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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 SeptemberJune 30, 20212022
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. 000-20501
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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)
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 November 4, 2021,August 2, 2022, 2,000,000 shares of the registrant’s Common Stock , $1.25 par value 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.
TABLE OF CONTENTS
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| PART I - FINANCIAL INFORMATION | | | |
| Consolidated Financial Statements | | | |
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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; (ii) operational factors, remediation of our material weakness, indebtedness, protection of confidential customer information or proprietary business information, operational failures, our service 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 by third parties and affiliates and economic downturns, defaults and other events adversely affecting our investments; (iv) our reinsurance and hedging programs; (v) our products, structure and product distribution, including variable annuity guaranteed benefits features within certain 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 and experience differing from pricing expectations or reserves, amortization of 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, 2020,2021, 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. 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
SeptemberJune 30, 20212022 (Unaudited) and December 31, 20202021
| | | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | (in millions, except share data) | | (in millions, except share data) |
| ASSETS | ASSETS | | ASSETS | |
| Investments: | Investments: | | Investments: | |
| Fixed maturities available-for-sale, at fair value (amortized cost of $67,332 and $68,136) (allowance for credit losses of $27 and $13) | $ | 71,708 | | | $ | 76,353 | | |
| Mortgage loans on real estate (net of allowance for credit losses of $64 and $81) | 13,431 | | | 13,142 | | |
| Fixed maturities available-for-sale, at fair value (amortized cost of $69,340 and $68,636) (allowance for credit losses of $19 and $22) | | Fixed maturities available-for-sale, at fair value (amortized cost of $69,340 and $68,636) (allowance for credit losses of $19 and $22) | $ | 62,674 | | | $ | 73,076 | |
| Mortgage loans on real estate (net of allowance for credit losses of $64 and $62) | | Mortgage loans on real estate (net of allowance for credit losses of $64 and $62) | 14,463 | | | 14,016 | |
| | Policy loans | Policy loans | 3,541 | | | 3,635 | | Policy loans | 3,544 | | | 3,540 | |
| Other equity investments (1) | Other equity investments (1) | 2,733 | | | 1,342 | | Other equity investments (1) | 2,968 | | | 2,759 | |
| Trading securities, at fair value | Trading securities, at fair value | 409 | | | 5,340 | | Trading securities, at fair value | 345 | | | 379 | |
| Other invested assets | Other invested assets | 2,339 | | | 2,383 | | Other invested assets | 1,443 | | | 2,910 | |
| Total investments | Total investments | 94,161 | | | 102,195 | | Total investments | 85,437 | | | 96,680 | |
| Cash and cash equivalents | Cash and cash equivalents | 1,307 | | | 2,043 | | Cash and cash equivalents | 2,316 | | | 1,815 | |
| Deferred policy acquisition costs | Deferred policy acquisition costs | 4,099 | | | 3,816 | | Deferred policy acquisition costs | 5,490 | | | 4,267 | |
| | Amounts due from reinsurers (allowance for credit losses of $— and $5 ) (fair value of $5,869 and $—) (3) | 13,388 | | | 3,053 | | |
| Amounts due from reinsurers (allowance for credit losses of $6 and $5) (includes amounts accounted for at fair value of $4,681 and $5,813) (3) | | Amounts due from reinsurers (allowance for credit losses of $6 and $5) (includes amounts accounted for at fair value of $4,681 and $5,813) (3) | 12,399 | | | 13,300 | |
