | (1,454) | | | | | | | (3) | | | (1,457) | |
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| Net income (loss) | | 5,736 | | | | | | | 14 | | | 5,750 | |
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| Net income (loss) attributable to Equitable Financial | | $ | 5,743 | | | | | | | $ | 14 | | | $ | 5,757 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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| | Three Months Ended March 31, 2020 |
| | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statements of Comprehensive Income (Loss) | | | | | | | | | | |
| Net income (loss) | | $ | 5,736 | | | | | | | $ | 14 | | | $ | 5,750 | |
| Foreign currency translation adjustment | | 0 | | | | | | | 0 | | | 0 | |
| Change in unrealized gains (losses), net of reclassification adjustment | | 1,514 | | | | | | | (4) | | | 1,510 | |
| Changes in defined benefit plan related items not yet recognized in periodic benefit cost, net of reclassification adjustment | | 0 | | | | | | | 0 | | | 0 | |
| Other comprehensive (income) loss from discontinued operations | | 0 | | | | | | | 0 | | | 0 | |
| Other comprehensive income | | 1,514 | | | | | | | (4) | | | 1,510 | |
| Comprehensive income (loss) | | 7,250 | | | | | | | 10 | | | 7,260 | |
| Less: Comprehensive income (loss) attributable to noncontrolling interest | | (7) | | | | | | | 0 | | | (7) | |
| Comprehensive income (loss) attributable to Equitable Financial | | $ | 7,257 | | | | | | | $ | 10 | | | $ | 7,267 | |
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| | Three Months Ended March 31, 2020 |
| | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statements of Equity: | | | | | | | | | | |
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| Retained earnings, beginning of year | | $ | 2,242 | | | | | | | $ | (97) | | | $ | 2,145 | |
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| Net income (loss) attributable to Equitable Financial | | 5,743 | | | | | | | 14 | | | 5,757 | |
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| Retained earnings, end of period | | $ | 7,953 | | | | | | | $ | (83) | | | $ | 7,870 | |
| Accumulated other comprehensive income (loss), beginning of year | | $ | 1,592 | | | | | | | $ | 4 | | | $ | 1,596 | |
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| Other comprehensive income (loss) | | 1,514 | | | | | | | (4) | | | 1,510 | |
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| Accumulated other comprehensive income (loss), end of period | | $ | 3,106 | | | | | | | $ | 0 | | | $ | 3,106 | |
| Total Equitable Financial equity, end of period | | $ | 18,872 | | | | | | | $ | (83) | | | $ | 18,789 | |
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| Total equity, end of period | | $ | 18,881 | | | | | | | $ | (83) | | | $ | 18,798 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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| March 31, 2020 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Cash Flows: | | | | | | | | | |
| Cash flow from operating activities: | | | | | | | | | |
| Net income (loss) | $ | 5,736 | | | | | | | $ | 14 | | | $ | 5,750 | |
| Adjustments to reconcile Net income (loss) to Net cash provided by (used in) operating activities: | | | | | | | | | |
| Policy charges and fee income | (904) | | | | | | | (1) | | | (905) | |
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| Net derivative (gains) losses | (9,533) | | | | | | | 1 | | | (9,532) | |
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| Amortization and depreciation | 1,025 | | | | | | | (35) | | | 990 | |
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| Future policy benefits | 1,817 | | | | | | | 29 | | | 1,846 | |
| Reinsurance recoverable | (97) | | | | | | | 1 | | | (96) | |
| Current and deferred income taxes | 1,462 | | | | | | | 3 | | | 1,465 | |
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| Net cash provided by (used in) operating activities | $ | (621) | | | | | | | $ | 12 | | | $ | (609) | |
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| Change in collateralized pledged assets | 45 | | | | | | | (1) | | | 44 | |
| Change in collateralized pledged liabilities | 667 | | | | | | | (11) | | | 656 | |
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| Net cash provided by (used in) financing activities | $ | 2,504 | | | | | | | $ | (12) | | | $ | 2,492 | |
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| Cash and cash equivalents, end of period | 7,492 | | | | | | | 0 | | | 7,492 | |
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14) SUBSEQUENT EVENTS
Funding Agreement-Backed Notes Program
Pursuant to a funding agreement-backed notesthe FABN program discussed in Note 12, in April 2021, Equitable Financial may issueissued a $350 million funding agreementsagreement to a Delaware special purpose statutory trust (the “Trust”) in exchange for the proceeds from issuances of fixed and floating rate medium-term marketable notes issued by the Trust from time to time (the “Trust notes”). The funding agreements have matchingwith a fixed interest rate of 0.50% per annum and a maturity payment terms todate of April 6, 2023. In addition, on the applicable Trust notes. The maximum aggregate principal amount of Trust notes permitted to be outstanding at any one time is $5 billion.
Effective July 7, 2020,same date Equitable Financial issued a $650 million funding agreement to the Trust. The funding agreement hasTrust with a fixedfloating interest rate of 1.4%equal to the compounded Secured Overnight Financing Rate (“SOFR”) plus 39 basis points per annum and will maturewhich matures on July 7, 2025.April 6, 2023. Funding agreements issued to the Trust will be reported in Policyholders’Policyholders' account balances in the consolidated balance sheets in subsequent periods.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations is presented pursuant to General Instruction (H)(2)(a) of Form 10-Q. The management’s narrative that follows should be read in conjunction with the consolidated financial statements and the related Notes to Consolidated Financial Statements included elsewhere herein, with the information provided under “Note Regarding Forward-looking Statements and Information” included elsewhere herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in Part II, Item 7 and “Risk Factors” in Part I, Item 1A included in Equitable Financial’s Annual Report on Form 10-K for the year ended December 31, 20192020 (“20192020 Form 10-K”). The management’s narrative that follows represents a discussion and analysis of Equitable Financial’s financial condition and results of operations and not the financial condition and results of operations of Equitable Holdings, Inc. (“Holdings”). Executive Summary
Overview
We are one of America’s leading financial services companies, providing advice and solutions for helping Americans set and meet their retirement goals and protect and transfer their wealth across generations. We operate as a single segment entity based on the manner in which we use financial information to evaluate business performance and to determine the allocation of resources. We benefit from our complementary mix of product offerings. This mix in product offerings provides diversity in our earnings sources, which helps offset fluctuations in market conditions and variability in business results, while offering growth opportunities.
COVID-19 ImpactReinsurance of Legacy Variable Annuity Block and Sale of Runoff Variable Annuity Reinsurance Entity
DuringOn October 27, 2020, Holdings entered into an MTA with VIAC, pursuant to which, among other things, VIAC will acquire all of the first halfshares of 2020the capital stock of CS Life. Prior to the closing, CS Life will affect the recapture of all of the business that is currently ceded to CS Life RE and sell 100% of the common stock of CS Life RE to an affiliate. Immediately following the sale of CS Life, CS Life and Equitable Financial will enter into a coinsurance and modified coinsurance agreement (the “Reinsurance Agreement”), pursuant to which Equitable Financial will cede to CS Life, on a combined coinsurance and modified coinsurance basis, legacy variable annuity policies sold by Equitable Financial in particular,2006-2008 (the “Block”). The Block is comprised of non-New York “Accumulator” policies containing fixed rate GMIB and/or GMDB guarantees. CS Life will deposit assets supporting the General Account liabilities relating to the Block into a trust account for the benefit of Equitable Financial to secure its obligations to Equitable Financial under the Reinsurance Agreement. Equitable Financial will reinsure the separate accounts relating to the Block on a modified coinsurance basis. At closing, VIAC will contribute additional assets to the trust such that trust assets will exceed the liabilities they secure. Venerable Holdings Inc (“VHI”)will provide a parental guarantee of CS Life’s obligation to Equitable Financial under the Reinsurance Agreement. In addition, the investment of assets in the trust account will be subject to investment guidelines and the requirements of the trust will be strengthened upon certain triggers related to capital adequacy. The Reinsurance Agreement also contains additional counterparty risk management and mitigation provisions.
The transaction is expected to close in the second quarter of 2020,2021, subject to the satisfaction or waiver of customary closing conditions.
COVID-19 Impact
We continue to closely monitor developments related to the COVID-19 pandemic. The extent of the COVID-19 pandemic’s impact on us will depend on future developments that are highly uncertain, including the severity and duration of the pandemic, negatively impactedactions taken by governments and other third parties in response to the U.S.pandemic and global economies. Capital markets continued to experience significant volatilitythe availability and unemployment levels rose dramatically. In addition, many businesses and schools remained closed or were ordered to close and many states and local communities instituted or maintained social distancing and sheltering in place requirements. It remains unclear whether states and municipalities across the U.S. will be able to safely re-open schools in several weeks given the spreadefficacy of vaccines against COVID-19 including against variant strains of the virus. The COVID-19 pandemic is rapidly evolving in the U.S. and while certain cities and/or states are beginning the process of re-opening, others are pausing re-opening plans due to dramatic surges in COVID-19 cases. It is expected thatnot possible to predict or estimate the longer-term effects fromof the pandemic, are likelyor any additional actions taken to persist for months to come. Governments aroundcontain or address the world continued to implement economic stimulus measures that are intended to steady businesses and consumers until economic activity and financial markets meaningfully recover. The timing and magnitude of any such recovery, however, remains uncertain.