| Loans to affiliates | Loans to affiliates | 1,900 | | | 900 | | Loans to affiliates | 1,900 | | | 1,900 | |
| GMIB reinsurance contract asset, at fair value | GMIB reinsurance contract asset, at fair value | 2,156 | | | 2,859 | | GMIB reinsurance contract asset, at fair value | 1,612 | | | 2,068 | |
| Current and deferred income taxes | Current and deferred income taxes | 886 | | | — | | Current and deferred income taxes | 2,302 | | | 842 | |
| Other assets | Other assets | 3,601 | | | 3,078 | | Other assets | 4,782 | | | 3,023 | |
| Separate Accounts assets | Separate Accounts assets | 138,942 | | | 133,350 | | Separate Accounts assets | 113,780 | | | 143,912 | |
| Total Assets | Total Assets | $ | 260,440 | | | $ | 251,294 | | Total Assets | $ | 230,018 | | | $ | 267,807 | |
| | LIABILITIES | LIABILITIES | | LIABILITIES | |
| Policyholders’ account balances | Policyholders’ account balances | $ | 72,055 | | | $ | 63,109 | | Policyholders’ account balances | $ | 74,908 | | | $ | 75,467 | |
| Future policy benefits and other policyholders' liabilities | Future policy benefits and other policyholders' liabilities | 37,416 | | | 40,151 | | Future policy benefits and other policyholders' liabilities | 34,193 | | | 36,851 | |
| Broker-dealer related payables | Broker-dealer related payables | 641 | | | 1,064 | | Broker-dealer related payables | 174 | | | 630 | |
| | Amounts due to reinsurers | Amounts due to reinsurers | 211 | | | 122 | | Amounts due to reinsurers | 125 | | | 135 | |
| | Current and deferred income taxes | — | | | 234 | | |
| | Other liabilities | Other liabilities | 2,510 | | | 1,580 | | Other liabilities | 3,316 | | | 2,078 | |
| Separate Accounts liabilities | Separate Accounts liabilities | 138,942 | | | 133,350 | | Separate Accounts liabilities | 113,780 | | | 143,912 | |
| Total Liabilities | Total Liabilities | $ | 251,775 | | | $ | 239,610 | | Total Liabilities | $ | 226,496 | | | $ | 259,073 | |
| Redeemable noncontrolling interest (2) | Redeemable noncontrolling interest (2) | $ | 25 | | | $ | 41 | | Redeemable noncontrolling interest (2) | $ | 21 | | | $ | 28 | |
| Commitments and contingent liabilities (Note 13) | 0 | | 0 | |
| Commitments and contingent liabilities (Note 12) | | Commitments and contingent liabilities (Note 12) | 0 | | 0 |
| | EQUITY | EQUITY | | EQUITY | |
| Equity attributable to Equitable Financial: | Equity attributable to Equitable Financial: | | Equity attributable to Equitable Financial: | |
| Common stock, $1.25 par value; 2,000,000 shares authorized, issued and outstanding | Common stock, $1.25 par value; 2,000,000 shares authorized, issued and outstanding | $ | 2 | | | $ | 2 | | Common stock, $1.25 par value; 2,000,000 shares authorized, issued and outstanding | $ | 2 | | | $ | 2 | |
| Additional paid-in capital | Additional paid-in capital | 8,539 | | | 7,841 | | Additional paid-in capital | 8,539 | | | 8,546 | |
| Retained earnings | (2,187) | | | (795) | | |
| Accumulated deficit | | Accumulated deficit | (206) | | | (2,199) | |
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | 2,286 | | | 4,595 | | Accumulated other comprehensive income (loss) | (4,834) | | | 2,357 | |
| | Total Equity | Total Equity | 8,640 | | | 11,643 | | Total Equity | 3,501 | | | 8,706 | |
| Total Liabilities, Redeemable Noncontrolling Interest and Equity | Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 260,440 | | | $ | 251,294 | | Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 230,018 | | | $ | 267,807 | |
(1)See Note 2 of the Notes to these Consolidated Financial Statements for details of balances with VIEs.
(2)See Note 1211 of the Notes to these Consolidated Financial Statements for details of redeemable noncontrolling interest.
(3)Represents the fair value of the ceded reserves to Venerable. See Note 1- Organization1 of the Notes to these Consolidated Financial Statements for details of the Venerable transactionTransaction and Note 8- Fair Value Disclosures.7 of the Notes to these Consolidated Financial Statements.
See Notes to Consolidated Financial Statements (Unaudited).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Consolidated Statements of Income (Loss)
For the Three and NineSix Months Ended SeptemberJune 30, 20212022 and 20202021 (Unaudited)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 | |
| | (in millions) | | (in millions) |
| REVENUES | REVENUES | | | REVENUES | | |
| Policy charges and fee income | Policy charges and fee income | $ | 811 | | | $ | 853 | | | $ | 2,581 | | | $ | 2,582 | | | Policy charges and fee income | $ | 735 | | | $ | 890 | | | $ | 1,502 | | | $ | 1,770 | | |
| Premiums | Premiums | 181 | | | 178 | | | 574 | | | 613 | | | Premiums | 166 | | | 188 | | | 355 | | | 393 | | |
| Net derivative gains (losses) | Net derivative gains (losses) | (236) | | | (1,527) | | | (4,152) | | | 2,097 | | | Net derivative gains (losses) | 2,150 | | | (1,138) | | | 2,895 | | | (3,916) | | |
| Net investment income (loss) | Net investment income (loss) | 885 | | | 809 | | | 2,655 | | | 2,334 | | | Net investment income (loss) | 695 | | | 934 | | | 1,450 | | | 1,770 | | |
| Investment gains (losses), net: | Investment gains (losses), net: | | | Investment gains (losses), net: | | |
| Credit losses on available-for-sale debt securities and loans | Credit losses on available-for-sale debt securities and loans | (2) | | | (4) | | | 4 | | | (47) | | | Credit losses on available-for-sale debt securities and loans | (9) | | | 5 | | | 1 | | | 6 | | |
| Other investment gains (losses), net | Other investment gains (losses), net | 166 | | | 19 | | | 753 | | | 262 | | | Other investment gains (losses), net | (233) | | | 405 | | | (565) | | | 587 | | |
| Total investment gains (losses), net | Total investment gains (losses), net | 164 | | | 15 | | | 757 | | | 215 | | | Total investment gains (losses), net | (242) | | | 410 | | | (564) | | | 593 | | |
| Investment management and service fees | Investment management and service fees | 228 | | | 257 | | | 791 | | | 744 | | | Investment management and service fees | 181 | | | 280 | | | 374 | | | 563 | | |
| Other income | Other income | 24 | | | 18 | | | 65 | | | 43 | | | Other income | 25 | | | 27 | | | 47 | | | 41 | | |
| Total revenues | Total revenues | 2,057 | | | 603 | | | 3,271 | | | 8,628 | | | Total revenues | 3,710 | | | 1,591 | | | 6,059 | | | 1,214 | | |
| | BENEFITS AND OTHER DEDUCTIONS | BENEFITS AND OTHER DEDUCTIONS | | | BENEFITS AND OTHER DEDUCTIONS | | |
| Policyholders’ benefits | Policyholders’ benefits | 708 | | | 950 | | | 2,383 | | | 4,267 | | | Policyholders’ benefits | 805 | | | 852 | | | 1,750 | | | 1,675 | | |
| Interest credited to policyholders’ account balances | Interest credited to policyholders’ account balances | 285 | | | 277 | | | 841 | | | 845 | | | Interest credited to policyholders’ account balances | 287 | | | 286 | | | 579 | | | 556 | | |
| Compensation and benefits | Compensation and benefits | 111 | | | 76 | | | 246 | | | 210 | | | Compensation and benefits | 44 | | | 54 | | | 89 | | | 135 | | |
| Commissions | Commissions | 140 | | | 153 | | | 494 | | | 462 | | | Commissions | 164 | | | 172 | | | 335 | | | 354 | | |
| Interest expense | Interest expense | — | | | — | | | 1 | | | — | | | Interest expense | — | | | — | | | — | | | 1 | | |
| Amortization of deferred policy acquisition costs | Amortization of deferred policy acquisition costs | 93 | | | 119 | | | 342 | | | 1,290 | | | Amortization of deferred policy acquisition costs | 136 | | | 187 | | | 285 | | | 249 | | |