As a financial services company, factors such as the volatility and strength of equity markets, interest rates, consumer spending, and government debt and spending all affect the business and economic environment and, ultimately, the amount and profitability of our business. During the current economic downturn, the demand for our products and services and our investment returns could be materially and adversely affected. In addition, the growing number of COVID-19 related deaths could have an adverse effect on our insurance business due to increased mortality and, in certain cases, morbidity rates.
To date, COVID-related impacts, including adverse mortality experience, have been manageable and below initial expectations. In response to the current environment, we are adapting our processes to meet client needs. For example, we have modified our underwriting policies to offer a fluid-less, touchless process to help more clients access the protection they need. In addition, we have accelerated our digital adoption programs, leading to improved outcomes for clients, advisors, and the company. With schools closed and an uncertain outlook on reopening, we have developed digital tools and enhanced our remote engagement with our educator clients, which is resulting in improved retention and increases in retirement plan contributions.
Action taken by state insurance departments, including the NYDFS, to require insurers to offer flexible premium payment plans, relax payment dates, waive late fees and penalties in order to avoid canceling or non-renewing polices may negatively affect our results of operations. Additionally, the profitability of many of our retirement, protection and investment products depends in partpandemic, on the value of the AUM supporting them, which has declinedeconomy and may continue to decline substantially depending on any of the foregoing conditions. The ongoing economic impact and the potential for continued volatility and declines in the capital markets could have a significant adverse effect on our business, results of operations, and financial condition, particularly if economic activity and financialincluding the impact on our investment portfolio or the need for us to revisit or revise targets previously provided to the markets do not recover and/or recover slowly.
While the COVID-19 pandemic significantly affected the capital markets and economy, we believe the actions we have previously taken help assure that our economic balance sheet is protected from interest rate and equity declines. These actions
include redesigning our product portfolio to concentrate on offering less capital-intensive products and implementing a hedging strategy that manages and protects against the economic risks associated with our in-force GMxB products. In addition to our hedging strategy, we employ various other methods to manage the risksaspects of our in-force variable annuity products, including asset-liability matching, volatility management tools within the Separate Accounts and an active in-force management program, including buyout offers for certain products. Our General Account was impacted both from declining interest rates, which had a positive effect on fair value, and sharply increased credit spreads, which had a negative impact on fair value. Due to the General Account’s exposure to U.S. government bonds and credit quality of the portfolio, we feel that our balance sheet is well positioned to withstand the extreme volatility in the capital markets.
In light of the unprecedented decline in long-term interest rates in the first quarter of 2020, we updated our long-term GAAP interest rate assumption to grade from current rates over 10-years to the 5-year historical average (currently 2.25%). For additional information, see “—Significant Factors Impacting Our Results—Assumption Updates and Model Changes.”
Operationally, we acted quickly and implemented our risk management and contingency plans as the COVID-19 pandemic evolved. For example, among other things, we implemented travel restrictions, imposed self-quarantine requirements for employees and affiliated advisors who were exposed to someone who tested positive or had traveled to certain countries with active COVID-19 outbreaks and, finally, we temporarily closed our corporate locations and affiliated advisor branch offices. As a result, most of our employee and affiliated advisors are currently working remotely. The remote working arrangement has detracted from the ability of our affiliated advisors to sell our products in the normal course and, as a result, the demand for our products and services has been adversely impacted and going forward could decline further as the pandemic persists. We are also mindful that an extended period of remote work arrangements could strain our business continuity plans, introduce additional operational risk, including cybersecurity and privacy risks, and impair our ability to effectively manage our business.
While the COVID-19 pandemic has negatively impacted our business and financial results, the extent and nature of its full financial impact cannot reasonably be estimated at this time due to the uncertainty as to the severity and duration of the pandemic.model. For additional information regarding the potential impacts of the COVID-19 pandemic and action we have taken to mitigate certain impacts, see “Risk Factors—Risks Relating to Conditions in the Financial Markets and Economy—The novel coronavirus (COVID-19) pandemic has adversely impactedpandemic” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—COVID-19 Impact” in our business and could materially adversely affect our business, resultsAnnual Report on Form 10-K for the year ended December 31, 2020.
Revenues
Our revenues come from three principal sources:
•fee income derived from our productsproducts;
•premiums from our traditional life insurance and annuity products; and
•investment income from our General Account investment portfolio.
Our fee income varies directly in relation to the amount of the underlying AV or benefit base of our life insurance and annuity products which are influenced by changes in economic conditions, primarily equity market returns, as well as net flows. Our premium income is driven by the growth in new policies written and the persistency of our in-force policies, both of which are influenced by a combination of factors, including our efforts to attract and retain customers and market conditions that influence demand for our products. Our investment income is driven by the yield on our General Account investment portfolio and is impacted by the prevailing level of interest rates as we reinvest cash associated with maturing investments and net flows to the portfolio.
Benefits and Other Deductions
Our primary expenses are:
•policyholders’ benefits and interest credited to policyholders’ account balances;
•sales commissions and compensation paid to intermediaries and advisors that distribute our products and services; and
•compensation and benefits provided to our employees and other operating expenses.
Policyholders’ benefits are driven primarily by mortality, customer withdrawals and benefits which change in response to changes in capital market conditions. In addition, some of our policyholders’ benefits are directly tied to the AV and benefit base of our variable annuity products. Interest credited to policyholders varies in relation to the amount of the underlying AV or benefit base. Sales commissions and compensation paid to intermediaries and advisors vary in relation to premium and fee income generated from these sources, whereas compensation and benefits to our employees are more constant and impacted by market wages and decline with increases in efficiency. Our ability to manage these expenses across various economic cycles and products is critical to the profitability of our company.
Net Income Volatility
We have offered and continue to offer variable annuity products with GMxB features. The future claims exposure on these features is sensitive to movements in the equity markets and interest rates. Accordingly, we have implemented hedging and reinsurance programs designed to mitigate the economic exposure to us from these features due to equity market and interest rate movements. Changes in the values of the derivatives associated with these programs due to equity market and interest rate movements are recognized in the periods in which they occur while corresponding changes in offsetting liabilities not measured at fair value, are recognized over time. This results in net income volatility as further described below. See “—Significant Factors Impacting Our Results—Impact of Hedging and GMIB Reinsurance on Results.”
In addition to our dynamic hedging strategy, we have static hedge positions designed to mitigate the adverse impact of changing market conditions on our statutory capital. We believe this program will continue to preserve the economic value of our variable annuity contracts and better protect our target variable annuity asset level. However, these static hedge positions increase the size of our derivative positions and may result in higher net income volatility on a period-over-period basis.
An additional source of Netnet income (loss) volatility is the impact of the Company’s annual actuarial assumption review. See “—Significant Factors Impacting Our Results—Assumption Updates and Model Changes”, for further detail of the impact of assumption updates on Netnet income (loss) in first quarter 2020.
Significant Factors Impacting Our Results
The following significant factors have impacted, and may in the future impact, our financial condition, results of operations or cash flows.
Impact of Hedging and GMIB Reinsurance on Results
We have offered and continue to offer variable annuity products with GMxB features. The future claims exposure on these features is sensitive to movements in the equity markets and interest rates. Accordingly, we have implemented hedging and reinsurance programs designed to mitigate the economic exposure to us from these features due to equity market and interest rate movements. These programs include:
•Variable annuity hedging programs. We use a dynamic hedging program (within this program, generally, we reevaluate our economic exposure at least daily and rebalance our hedge positions accordingly) to mitigate certain risks associated with the GMxB features that are embedded in our liabilities for our variable annuity products. This program utilizes various derivative instruments that are managed in an effort to reduce the economic impact of unfavorable changes in GMxB features’ exposures attributable to movements in the equity markets and interest rates. Although this program is designed to provide a measure of economic protection against the impact of adverse market conditions, it does not qualify for hedge accounting treatment. Accordingly, changes in value of the derivatives will be recognized in the period in which they occur with offsetting changes in reserves partially recognized in the current period, resulting in net income volatility. In addition to our dynamic hedging program, we have a hedging program using static hedge positions (derivative positions intended to be held to maturityheld-to-maturity with less frequent re-balancing) to protect our statutory capital against stress scenarios. This program in addition to our dynamic hedge program has increased the size of our derivative positions, resulting in an increase in net income volatility.
•GMIB reinsurance contracts. Historically, GMIB reinsurance contracts were used to cede to affiliated and non-affiliated reinsurers a portion of our exposure to variable annuity products that offer a GMIB feature. We account for the GMIB reinsurance contracts as derivatives and report them at fair value. Gross GMIB reserves are calculated on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts. Accordingly, our gross reserves will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts. Because changes in the fair value of the GMIB reinsurance contracts are recorded in the period in which they occur and a majority of the changes in gross reserves for GMIB are recognized over time, net income will be more volatile.
Effect of Assumption Updates on Operating Results
Our actuaries oversee the valuation of the product liabilities and assets and review the underlying inputs and assumptions. We comprehensively review the actuarial assumptions underlying these valuations and update assumptions during the third quarter of each year. Assumptions are based on a combination of Company experience, industry experience, management actions and expert judgment and reflect our best estimate as of the date of the applicable financial statements. Changes in
assumptions can result in a significant change to the carrying value of product liabilities and assets and, consequently, the impact could be material to earnings in the period of the change.