| Other operating costs and expenses | Other operating costs and expenses | 223 | | | 221 | | | 847 | | | 653 | | | Other operating costs and expenses | 305 | | | 225 | | | 572 | | | 624 | | |
| Total benefits and other deductions | Total benefits and other deductions | 1,560 | | | 1,796 | | | 5,154 | | | 7,727 | | | Total benefits and other deductions | 1,741 | | | 1,776 | | | 3,610 | | | 3,594 | | |
| Income (loss) from continuing operations, before income taxes | Income (loss) from continuing operations, before income taxes | 497 | | | (1,193) | | | (1,883) | | | 901 | | | Income (loss) from continuing operations, before income taxes | 1,969 | | | (185) | | | 2,449 | | | (2,380) | | |
| Income tax (expense) benefit | Income tax (expense) benefit | (99) | | | 249 | | | 500 | | | (181) | | | Income tax (expense) benefit | (387) | | | 12 | | | (453) | | | 599 | | |
| Net income (loss) | Net income (loss) | 398 | | | (944) | | | (1,383) | | | 720 | | | Net income (loss) | 1,582 | | | (173) | | | 1,996 | | | (1,781) | | |
| | Less: Net income (loss) attributable to the noncontrolling interest | Less: Net income (loss) attributable to the noncontrolling interest | — | | | 2 | | | 1 | | | (1) | | | Less: Net income (loss) attributable to the noncontrolling interest | (3) | | | 1 | | | (4) | | | 1 | | |
| Net income (loss) attributable to Equitable Financial | Net income (loss) attributable to Equitable Financial | $ | 398 | | | $ | (946) | | | $ | (1,384) | | | $ | 721 | | | Net income (loss) attributable to Equitable Financial | $ | 1,585 | | | $ | (174) | | | $ | 2,000 | | | $ | (1,782) | | |
See Notes to Consolidated Financial Statements (Unaudited).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Consolidated Statements of Comprehensive Income (Loss)
For the Three and NineSix Months Ended SeptemberJune 30, 20212022 and 20202021 (Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 | |
| | (in millions) | | (in millions) |
| COMPREHENSIVE INCOME (LOSS) | COMPREHENSIVE INCOME (LOSS) | | | COMPREHENSIVE INCOME (LOSS) | | |
| Net income (loss) | Net income (loss) | $ | 398 | | | $ | (944) | | | $ | (1,383) | | | $ | 720 | | | Net income (loss) | $ | 1,582 | | | $ | (173) | | | $ | 1,996 | | | $ | (1,781) | | |
| | Other comprehensive income (loss), net of income taxes: | Other comprehensive income (loss), net of income taxes: | | | Other comprehensive income (loss), net of income taxes: | | |
| Change in unrealized gains (losses), net of adjustments (1) | Change in unrealized gains (losses), net of adjustments (1) | (354) | | | 247 | | | (2,309) | | | 3,327 | | | Change in unrealized gains (losses), net of adjustments (1) | (3,675) | | | 1,159 | | | (7,191) | | | (1,955) | | |
| | Other comprehensive income (loss), net of income taxes | Other comprehensive income (loss), net of income taxes | (354) | | | 247 | | | (2,309) | | | 3,327 | | | Other comprehensive income (loss), net of income taxes | (3,675) | | | 1,159 | | | (7,191) | | | (1,955) | | |
| Comprehensive income (loss) | Comprehensive income (loss) | 44 | | | (697) | | | (3,692) | | | 4,047 | | | Comprehensive income (loss) | (2,093) | | | 986 | | | (5,195) | | | (3,736) | | |
Less: Comprehensive income (loss) attributable to the noncontrolling interest | Less: Comprehensive income (loss) attributable to the noncontrolling interest | — | | | 2 | | | 1 | | | (1) | | | Less: Comprehensive income (loss) attributable to the noncontrolling interest | (3) | | | 1 | | | (4) | | | 1 | | |