Most of the variable annuity products, variable universal life insurance and universal life insurance products we offer maintain policyholder deposits that are reported as liabilities and classified within either Separate Accounts liabilities or policyholder account balances. Our products and riders also impact liabilities for future policyholder benefits and unearned revenues and assets for DAC and DSI. The valuation of these assets and liabilities (other than deposits) are based on differing accounting methods depending on the product, each of which requires numerous assumptions and considerable judgment. The accounting guidance applied in the valuation of these assets and liabilities includes, but is not limited to, the following: (i) traditional life insurance products for which assumptions are locked in at inception; (ii) universal life insurance and variable life insurance secondary guarantees for which benefit liabilities are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the accumulation period based on total expected assessments; (iii) certain product guarantees for which benefit liabilities are accrued over the life of the contract in proportion to actual and future expected policy assessments; and (iv) certain product guarantees reported as embedded derivatives at fair value.
For further details of our accounting policies and related judgments pertaining to assumption updates, see Note 2 toof the Notes to the Company’s consolidated financial statementsConsolidated Financial Statements and “—Summary“Summary of Critical Accounting Estimates —Liability for Future Policy Benefits” included in the Annual Report on2020 Form 10-K for the year ended December 31, 2019.10-K.
Assumption Updates and Model Changes
We conduct our annual review of our assumptions and models during the third quarter of each year. However, weWe also update our assumptions as needed in the event we become aware of economic conditions or events that could require a change in our assumptions that we believe may have a significant impact to the carrying value of product liabilities and assets and consequently materially impact our earnings in the period of the change.
Impact of Assumption Updates and Model Changes on Income from Continuing Operations before income taxes and Net income (loss)
The table below presents the first quarterimpact of our actuarial assumption update during the three months ended March 31, 2020 dueto our Income (loss) from continuing operations, before income taxes and Net income (loss). There was no assumption update for the three months ended March 31, 2021.
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| Three Months Ended March 31, |
| 2020 |
| (in millions) |
| Impact of assumption update on Net income (loss): | |
| Variable annuity product features related assumption update | $ | (1,456) | |
| All other assumption updates | (666) | |
| Impact of assumption updates on Income (loss) from continuing operations, before income tax | (2,122) | |
| Income tax (expense) benefit on assumption update | 446 | |
| Net income (loss) impact of assumption update | $ | (1,676) | |
2020 Assumption Update
Due to the extraordinary economic conditions driven by the COVID-19 pandemic in the first quarter of 2020, we updated our interest rate assumption to grade from the current spot interest rate environmentcurve to an ultimate five-year historical average over a 10-year period. As such, the 10-year U.S. Treasury yield grades from the current level to an ultimate 5-year average of 2.25%. We determined that no assumption updates were necessary in the second quarter of 2020.
The low interest rate environment and subsequent update to the interest rate assumption caused a loss recognition event for our life interest-sensitive products, as well as to certain run-off business. This loss recognition event caused an acceleration of DAC amortization on our life interest-sensitive products and an increase in the premium deficiency reserve on the run-off business in the first quarter of 2020.
Impact of Assumption Updates and Model Changes on Income from Continuing Operations before income taxes and Net income (loss)
The table below presents the impact of our actuarial assumption update during the three and six months ended June 30, 2020 to our Income (loss) from continuing operations, before income taxes and Net income (loss):
| | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 |
| (in millions) | | |
Impact of assumption update on Net income (loss): | | | |
Variable annuity product features related assumption update | $ | — | | | $ | (1,456) | |
Assumption updates for other business | — | | | (688) | |
Impact of assumption updates on Income (loss) from continuing operations, before income tax | — | | | (2,144) | |
Income tax (expense) benefit on assumption update | — | | | 451 | |
Net income (loss) impact of assumption update | $ | — | | | $ | (1,693) | |
2020 Assumption Update
The impact of the economic assumption update in the first six monthsquarter of 2020 was a decrease of $2.1 billion to Incomeincome (loss) from continuing operations, before income taxes and a decrease to Netnet income (loss) of $1.7 billion.
The net impact of this assumption update on Incomeincome (loss) from continuing operations, before income taxes of $2.1 billion consisted of an increase in Policyholders’ benefits of $1.3 billion, an increase in the Amortization of DAC of $861 million, an increase in Policypolicy charges and fee income of $54 million, andan increase in policyholders’ benefits of $1.3 billion, a decrease in Interestinterest credited to policyholders’ account balances of $6 million and an increase in the amortization of DAC of $840 million.
Impact of Assumption Update and COVID-19 Impacts on Income from Continuing Operations before income taxes and Net income (loss)
The unprecedented and rapid spread of COVID-19 and the related restrictions and social distancing measures implemented throughout the world have caused severe, lasting turmoil in the financial markets during the first six months of 2020.
The table below presents the impact of COVID-19 pandemic related impacts on Incomeincome (loss) from continuing operations, before income taxes and on Netnet income (loss) during the first six months ofThree Months Ended March 31, 2020:
| | | Six Months Ended June 30, 2020 | | | Three Months Ended March 31, 2020 |
| | COVID-19 Impacts | | | COVID-19 Impacts |
| | Interest Rate Assumption Update | | Impacts other than Interest Rate Assumption
Update (1) | | Total | | Interest Rate Assumption Update | | Impacts other than Interest Rate Assumption
Update (1) | | Total |
| | (in millions) | | | (in millions) |
| Net income (loss) from continuing operations, before income taxes | Net income (loss) from continuing operations, before income taxes | $ | (2,144) | | | $ | (114) | | | $ | (2,258) | | Net income (loss) from continuing operations, before income taxes | $ | (2,122) | | | $ | (67) | | | $ | (2,189) | |
| Income tax (expense) benefit | Income tax (expense) benefit | 451 | | | 24 | | | 475 | | Income tax (expense) benefit | 446 | | | 14 | | | 460 | |
| Net income (loss) from continuing operations, net of taxes | Net income (loss) from continuing operations, net of taxes | $ | (1,693) | | | $ | (90) | | | $ | (1,783) | | Net income (loss) from continuing operations, net of taxes | $ | (1,676) | | | $ | (53) | | | $ | (1,729) | |
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(1) Includes amounts primarily due to non-variable annuity hedging impacts resulting from unprecedented volatility in equity markets and accelerated amortization of DAC due to continued loss recognition resulting from first quarter 2020 interest rate assumption update.
2020 Model Changes
In the first quarter of 2020, we adopted a new economic scenario generator to calculate the fair value of the GMIB reinsurance contract asset and GMxB derivative features liability, eliminating reliance on AXA Group for scenario production. The new economic scenario generator allows for a tighter calibration of U.S. indices, better reflecting our actual portfolio. The net impact of the new economic scenario generator resulted in an increase in Income (loss) from continuing operations, before income taxes of $165 million, and an increase to Net Income (loss) of $130 million.
Macroeconomic and Industry Trends
Our business and consolidated results of operations are significantly affected by economic conditions and consumer confidence, conditions in the global capital markets and the interest rate environment.
Financial and Economic Environment
During the second quarter,A wide variety of factors continue to impact global financial and economic conditions. These factors include, among others, significant volatility in financial markets and continued high unemployment levels as a result of the COVID-19 pandemic, concerns over economic growth in the United States and continued to adversely affect capital markets. As the pandemic evolved during the quarter, equity markets experienced significant volatility,low interest rates continued to drop to historical lows and many state and local governments maintained or instituted orders for non-essential businesses to close and residents to shelter in place. This resulted in an unprecedented slow-down in economic activity, a related dramatic increase in unemployment and fears of a global recession. rates.
Stressed conditions, volatility and disruptions in the capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities and derivatives are sensitive to changing market factors. An increase in market volatility could continue to affect our business, including through effects on the yields we earn on invested assets, changes in required reserves and capital and fluctuations in the value of our AV from which we derive our fee income. These effects could be exacerbated by uncertainty about future fiscal policy, changes in tax policy, the scope of potential deregulation and levels of global trade.
The potential for increased volatility, coupled with prevailing interest rates continuing to fallfalling and/or remaining below historical averages, could pressure sales and reduce demand for our products as consumers consider purchasing alternative products to meet their objectives. In addition, this environment could make it difficult to consistently develop products that are attractive to customers. Financial performance can be adversely affected by market volatility and equity market declines as fees driven by AV fluctuate, hedging costs increase and revenues decline due to reduced sales and increased outflows.
We monitor the behavior of our customers and other factors, including mortality rates, morbidity rates, annuitization rates and lapse and surrender rates, which change in response to changes in capital market conditions, to ensure that our products and solutions remain attractive and profitable. For additional information on our sensitivity to interest rates and capital market prices, see “Quantitative and Qualitative Disclosures About Market Risk”.
Interest Rate Environment
We believe the interest rate environment will continue to impact our business and financial performance in the future for several reasons, including the following:
•Certain of our variable annuity and life insurance products pay guaranteed minimum interest crediting rates. We are required to pay these guaranteed minimum rates even if earnings on our investment portfolio decline, with the resulting investment margin compression negatively impacting earnings. In addition, we expect more policyholders to hold policies with comparatively high guaranteed rates longer (lower lapse rates) in a low interest rate environment. Conversely, a rise in average yield on our investment portfolio should positively impact earnings. Similarly, we expect policyholders would be less likely to hold policies with existing guaranteed rates (higher lapse rates) as interest rates rise.
•A prolonged low interest rate environment also may subject us to increased hedging costs or an increase in the amount of statutory reserves that our insurance subsidiaries are required to hold for GMxB features, lowering their statutory surplus, which would adversely affect their ability to pay dividends to us. In addition, it may also increase the perceived value of GMxB features to our policyholders, which in turn may lead to a higher rate of annuitization and higher persistency of those products over time. Finally, low interest rates may continue to cause an acceleration of DAC amortization or reserve increase due to loss recognition for interest-sensitive products.
For a discussion on derivatives we used to hedge interest rates, see Note 4 of the Notes to the Consolidated Financial Statements in this Form 10-Q.
Regulatory Developments
We are regulated primarily by the New York State Department of Financial Services (“NYDFS”),NYDFS, with some policies and products also subject to federal regulation. On an ongoing basis, regulators refine capital requirements and introduce new reserving standards. Regulations recently adopted or currently under review can potentially impact our statutory reserve, capital requirements and profitability of the industry and result in increased regulation and oversight for the industry.
•COVID-19 Impact. In March For additional information on the regulatory developments and risk we face, see “Business—Regulation” and “Risk Factors—Legal and Regulatory Risks” in the 2020 in connection with the COVID-19 pandemic, many U.S. state insurance regulators began issuing bulletins, directives and guidance encouraging, requestingForm 10-K, as amended or directing licensed life insurance companies to
implement life insurance policy measures such as: providing grace periods to policyholders for the paymentsupplemented in our subsequently filed Quarterly Reports on Form 10-Q in “Management’s Discussion and Analysis of insurance premiumsFinancial Condition and forbearing on the cancellation or non-renewalResults of life insurance policies due to non-payment of premium.Operations—Macroeconomic and Industry Trends—Regulatory Developments.”
Regulation 213. In addition, some states’ governors have issued emergency orders and state insurance commissioners have promulgated emergency regulations requiring such actions. For example, the NYDFS promulgated emergency regulations requiring insurance company actions with respect to many lines of insurance. Among other requirements, these emergency measures temporarily required New York, licensed life insurers to extend the grace period for the paymentRegulation 213, adopted in May of premiums2019 and fees to 90 days for any life policyholder or group certificate holder facing financial hardship as a result of the COVID-19 pandemic. In addition, licensed life insurers were required to provide 90 days to exercise rights or benefits for a policyholder who was unable timely to exercise such rights as a result of the COVID-19 pandemic. New York licensed insurers were prohibited from imposing any late fees or reporting such policyholder to a credit reporting agency or debt collection agency in the event of a policyholder’s failure to timely pay premium and were required to permit policyholders who did not make a premium payment due to financial hardship as a result of the COVID-19 pandemic to pay the premium over a 12-month period. These measures expiredamended on July 6, 2020, however we cannot predict what future orders or regulations, if any, will be implemented as a result of the ongoing COVID-19 pandemic.
•Variable Annuity Capital Standards. In 2015, the NAIC Financial Condition (E) Committee established a working group to study and address, as appropriate, regulatory issues resulting from variable annuity captive reinsurance transactions, including reforms that would improve the current statutory reserve and RBC framework for insurance companies that sell variable annuity products. In August 2018, the NAIC adopted the new framework developed and proposed by this working group. Following its referral to various NAIC committees to develop the full implementation details, the new framework became operational in January 2020. Among other changes, the new framework includes new prescriptions for reflecting hedge effectiveness, investment returns, interest rates, mortality and policyholder behavior in calculating statutory reserves and RBC. Once effective, it is expected to materially change the level of variable annuity reserves and RBC requirements as well as their sensitivity to capital markets including interest rate, equity markets, volatility and credit spreads. Overall, we believe the NAIC reform has moved variable annuity capital standards towards an economic framework and is consistent with how we manage our business. Equitable Financial adopted the NAIC reserve and capital framework for the year ended December 31, 2019.
•On February 26, 2020 the NYDFS adopted amendments to Regulation 213 that differand March 31, 2021, differs from the NAIC variable annuity reserve and capital framework. TheseThe February 2020 and the March 2021 amendments will not materially affect Equitable Financial’sHoldings’ U.S. GAAP financial condition, results of operations or stockholders’ equity. However, Regulation 213, as amended, absent management action, will require Holdings’ principal insurance subsidiary, Equitable Financial, to carry statutory basis reserves for its variable annuity contract obligations equal to the greater of those required under (i) the NAIC standard or (ii) a revised version of the NYDFS requirement in effect prior to the adoption of the first amendment for contracts issued prior to January 1, 2020, and for policies issued after that date a new standard that we believe is more conservative than the NAIC standard. Absent management action, we believe that the adoption of the amendments will materially increase the statutory basis reserves thatRegulation 213 could (i) negatively impact Equitable Financial will be required to carryFinancial’s surplus level and willRBC ratio and (ii) materially and adversely affect Equitable Financial’s dividend capacity from 2021 and moving forward. These impacts would be more adverse in periods of rising equity and/or interest rate markets, particularly following the capacityequity market appreciation in the second half of Equitable Financial to distribute dividends to Holdings beyond 2020.2020 and the first quarter of 2021, and will be exacerbated upon closing of the Venerable Transaction. Holdings is considering management actions to mitigate the impact of Regulation 213. These actions could include seeking further amendment of Regulation 213 or exemptive relief therefrom to make the regulation’s application to Equitable Financial more consistent with the NAIC reserve and capital framework, as well as changing Holdings’the Company’s underwriting practices to emphasize issuing variable annuity products out of affiliates which are not domiciled in New York, increasing the use of reinsurance and other corporate transactions intended to reduce the impact of the regulation. There can be no assurance that any management action individually or collectively will fully mitigate the impact of Regulation 213. Other state insurance regulators may also propose and adopt standards differentthat differ from the NAIC framework.
•DOL Fiduciary Rule andRules / “Best Interest” PTEs. Standards of Conduct
In the wake of the March 2018 federal appeals court decision to vacate the 2016 DOL Fiduciary Rule, the DOL announced that it plannedits intention to issue revised fiduciary investment advice regulations. In JuneDecember 2020, the DOL proposedfinalized a “best interest” prohibited transaction exemption (“PTE”PTE 2020-02”) for investment advice fiduciaries under ERISA.ERISA, with an enforcement date of December 20, 2021. The proposalnew rule restores the five-part test for determining fiduciary status that was in effect prior to the 2016 DOL Fiduciary Rule, although the scope of the PTE now extends to rollover transactions if they constitute “investment advice” under the five-part test. If fiduciary status is triggered, the PTE 2020-02 prescribes a set of impartial conduct standards and disclosure obligations that are intended to be consistent with the SEC’s Regulation Best Interest. We are currently assessingdevoting significant time and resources towards coming into compliance with PTE 2020-02 but do not expect the proposed PTEnew rules to determine thehave a material impact it may have on our business. However, in April 2021, the DOL published a set of Frequently Asked Questions document in which they indicated they are likely to further amend their fiduciary regulations, including PTE 2020-02, and we are closely monitoring for any such developments.
On April 29, 2021, the Appellate Division of the NYS Supreme Court, Third Department, overturned NY Department of Financial Services Regulation 187 — Suitability and Best Interests in Life Insurance and Annuity Transactions (“Regulation 187”) for being unconstitutionally vague. The NYDFS has thirty days to file their appeal. It is anticipated that the state will file for and the court will automatically grant a stay, which means that Regulation 187 will stay in effect until the high court determines a final resolution.
Climate Risks. In September 2020, the NYDFS announced that it expects insurers to integrate financial risks from climate change into their governance frameworks, risk management processes, and business strategies, and that it will integrate questions on this topic into their examinations in 2021. On March 25, 2021, the NYDFS issued for public comment proposed guidance for New York domestic insurers, such as Equitable Financial, which states that insurers are expected to take a proportionate approach to managing climate risks that reflects its exposure to climate risks. For example, an insurer should integrate the evaluation of climate risks into its governance structure and use scenario analysis to guide risk assessment. We are reviewing the NYDFS’ proposed guidance.
•NYDFS Guidance on Diversity and Corporate GovernancOther “Best Interest” Standards of Conduct. Following the decision to vacate the DOL Fiduciary Rule in 2018, , the NAIC adopted, and state regulators either have adopted or are currently considering whether to apply, an impartial conduct or fiduciary standard to recommendations made in connection with certain annuities and, in one case, to life insurance policies. For example, the NAIC has amended its Suitability in Annuity Transactions Model Regulation to apply a best interest of the consumer standard to insurance producers’ annuity recommendations and require that insurers supervise such recommendations. To date, the amended regulation has been adopted in Iowa and Arizona. In July 2018,e. On March 16, 2021, the NYDFS issued a
final version circular letter which states that the NYDFS expects the insurers that it regulates to make diversity of Regulation 187 that adoptstheir leadership a “best interest” standard for recommendationsbusiness priority and a key element of their corporate governance. The NYDFS intends to collect data regarding the salediversity of life insurancecorporate boards and annuity productsmanagement, and it will include diversity-related questions in New York. Regulation 187 took effect on August 1, 2019 with respect to annuity sales and took effect on February 1, 2020 for life insurance sales and is applicable to sales of life insurance and annuity productsits examination process starting in New York.2022. We have developed our compliance framework for Regulation 187 with respect to annuity sales as well as our life insurance business. In addition, state regulators and legislatures in Nevada, New Jersey and Maryland have proposed measures that would make broker-dealers, sales agents, and investment advisers and their representatives subject to a fiduciary duty when providing products and services to customers, including pension plans and IRAs. Massachusetts has adopted such a regulation applying a fiduciary duty standard to broker-dealers and their agents, but it does not apply to insurance product sales, including variable annuities. Beyondare considering the New York regulation, the likelihood of enactment of any such state-based regulation is uncertain at this time, but if implemented, these regulations could have adverse effects on our business and consolidated results of operations.