| Comprehensive income (loss) attributable to Equitable Financial | Comprehensive income (loss) attributable to Equitable Financial | $ | 44 | | | $ | (699) | | | $ | (3,693) | | | $ | 4,048 | | | Comprehensive income (loss) attributable to Equitable Financial | $ | (2,090) | | | $ | 985 | | | $ | (5,191) | | | $ | (3,737) | | |
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(1)See Note 1110 of the Notes to these Consolidated Financial Statements 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 Comprehensive Income (Loss)Equity
For the Three and NineSix Months Ended SeptemberJune 30, 20212022 and 20202021 (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 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) | | | | |
| July 1, 2021 | $ | 2 | | | $ | 8,531 | | | $ | (2,584) | | | $ | 2,640 | | | $ | 8,589 | | | $ | — | | | $ | 8,589 | | | | | |
| Dividend to parent company | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | |
| Capital contribution from parent company | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | |
| Net income (loss) | — | | | — | | | 398 | | | — | | | 398 | | | — | | | 398 | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | (354) | | | (354) | | | — | | | (354) | | | | | |
| Other | — | | | 8 | | | (1) | | | — | | | 7 | | | — | | | 7 | | | | | |
| September 30, 2021 | $ | 2 | | | $ | 8,539 | | | $ | (2,187) | | | $ | 2,286 | | | $ | 8,640 | | | $ | — | | | $ | 8,640 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| Equitable Financial Equity | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total | | Non-controlling Interest | | Total Equity | | | | |
| (in millions) | | | | |
| April 1, 2022 | $ | 2 | | | $ | 8,530 | | | $ | (1,791) | | | $ | (1,159) | | | $ | 5,582 | | | $ | — | | | $ | 5,582 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | — | | | — | | | 1,585 | | | — | | | 1,585 | | | — | | | 1,585 | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | (3,675) | | | (3,675) | | | — | | | (3,675) | | | | | |
| Other | — | | | 9 | | | — | | | — | | | 9 | | | — | | | 9 | | | | | |
| June 30, 2022 | $ | 2 | | | $ | 8,539 | | | $ | (206) | | | $ | (4,834) | | | $ | 3,501 | | | $ | — | | | $ | 3,501 | | | | | |
| | July 1, 2020 | $ | 2 | | | $ | 7,821 | | | $ | 2,580 | | | $ | 4,676 | | | $ | 15,079 | | | $ | 9 | | | $ | 15,088 | | |
| April 1, 2021 | | April 1, 2021 | $ | 2 | | | $ | 7,827 | | | $ | (2,403) | | | $ | 1,481 | | | $ | 6,907 | | | $ | — | | | $ | 6,907 | |
| Dividend to parent company | Dividend to parent company | — | | | — | | | — | | | — | | | — | | | — | | | — | | Dividend to parent company | — | | | — | | | (7) | | | — | | | (7) | | | — | | | (7) | |
| Capital contribution from parent company | | Capital contribution from parent company | — | | | 750 | | | — | | | — | | | 750 | | | — | | | 750 | |
| Net income (loss) | Net income (loss) | — | | | — | | | (946) | | | — | | | (946) | | | — | | | (946) | | Net income (loss) | — | | | — | | | (174) | | | — | | | (174) | | | — | | | (174) | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | — | | | — | | | — | | | 247 | | | 247 | | | — | | | 247 | | Other comprehensive income (loss) | — | | | — | | | — | | | 1,159 | | | 1,159 | | | — | | | 1,159 | |
| Other | Other | — | | | 10 | | | — | | | — | | | 10 | | | — | | | 10 | | Other | — | | | (46) | | | — | | | — | | | (46) | | | — | | | (46) | |
| September 30, 2020 | $ | 2 | | | $ | 7,831 | | | $ | 1,634 | | | $ | 4,923 | | | $ | 14,390 | | | $ | 9 | | | $ | 14,399 | | |
| June 30, 2021 | | June 30, 2021 | $ | 2 | | | $ | 8,531 | | | $ | (2,584) | | | $ | 2,640 | | | $ | 8,589 | | | $ | — | | | $ | 8,589 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Consolidated Statements of Equity