•Regulation Best Interest. In June 2019, the SEC released a set of rules that, among other things, enhance the existing standard of conduct for broker-dealers to require them to act in the best interest of their retail customers (“Regulation Best Interest”); clarify the nature of the fiduciary obligations owed by registered investment advisers to their clients; impose new disclosure requirements aimed at ensuring investors understand the nature of their relationship with their investment professionals; and restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor”. The effective date for compliance with these rules was June 30, 2020. Investment advisers to retail clients as well as broker-dealers serving retail customers are now required to deliver to retail clients and customers and file with the SEC the new Form CRS, which provides disclosures about its standard of conduct and conflicts of interest. The intent of these rules is to impose on broker-dealers an enhanced duty of care to their customers similar to that which applies to investment advisers under existing law and to require both broker-dealers and investment advisers to provide enhanced disclosure regarding the nature of their services to retail clients and customers and associated conflicts of interest. We have developed systems and processes and put in place policies and procedures to ensure that we are in compliance with Regulation Best Interest. Meanwhile, two lawsuits, one by seven states and the District of Columbia and the other by private firms, which were filed in September 2019 and sought to vacate Regulation Best Interest, were dismissed by the U.S. Second Circuit Court of Appeals in June 2020, and the plaintiffs have not yet announced whether they intend appeal to the U.S. Supreme Court. In addition, FINRA is also currently focusing on examining compliance efforts by broker-dealers with Regulation Best Interest.
•Derivatives Regulation. The amount of collateral we are required to pledge and the expenses we incur under our derivatives transactions are expected to increase as a result of the requirement to pledge initial margin for non-centrally cleared derivative transactions (“OTC” derivatives) entered into after the phase-in period, which will become applicable to us in September 2021 as a result of adoption by the Office of the Comptroller of the Currency, the Federal Reserve Board, the FDIC, the Farm Credit Administration, and the Federal Housing Finance Agency and the Commodity Futures Trading Commission of final margin requirements for OTC derivatives. Also, the SEC has finalized and adopted the final set of rules related to security-based swaps, which triggers the compliance date for security-based swap entities registration and compliance with previously adopted rules regarding margin, capital, segregation, recordkeeping and reporting and business conduct for security-based swaps. The rules became effective on April 6, 2020. The compliance date for registration of (i) security-based swap dealers that incur a registration obligation as a result of meeting certain thresholds to be set by the SEC on August 6, 2021 will be November 1, 2021 and (ii) major security-based swap participants that incur a registration obligation as a result of security-based swap activities in their quarter ending September 30, 2021 will be December 1, 2021. We continue to monitor developments and are evaluating the potential effect these rules might have on our business.
Impact of the SECURE Act
On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”). The SECURE Act contains a number of provisions that affect the administration and operation of defined contribution plans such as 401(k) and 403(b) plans and IRAs, including provisions that encourage additional retirement savings and lifetime income options, promote the adoption of retirement plans by small employers, provide lifetime income portability, and accelerate the distribution of retirement benefits of deceased retirees. Many provisions of the SECURE Act become effective for plan years beginning after December 31, 2019. At this time, we cannot predict the impact the SECURE Act will have on our business, financial condition or results of operations.
Impact of the CARES Act
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. Several tax provisions were includedNYDFS’ guidance as part of a broad economic relief package. These include the temporary allowance of Net Operating Loss carrybacksour commitment to diversity and the acceleration of Alternative Minimum Tax (“AMT”) credit refunds. The Company is assessing the economic and financial statement impact of these provisions.inclusion.
Impact of the Tax Cut and Jobs Act
In December 2017, the Tax Cut and Jobs Act (“TCJA”) was signed into law. The TCJA reduced the federal corporate income tax rate to 21% and repealed the corporate AMT while keeping existing AMT credits. It also contained measures affecting the Company, including changes to the DRD, insurance reserves and tax DAC. As a result of the TCJA, our Net Income has improved.
In August 2018, the NAIC adopted changes to the RBC calculation, including the C-3 Phase II Total Asset Requirement for variable annuities, to reflect the 21% corporate income tax rate in RBC, which resulted in a reduction to our Combined RBC Ratio.
Overall, the TCJA had a net positive economic impact on us and we continue to monitor regulations related to this reform.
Consolidated Results of Operations
Our consolidated results of operations are significantly affected by conditions in the capital markets and the economy because we offer market sensitive products. These products have been a significant driver of our results of operations. Because the future claims exposure on these products is sensitive to movements in the equity markets and interest rates, we have in place various hedging and reinsurance programs that are designed to mitigate the economic risksrisk of movements in the equity markets and interest rates. The volatility in Netnet income attributable to Equitable Financial for the periods presented below results from the mismatch between: (i) the change in carrying value of the reserves for GMDB and certain GMIB features that do not fully and immediately reflect the impact of equity and interest market fluctuations; and (ii) the change in fair value of products with the GMIB feature that hashave a no-lapse guarantee,guarantee; and (iii) our hedging and reinsurance programs.
The following table summarizes our consolidated statements of income (loss) for the sixthree months ended June 30, 2020March 31, 2021 and 2019:2020:
Consolidated Statement of Income (Loss)
| | | Six Months Ended June 30, | | | Three Months Ended March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020 | |
| | (in millions) | | | (in millions) |
| REVENUES | REVENUES | | | REVENUES | | |
| Policy charges and fee income | Policy charges and fee income | $ | 1,729 | | | $ | 1,724 | | | Policy charges and fee income | $ | 880 | | | $ | 905 | | |
| Premiums | Premiums | 435 | | | 464 | | | Premiums | 205 | | | 236 | | |
| Net derivative gains (losses) | Net derivative gains (losses) | 3,630 | | | (1,733) | | | Net derivative gains (losses) | (2,778) | | | 9,532 | | |
| Net investment income (loss) | Net investment income (loss) | 1,525 | | | 1,783 | | | Net investment income (loss) | 836 | | | 604 | | |
| Investment gains (losses), net: | Investment gains (losses), net: | | | Investment gains (losses), net: | | |
| Credit losses on AFS debt securities and loans | Credit losses on AFS debt securities and loans | (43) | | | — | | | Credit losses on AFS debt securities and loans | 1 | | | (12) | | |
| Other investment gains (losses), net | Other investment gains (losses), net | 243 | | | (20) | | | Other investment gains (losses), net | 182 | | | 67 | | |
| Total investment gains (losses), net | Total investment gains (losses), net | 200 | | | (20) | | | Total investment gains (losses), net | 183 | | | 55 | | |
| Investment management and service fees | Investment management and service fees | 487 | | | 503 | | | Investment management and service fees | 283 | | | 252 | | |
| Other income | Other income | 25 | | | 40 | | | Other income | 14 | | | 15 | | |
| Total revenues | Total revenues | 8,031 | | | 2,761 | | | Total revenues | (377) | | | 11,599 | | |
| | BENEFITS AND OTHER DEDUCTIONS | BENEFITS AND OTHER DEDUCTIONS | | | BENEFITS AND OTHER DEDUCTIONS | | |
| Policyholders’ benefits | Policyholders’ benefits | 3,297 | | | 1,687 | | | Policyholders’ benefits | 823 | | | 2,626 | | |
| Interest credited to policyholders’ account balances | Interest credited to policyholders’ account balances | 568 | | | 557 | | | Interest credited to policyholders’ account balances | 270 | | | 289 | | |
| Compensation and benefits | Compensation and benefits | 134 | | | 167 | | | Compensation and benefits | 81 | | | 80 | | |
| Commissions | Commissions | 309 | | | 309 | | | Commissions | 182 | | | 161 | | |
| Interest expense | Interest expense | — | | | 4 | | | Interest expense | 1 | | | — | | |
| Amortization of deferred policy acquisition costs | Amortization of deferred policy acquisition costs | 1,222 | | | 309 | | | Amortization of deferred policy acquisition costs | 62 | | | 1,022 | | |
| Other operating costs and expenses | Other operating costs and expenses | 431 | | | 400 | | | Other operating costs and expenses | 399 | | | 214 | | |
| Total benefits and other deductions | Total benefits and other deductions | 5,961 | | | 3,433 | | | Total benefits and other deductions | 1,818 | | | 4,392 | | |
| Income (loss) from continuing operations, before income taxes | Income (loss) from continuing operations, before income taxes | 2,070 | | | (672) | | | Income (loss) from continuing operations, before income taxes | (2,195) | | | 7,207 | | |
| Income tax (expense) benefit | Income tax (expense) benefit | (425) | | | 109 | | | Income tax (expense) benefit | 587 | | | (1,457) | | |
| Net income (loss) | Net income (loss) | 1,645 | | | (563) | | | Net income (loss) | (1,608) | | | 5,750 | | |
| Less: Net income (loss) attributable to the noncontrolling interest | Less: Net income (loss) attributable to the noncontrolling interest | (3) | | | 3 | | | Less: Net income (loss) attributable to the noncontrolling interest | — | | | (7) | | |
| Net income (loss) attributable to Equitable Financial | Net income (loss) attributable to Equitable Financial | $ | 1,648 | | | $ | (566) | | | Net income (loss) attributable to Equitable Financial | $ | (1,608) | | | $ | 5,757 | | |
The following discussion compares the results for the sixthree months ended June 30, 2020March 31, 2021 to the sixthree months ended June 30, 2019.March 31, 2020.
SixThree Months Ended June 30, 2020March 31, 2021 Compared to the SixThree Months Ended June 30, 2019March 31, 2020
Net Income (Loss) Attributable to Equitable Financial
Net income (loss) attributable to Equitable Financial increaseddecreased by $2.2$7.4 billion, to a net incomeloss of $1.6 billion for the sixthree months ended June 30, 2020March 31, 2021 from a net lossincome of $566 million$5.8 billion for the sixthree months ended June 30, 2019,March 31, 2020, primarily driven by the following notable items:
Unfavorable items included:
•Increase in Net derivative gains of $5.4decreased by $12.3 billion driven by gains from freestanding derivatives mainly reflecting the decreasedue to an increase in interest rates and equity market appreciation in the first halfquarter of 20202021 compared to increasesdecreases in bothinterest rates and equity markets and interest ratesmarket depreciation in the first halfquarter of 2019,2020, as well as the positive impacts from non-performance risk and credit spreads reflecting spread widening.widening in the first quarter of 2020.
•Increase in Net investment gains of $220Other operating costs and expenses increased by $185 million primarily duedriven by legal accruals related to the rebalancing of our U.S. Treasury portfolio.COI litigation
Partially offsetting this increase were the following notable items:.
•IncreaseFee-type revenue decreased by $26 million mainly due to lower amortization of the initial fee liability from the non-recurrence of the first quarter of 2020 interest rate assumption update and higher ceded premiums due to a new Term reinsurance treaty entered into in April 2020. This decrease was partially offset by higher fees as a result of higher average Separate Accounts AV.
These were partially offset by the following favorable items:
•Policyholders’ benefits of $1.6decreased by $1.8 billion mainly due to an increase in our GMxB liabilities driven by the impactnon-recurrence of the assumption update in first quarter 2020 related to COVID-19 and the unfavorable impact of equity markets, offset by higher Net derivatives gains.
•Increase in Amortization of DAC of $913 million mainly in our life products driven by the impact of theinterest rate assumption update in the first quarter of 2020 relatedand equity markets appreciation in the first quarter of 2021 compared to equity market depreciation in the first quarter of 2020.
•Amortization of DAC decreased by $960 million mainly due to the interest rate assumption update in the first quarter of 2020 as a result of the extraordinary economic conditions driven by COVID-19. As a result of the lower interest rate assumption, our life products continued inexperienced loss recognition resulting in additionalan acceleration of DAC amortization in the first quarter of DAC.2020.
•Decrease in Net investment income of $258increased by $232 million mainly due to a change in the market value of trading securities supporting our variable annuity products due to higher credit spreads in 2020 compared to 2019 as well as losses on our alternative investment portfolio driven by the March equity markets decline.higher income from alternative and seed capital investments.
•Decrease in Revenue from fees and related items (“fee-type revenue”), including Policy charges and fee income, Premiums, Investment Management service fees and Other income, of $55Net investment gains increased by $128 million primarily due to lower average Separate Accounts AV in our variable annuity products reflecting the March equity markets decline and lower premiums on traditional products (offset in Policyholders' benefits) as well as higher ceded premiums, partially offset by a decreaserebalancing in the initial fee liability for our life products reflectingGeneral Account associated with the impact of assumption updates related to COVID-19 (offset in Amortization of DAC).Venerable transaction.
•Increase in Interest credited to policyholders’ account balances of $11decreased by $19 million mainly driven by new business growth.due to a shift in portfolio mix and lower funding agreements costs due to lower interest rates.
•Income tax expense increaseddecreased by $534 million$2.0 billion primarily driven by pre-tax income in the first half of 2020 compared to a pre-tax loss in the first halfquarter of 2019.2021 compared to pre-tax income in the first quarter of 2020.
See “—Significant Factors Impacting Our Results—Assumption Updates and Model Changes” for more information regarding the COVID-19-related assumption update.
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in our consolidated financial statements included elsewhere herein. For a discussion of our significant accounting policies, see Note 2 to the Company’s consolidated financial statements included in our 20192020 Form 10-K. The most critical estimates include those used in determining:
•liabilities for future policy benefits;
•accounting for reinsurance;
•capitalization and amortization of DAC and policyholder bonus interest credits;
•estimated fair values of investments in the absence of quoted market values and investment impairments;
•estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation;
•measurement of income taxes and the valuation of deferred tax assets; and
•liabilities for litigation and regulatory matters.
In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries while others are specific to our business and operations. Actual results could differ from these estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.There have been no material changes to the quantitative and qualitative disclosures about market risk described in the Annual Report on Form 10-K for the year ended December 31, 2020 in "Quantitative and Qualitative Disclosures About Market Risk".
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The management of the Company,Management, with the participation of the Company’s Chief Executive Officer (CEO) and Chief Financial Officer, (CFO), has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, (asas defined in Rule 13a-15(e) underof the Securities Exchange Act of 1934, as amended)Act. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2020. This evaluation is performed to determine if our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms.
Due to the material weakness described below, the Company’s CEO and CFO have concluded thatMarch 31, 2021, the Company’s disclosure controls and procedures were not effective as of June 30, 2020.effective.
As previously reported, the Company identified a material weaknessNo change in the design and operation of the Company’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies,reporting, as defined in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company’s management, including the Company’s CEO and CFO, have concluded that we do not maintain effective controls to timely validate that actuarial models are properly configured to capture all relevant product features and provide reasonable assurance timely reviews of assumptions and data haveExchange Act Rule 13a-15(f), occurred and, as a result, errors were identified in future policyholders’ benefits and deferred policy acquisition costs balances.
This material weakness resulted in misstatements in the Company’s previously issued annual and interim financial statements and resulted in:
(i) the revision of the interim financial statements for the nine, six, and three months ended September 30, June 30, and March 31, 2018 and 2017, respectively, and the annual financial statements for the year ended December 31, 2017;
(ii) the revision for the three and six months ended March 31, 2018 and June 30, 2018, respectively, as well as the three, six and nine months ended March 31, 2017, June 30, 2017 and September 30, 2017, respectively and for the years ended December 31, 2017 and 2016;
(iii) the revision of the interim financial statements forduring the three months ended March 31, 2018, the nine months ended September 30, 2017, the six months ended June 30, 2017 and the annual financial statements for the years ended December 31, 2017 and 2016; and
(iv) the restatement of the annual financial statements for the year ended December 31, 2016, the revision to each of the quarterly interim periods for 2017 and 2016, and the revision of the annual financial statements for the year ended December 31, 2015.
These revisions and restatements were directly related to the material weakness described above and not indicative of any new material weaknesses. Until remediated, there is a reasonable possibility2021, that this material weakness could result in a material misstatement of the Company’s consolidated financial statements or disclosures that would not be prevented or detected.
Remediation Status of Material Weakness
For the material weakness related to Actuarial Models, Assumptions and Data, management has implemented and tested new or enhanced controls as described below but determined that further sustained operation is necessary.
Remediation Activities: Material Weakness Related to Actuarial Models, Assumptions and Data
•We have designed, implemented and tested an enhanced model validation control framework, including a rotational schedule to periodically re-validate all U.S. GAAP models.
•We have designed, implemented and tested enhanced controls and governance processes for new model implementations.
•We have designed, implemented and tested enhanced controls for model changes.
•We have designed, implemented and tested enhanced controls over the annual assumption setting process, including a comprehensive master assumption inventory and risk framework.
•We have designed, implemented and tested new controls and are redesigning certain of these controls to validate the reliability of significant data flows feeding actuarial models and assumptions
Second quarter 2020 controls have operated as designed. However, given that certain controls noted above have only operated effectively in one financial closing cycle during the year, and controls are still being redesigned, we have determined that further work and sustained operation is appropriate before concluding the controls are operationally effective.
Changes in Internal Control Over Financial Reporting
As described above, the Company continues to design certain controls in connection with its remediation plan. These remediation efforts related to the material weakness described above represent changes in our internal control over financial reporting for the quarter ended June 30, 2020 that have materially affected, or areis reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding certain legal proceedings pending against us, see Note 1312 of the Notes to the Consolidated Financial Statements (unaudited) in this Form 10-Q. See “Risk Factors—Legal and Regulatory Risks—Legal and regulatoryregulatory” actions could have a material adverse effect on our reputation, business, results of operations or financial condition” included in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Item 1A. Risk Factors
You should carefully consider the risks described in the “Risk Factors” section included in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.. Risks to which we are subject include, but are not limited to, the factors mentioned under “Note Regarding Forward-Looking Statements and Information” above and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q.
The novel coronavirus (COVID-19) pandemic has adversely impacted our businessfollowing should be read in conjunction with and could materially adversely affect our business, results of operations or financial condition insupplements and amends the future.
The COVID-19 pandemic has negatively impacted the U.S. and global economies, created significant volatility in the capital markets and dramatically increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and schools and the institution of social distancing and sheltering in place requirements in many states and local communities. It remains unclear whether states and municipalities across the U.S. will be able to safely re-open schools in several weeks given the spread of the virus. Businesses or schools that reopen may also restrict or limit access for the foreseeable future or on a permanent basis. As a result, our ability to sell products through our regular channels and the demand for our products and services has been significantly impacted. The extent to which the COVID-19 pandemic impacts our business, results of operations or financial condition will depend on future developments that are highly uncertain, including the severity and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, and could cause us to revise financial targets or other guidance we have previously provided.