For the Three and NineSix Months Ended SeptemberJune 30, 20212022 and 20202021 (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 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, 2021 | $ | 2 | | | $ | 7,841 | | | $ | (795) | | | $ | 4,595 | | | $ | 11,643 | | | $ | — | | | $ | 11,643 | |
| Dividend to parent company | — | | | — | | | (7) | | | — | | | (7) | | | — | | | (7) | |
| Capital contribution from parent company | — | | | 750 | | | — | | | — | | | 750 | | | — | | | 750 | |
| Net income (loss) | — | | | — | | | (1,384) | | | — | | | (1,384) | | | — | | | (1,384) | |
| Other comprehensive income (loss) | — | | | — | | | — | | | (2,309) | | | (2,309) | | | — | | | (2,309) | |
| Other | — | | | (52) | | | (1) | | | — | | | (53) | | | — | | | (53) | |
| September 30, 2021 | $ | 2 | | | $ | 8,539 | | | $ | (2,187) | | | $ | 2,286 | | | $ | 8,640 | | | $ | — | | | $ | 8,640 | |
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| January 1, 2020 | $ | 2 | | | $ | 7,809 | | | $ | 2,145 | | | $ | 1,596 | | | $ | 11,552 | | | $ | 13 | | | $ | 11,565 | |
| 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) | — | | | — | | | 721 | | | — | | | 721 | | | (2) | | | 719 | |
| Other comprehensive income (loss) | — | | | — | | | — | | | 3,327 | | | 3,327 | | | — | | | 3,327 | |
| Other | — | | | 22 | | | — | | | — | | | 22 | | | (2) | | | 20 | |
| September 30, 2020 | $ | 2 | | | $ | 7,831 | | | $ | 1,634 | | | $ | 4,923 | | | $ | 14,390 | | | $ | 9 | | | $ | 14,399 | |
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| Six Months Ended June 30, |
| Equitable Financial Equity | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total | | Non-controlling Interest | | Total Equity |
| (in millions) |
| January 1, 2022 | $ | 2 | | | $ | 8,546 | | | $ | (2,199) | | | $ | 2,357 | | | $ | 8,706 | | | $ | — | | | $ | 8,706 | |
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| Net income (loss) | — | | | — | | | 2,000 | | | — | | | 2,000 | | | — | | | 2,000 | |
| Other comprehensive income (loss) | — | | | — | | | — | | | (7,191) | | | (7,191) | | | — | | | (7,191) | |
| Other | — | | | (7) | | | (7) | | | — | | | (14) | | | — | | | (14) | |
| June 30, 2022 | $ | 2 | | | $ | 8,539 | | | $ | (206) | | | $ | (4,834) | | | $ | 3,501 | | | $ | — | | | $ | 3,501 | |
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| January 1, 2021 | $ | 2 | | | $ | 7,841 | | | $ | (795) | | | $ | 4,595 | | | $ | 11,643 | | | $ | — | | | $ | 11,643 | |
| Dividend to parent company | — | | | — | | | (7) | | | — | | | (7) | | | — | | | (7) | |
| | | | | | | | | | | | | |
| Capital contribution from parent company | — | | | 750 | | | — | | | — | | | 750 | | | — | | | 750 | |
| Net income (loss) | — | | | — | | | (1,782) | | | — | | | (1,782) | | | — | | | (1,782) | |
| Other comprehensive income (loss) | — | | | — | | | — | | | (1,955) | | | (1,955) | | | — | | | (1,955) | |
| Other | — | | | (60) | | | — | | | — | | | (60) | | | — | | | (60) | |
| June 30, 2021 | $ | 2 | | | $ | 8,531 | | | $ | (2,584) | | | $ | 2,640 | | | $ | 8,589 | | | $ | — | | | $ | 8,589 | |
See Notes to Consolidated Financial Statements (Unaudited).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
NineSix Months Ended SeptemberJune 30, 20212022 and 20202021 (Unaudited)
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | | 2022 | | 2021 | |
| | (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) | $ | (1,383) | | | $ | 720 | | | Net income (loss) | $ | 1,996 | | | $ | (1,781) | | |