While we have implemented risk management and contingency plans and taken other precautions with respect to the COVID-19 pandemic, such measures may not adequately protect our business from the full impacts of the pandemic. Currently, most of our employees and affiliated advisors are working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce additional operational risk, including but not limited to cybersecurity risks, and impair our ability to effectively manage our business. We also outsource a variety of functions to third parties, including certain of our administrative operations which are in India. As a result, we rely upon the successful implementation and execution of the business continuity planning of such entities in the current environment. While we closely monitor the business continuity activities of these third parties, successful implementation and execution of their business continuity strategies are largely outside our control. If one or more of the third parties to whom we outsource certain critical business activities experience operational failures as a result of the impacts from the spread of COVID-19, or claim that they cannot perform due to a force majeure, it could adversely impact our business, results of operations or financial condition.
Economic uncertainty and unemployment resulting from the impacts of the spread of COVID-19 may have an adverse effect on product sales and also result in existing policyholders seeking sources of liquidity and withdrawing at rates greater than we previously expected. COVID-19 could have an adverse effect on our insurance business due to increased mortality and, in certain cases, morbidity rates. In addition, many state insurance departments, including the NYDFS, are requiring insurers to offer flexible premium payment plans, relax payment dates, waive late fees and penalties in order to avoid canceling or non-renewing polices. If policyholder lapse and surrender rates or premium waivers significantly exceed our expectations, we may need to change our assumptions, models or reserves. The cost of reinsurance to us for these policies could increase, and we may encounter decreased availability of such reinsurance. Each of these could have a material adverse effect on our business, financial condition, results of operations, liquidity and cash flows.
Our investment portfolio (specifically, the increased risk of defaults, downgrades and volatility in the valuations of certain investment assets we hold) has been, and may continue to be, adversely affected as a result the COVID-19 pandemic and uncertainty regarding its outcome. Moreover, declines in equity markets and interest rates, reduced liquidity or a continued slowdown in the U.S. or in global economic conditions may also adversely affect the values and cash flows of these assets. Our investments in mortgages and commercial mortgage-backed securities have been, and could continue to be, negatively affected by delays or failures of borrowers to make payments of principal and interest when due. In some jurisdictions, local governments have imposed delays or moratoriums on many forms of enforcement actions. More broadly, increased
unemployment, slowing economic conditions, and uncertainty about occupant requirements evolving out of the COVID-19 crisis could negatively impact underlying real estate values over the longer term. The recent market volatility has also caused significant increases in credit spreads, which may increase our borrowing costs and decrease product fee income. Further, severe market volatility may leave us unable to react to market events in a prudent manner consistent with our historical investment practices. Market dislocations, decreases in observable market activity or unavailability of information, in each case, arising from the spread of COVID-19, may restrict our access to key inputs used to derive certain estimates and assumptions made in connection with financial reporting or otherwise. Restricted access to such inputs may make our financial statement balances and estimates and assumptions used to run our business subject to greater variability and subjectivity.
Additionally, COVID-19 could negatively affect our internal controls over financial reporting as the vast majority of our employees are required to work from home and most onsite locations remain closed, and therefore new processes, procedures, and controls could be required to respond to changes in our business environment. Further, should any key employees become ill from COVID-19 and unable to work, our ability to operate our internal controls may be adversely impacted.
Any of these events could cause or contribute to the risks and uncertainties enumeratedsection titled “Risk Factors” in our Annual Report on Form 10-K10-K.
Potential strategic transactions
We may consider potential strategic transactions, including acquisitions, dispositions, mergers, joint ventures and Quarterly Report on Form 10-Qsimilar transactions. These transactions may not be effective and could materially adversely affectresult in decreased earnings and harm to our business,competitive position. In addition, these transactions, if undertaken, may involve a number of risks and present financial, managerial and operational challenges. Any of the above could cause us to fail to realize the benefits anticipated from any such transaction.
On October 27, 2020, Holdings entered into a Master Transaction Agreement with Venerable Insurance and Annuity Company and Venerable Holdings, Inc.The closing of the transaction is subject to conditions, including the receipt of required regulatory approvals. No assurance can be given as to whether and when such conditions will be satisfied. A delay in the closing of the transaction may negatively impact the expected results from the transaction. In addition, if the transaction is completed, the actual financial results of operations or financial condition.the transaction could differ materially from our expectations and may be impacted by items not taken into account in our forecasts and calculations. For example, with the continued rise in interest rates and equity markets and reserve reduction following the Venerable transaction, Equitable Financial’s statutory reserve post-transaction could be floored at the aggregate cash surrender value of its variable annuity contracts. This would require Equitable Financial to hold statutory reserves in excess of what would otherwise be required. Equitable Financial hedges to its economic liabilities which are valued on a fair-value basis. Due to the statutory accounting treatment, the changes in the value of the derivatives are recognized in the period in which they occur while the offsetting changes in the reserves are recognized over time. As a result of this uneconomic statutory accounting asymmetry, our statutory RBC ratio and dividend capacity could be adversely impacted. The Company is considering management actions including corporate transactions to mitigate this impact. For more information on the Venerable transaction, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Reinsurance of Legacy Variable Annuity Block and Sale of Runoff Variable Annuity Reinsurance Entity.”
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
INDEX TO EXHIBITS
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| Number | | Description |
| # | Restated Charter of Equitable Financial Life Insurance Company, effective as of June 15, 2020. |
| # | By-laws of Equitable Financial Life Insurance Company, as amended June 15, 2020. |
| # | Section 302 Certification made by the registrant’s Chief Executive Officer | |
| # | Section 302 Certification made by the registrant’s Chief Financial Officer | |
| # | Section 906 Certification made by the registrant’s Chief Executive Officer | |
| # | Section 906 Certification made by the registrant’s Chief Financial Officer | |
| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 104 | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibits 101). | |
______________
# Filed herewith.
GLOSSARY
Selected Financial Terms
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| Account Value (“AV”) | Generally equals the aggregate policy account value of our retirement and protection products. General Account AV refers to account balances in investment options that are backed by the General Account while Separate Accounts AV refers to Separate Accounts investment assets. |
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| Alternative investments | Investments in real estate and real estate joint ventures and other limited partnerships. |
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| Assets under management (“AUM”) | Investment assets that are managed by one of our subsidiaries and includes: (i) assets managed by AB, (ii) the assets in our GAIA portfolio and (iii) the Separate Account assets of our retirement and protection businesses. Total AUM reflects exclusions between segments to avoid double counting. |
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| Combined RBC Ratio | Calculated as the overall aggregate RBC ratio for the Company’s insurance subsidiaries including capital held for its life insurance and variable annuity liabilities and non-variable annuity insurance liabilities. |
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| Conditional tail expectation (“CTE”) | Calculated as the average amount of total assets required to satisfy obligations over the life of the contract or policy in the worst x% of scenarios. Represented as CTE (100 less x). Example: CTE95 represents the worst five percent of scenarios. |
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| Deferred policy acquisition cost (“DAC”) | Represents the incremental costs related directly to the successful acquisition of new and certain renewal insurance policies and annuity contracts and which have been deferred on the balance sheet as an asset. |
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| Deferred sales inducements (“DSI”) | Represent amounts that are credited to a policyholder’s account balance that are higher than the expected crediting rates on similar contracts without such an inducement and that are an incentive to purchase a contract and also meet the accounting criteria to be deferred as an asset that is amortized over the life of the contract. |
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| Fee-Type Revenue | Revenue from fees and related items, including policy charges and fee income, premiums, investment management and service fees, and other income. |
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| Gross Premiums | First year premium and deposits and Renewal premium and deposits. |
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| Invested assets | Includes fixed maturity securities, equity securities, mortgage loans, policy loans, alternative investments and short-term investments. |
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| Premium and deposits | Amounts a policyholder agrees to pay for an insurance policy or annuity contract that may be paid in one or a series of payments as defined by the terms of the policy or contract. |
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| Reinsurance | Insurance policies purchased by insurers to limit the total loss they would experience from an insurance claim. |
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| Renewal premium and deposits | Premiums and deposits after the first twelve months of the policy or contract. |
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| Risk-based capital (“RBC”) | Rules to determine insurance company statutory capital requirements. It is based on rules published by the National Association of Insurance Commissioners (“NAIC”). |
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| Product Terms | |
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| Annuitant | The person who receives annuity payments or the person whose life expectancy determines the amount of variable annuity payments upon annuitization of an annuity to be paid for life. |
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| Annuitization | The process of converting an annuity investment into a series of periodic income payments, generally for life. |
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| Benefit base | A notional amount (not actual cash value) used to calculate the owner’s guaranteed benefits within an annuity contract. The death benefit and living benefit within the same contract may not have the same benefit base. |
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| Cash surrender value | The amount an insurance company pays (minus any surrender charge) to the policyholder when the contract or policy is voluntarily terminated prematurely. |
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| Dollar-for-dollar withdrawal | A method of calculating the reduction of a variable annuity benefit base after a withdrawal in which the benefit is reduced by one dollar for every dollar withdrawn. |
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| Future policy benefits | Future policy benefits for the annuities business are comprised mainly of liabilities for life-contingent income annuities, and liabilities for the variable annuity guaranteed minimum benefits accounted for as insurance.
Future policy benefits for the life business are comprised mainly of liabilities for traditional life and certain liabilities for universal and variable life insurance contracts (other than the Policyholders’ account balance). |
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| General Account Investment Portfolio | The invested assets held in the General Account. |
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| General Account | The assets held in the general accounts of our insurance companies as well as assets held in our separate accounts on which we bear the investment risk. |
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| GMxB | A general reference to all forms of variable annuity guaranteed benefits, including guaranteed minimum living benefits, or GMLBs (such as GMIBs, GMWBs and GMABs), and guaranteed minimum death benefits, or GMDBs (inclusive of return of premium death benefit guarantees). |
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| Guaranteed income benefit (“GIB”) | An optional benefit which provides the policyholder with a guaranteed lifetime annuity based on predetermined annuity purchase rates applied to a GIB benefit base, with annuitization automatically triggered if and when the contract AV falls to zero. |
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| Guaranteed minimum accumulation benefits (“GMAB”) | An optional benefit (available for an additional cost) which entitles an annuitant to a minimum payment, typically in lump-sum, after a set period of time, typically referred to as the accumulation period. The minimum payment is based on the benefit base, which could be greater than the underlying AV. |
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Guaranteed minimum death
benefits (“GMDB”) | An optional benefit (available for an additional cost) that guarantees an annuitant’s beneficiaries are entitled to a minimum payment based on the benefit base, which could be greater than the underlying AV, upon the death of the annuitant. |
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| Guaranteed minimum income benefits (“GMIB”) | An optional benefit (available for an additional cost) where an annuitant is entitled to annuitize the policy and receive a minimum payment stream based on the benefit base, which could be greater than the underlying AV. |
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Guaranteed minimum living
benefits (“GMLB”) | A reference to all forms of guaranteed minimum living benefits, including GMIBs, GMWBs and GMABs (does not include GMDBs). |
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| Guaranteed minimum withdrawal benefits (“GMWB”) | An optional benefit (available for an additional cost) where an annuitant is entitled to withdraw a maximum amount of their benefit base each year, for which cumulative payments to the annuitant could be greater than the underlying AV. |
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| Guaranteed withdrawal benefit for life (“GWBL”) | An optional benefit (available for an additional cost) where an annuitant is entitled to withdraw a maximum amount of their benefit base each year, for the duration of the policyholder’s life, regardless of account performance. |
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| Indexed Universal Life (“IUL”) | A permanent life insurance offering built on a universal life insurance framework that uses an equity-linked approach for generating policy investment returns. |
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| Living benefits | Optional benefits (available at an additional cost) that guarantee that the policyholder will get back at least his original investment when the money is withdrawn. |
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| Mortality and expense risk fee (“M&E fee”) | A fee charged by insurance companies to compensate for the risk they take by issuing life insurance and variable annuity contracts. |
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| Net flows | Net change in customer account balances in a period including, but not limited to, gross premiums, surrenders, withdrawals and benefits. It excludes investment performance, interest credited to customer accounts and policy charges. |
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| Policyholder account balances | Annuities. Policyholder account balances are held for fixed deferred annuities, the fixed account portion of variable annuities and non-life contingent income annuities. Interest is credited to the policyholder’s account at interest rates we determine which are influenced by current market rates, subject to specified minimums. Life Insurance Policies. Policyholder account balances are held for retained asset accounts, universal life policies and the fixed account of universal variable life insurance policies. Interest is credited to the policyholder’s account at interest rates we determine which are influenced by current market rates, subject to specified minimums. |
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| Return of premium (“ROP”) death benefit | This death benefit pays the greater of the account value at the time of a claim following the owner’s death or the total contributions to the contract (subject to adjustment for withdrawals). The charge for this benefit is usually included in the M&E fee that is deducted daily from the net assets in each variable investment option. We also refer to this death benefit as the Return of Principal death benefit. |
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| Rider | An optional feature or benefit that a policyholder can purchase at an additional cost. |
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| Roll-up rate | The guaranteed percentage that the benefit base increases by each year. |
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| Separate Account | Refers to the separate account investment assets of our insurance subsidiaries excluding the assets held in those separate accounts on which we bear the investment risk. |
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| Surrender charge | A fee paid by a contract owner for the early withdrawal of an amount that exceeds a specific percentage or for cancellation of the contract within a specified amount of time after purchase. |
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| Surrender rate | Represents annualized surrenders and withdrawals as a percentage of average AV. |
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| Universal life (“UL”) products | Life insurance products that provide a death benefit in return for payment of specified annual policy charges that are generally related to specific costs, which may change over time. To the extent that the policyholder chooses to pay more than the charges required in any given year to keep the policy in-force, the excess premium will be placed into the AV of the policy and credited with a stated interest rate on a monthly basis. |
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| Variable annuity | A type of annuity that offers guaranteed periodic payments for a defined period of time or for life and gives purchasers the ability to invest in various markets though the underlying investment options, which may result in potentially higher, but variable, returns. |
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| Variable Universal Life (“VUL”) | Universal life products where the excess amount paid over policy charges can be directed by the policyholder into a variety of Separate Account investment options. In the Separate Account investment options, the policyholder bears the entire risk and returns of the investment results. |
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ACRONYMS
•“AB” or “AllianceBernstein” means AB Holding and ABLP.
•“AFS” means available-for-sale
•“AOCI” means accumulated other comprehensive income
•“ASC” means Accounting Standards Codification
•“ASU” means Accounting Standards Update
•“AUM” means assets under management
•“AV” means Account Value
•“AXA” means AXA S.A., a société anonyme organized under the laws of France, and formerly our controlling stockholder.
•“AXA Financial” means AXA Financial, Inc., a Delaware corporation and a former wholly-owned direct subsidiary of Holdings. On October 1, 2018, AXA Financial merged with and into Holdings, with Holdings assuming the obligations of AXA Financial.
•“BPs” means basis points
•“CDS” means credit default swaps
•“CECL” means current expected credit losses
•“COI” means cost of insurance
•“COLI” means corporate owned life insurance
•“Company” means Equitable Holdings, Inc. with its consolidated subsidiaries
•“CS Life” means Corporate Solutions Life Reinsurance Company, a Delaware corporation and a wholly-owned direct subsidiary of Holdings.
•“CS Life RE” means CS Life RE Company, an Arizona corporation and a wholly-owned indirect subsidiary of Holdings.
•“CSA” means credit support annex
•“CTE” means conditional tail expectation
•“DAC” means deferred policy acquisition costs
•“DSC” means debt service coverage
•“DSI” means deferred sales inducement
•“EAFE” means European, Australasia, and Far East
•“EFS” means Equitable Financial Services, LLC, a Delaware corporation and a wholly-owned direct subsidiary of Holdings.
•“EIM” means Equitable Investment Management Group, LLC, a Delaware limited liability company and a wholly-owned indirect subsidiary of Holdings.
•“Equitable Distributors” means Equitable Distributors, LLC, a Delaware limited liability company, our wholesale broker/dealer for our retirement and protection businesses and a wholly-owned indirect subsidiary of Holdings.
•“Equitable Financial” means Equitable Financial Life Insurance Company, a New York corporation, a life insurance company and a wholly-owned subsidiary of EFS.
•“ETF” means exchange traded funds
•“Exchange Act” means Securities Exchange Act of 1934, as amended
•“FABN” means Funding Agreement Backed Notes Program
•“FASB” means Financial Accounting Standards Board
•“FHLB” means Federal Home Loan Bank
•“Holdings” means Equitable Holdings, Inc.
•“ISDA Master Agreement” means International Swaps and Derivatives Association Master Agreement
•“IUL” means indexed universal life
•“IUS” means Investments Under Surveillance
•“LIBOR” means London Interbank Offered Rate
•“LTV” means loan-to-value
•“MD&A” means Management’s Discussion and Analysis of Financial Condition and Results of Operations
•“MRBs” means market risk benefits
•“MSO” means Market Stabilizer Option
•“NAIC” means National Association of Insurance Commissioners
•“NAR” means net amount at risk
•“NAV” means net asset value
•“NLG” means no-lapse guarantee
•“NYDFS” means New York State Department of Financial Services
•“OCI” means other comprehensive income
•“OTC” means over-the-counter
•“REIT” means real estate investment trusts
•“SCS” means Structured Capital Strategies
•“SEC” means U.S. Securities and Exchange Commission
•“SIO” means structured investment option
•“SPE” means special purpose entity
•“TDRs” means troubled debt restructurings
•“TIPS” means treasury inflation-protected securities
•“U.S. GAAP” means accounting principles generally accepted in the United States of America
•“UL” means universal life
•“ULSG” means universal life products with secondary guarantee
•“VIAC” means Venerable Insurance and Annuity Company
•“VIE” means variable interest entity
•“VOE” means voting interest entity
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Equitable Financial Life Insurance Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Date: August 5, 2020May 6, 2021 | EQUITABLE FINANCIAL LIFE INSURANCE COMPANY | | |
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| By: | /s/ Anders MalmströmRobin M. Raju | |
| | Name: | Anders MalmströmRobin M. Raju |
| | Title: | Senior Executive Director and Chief Financial Officer
(Principal Financial Officer) |
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Date: August 5, 2020May 6, 2021 | | /s/ William Eckert | |
| | Name: | William Eckert |
| | Title: | Managing Director and Chief Accounting Officer
(Principal Accounting Officer)
|