| 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 | 841 | | | 845 | | | Interest credited to policyholders’ account balances | 579 | | | 556 | | |
| Policy charges and fee income | Policy charges and fee income | (2,581) | | | (2,582) | | | Policy charges and fee income | (1,502) | | | (1,770) | | |
| Net derivative (gains) losses | Net derivative (gains) losses | 4,152 | | | (2,097) | | | Net derivative (gains) losses | (2,895) | | | 3,916 | | |
| Credit losses on AFS debt securities and loans | Credit losses on AFS debt securities and loans | (4) | | | 47 | | | Credit losses on AFS debt securities and loans | (1) | | | (6) | | |
| Investment (gains) losses, net | Investment (gains) losses, net | (753) | | | (262) | | | Investment (gains) losses, net | 565 | | | (587) | | |
| Realized and unrealized (gains) losses on trading securities | Realized and unrealized (gains) losses on trading securities | 49 | | | (98) | | | Realized and unrealized (gains) losses on trading securities | 46 | | | 42 | | |
| Non-cash long-term incentive compensation expense | Non-cash long-term incentive compensation expense | (23) | | | 21 | | | Non-cash long-term incentive compensation expense | 23 | | | (31) | | |
| | Amortization and depreciation | Amortization and depreciation | 242 | | | 1,230 | | | Amortization and depreciation | 235 | | | 188 | | |
| | Equity (income) loss from limited partnerships | Equity (income) loss from limited partnerships | (371) | | | 13 | | | Equity (income) loss from limited partnerships | (159) | | | (219) | | |
| Changes in: | Changes in: | | | Changes in: | | |
| | Reinsurance recoverable (1) | Reinsurance recoverable (1) | (824) | | | (202) | | | Reinsurance recoverable (1) | (596) | | | (755) | | |
| Capitalization of deferred policy acquisition costs | Capitalization of deferred policy acquisition costs | (519) | | | (414) | | | Capitalization of deferred policy acquisition costs | (373) | | | (341) | | |
| Future policy benefits | Future policy benefits | 33 | | | 1,811 | | | Future policy benefits | 321 | | | 126 | | |
| Current and deferred income taxes | Current and deferred income taxes | (507) | | | 502 | | | Current and deferred income taxes | 451 | | | (605) | | |
| Other, net | Other, net | 229 | | | (171) | | | Other, net | (330) | | | 379 | | |
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | $ | (1,419) | | | $ | (637) | | | Net cash provided by (used in) operating activities | $ | (1,640) | | | $ | (888) | | |
| | 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 | $ | 25,629 | | | $ | 10,002 | | | Fixed maturities, available-for-sale | $ | 12,218 | | | $ | 20,494 | | |
| Mortgage loans on real estate | Mortgage loans on real estate | 1,417 | | | 454 | | | Mortgage loans on real estate | 713 | | | 543 | | |
| Trading account securities | Trading account securities | 5,010 | | | 1,320 | | | Trading account securities | 67 | | | 4,529 | | |
| Real estate joint ventures | | Real estate joint ventures | — | | | — | | |
| Short-term investments | Short-term investments | 84 | | | 1,431 | | | Short-term investments | (14) | | | 81 | | |
| Other | Other | 1,509 | | | 519 | | | Other | 204 | | | 1,096 | | |
| 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 | (32,790) | | | (16,620) | | | Fixed maturities, available-for-sale | (13,524) | | | (26,007) | | |
| Mortgage loans on real estate | Mortgage loans on real estate | (1,680) | | | (1,208) | | | Mortgage loans on real estate | (1,175) | | | (741) | | |
| Trading account securities | Trading account securities | (142) | | | (403) | | | Trading account securities | (79) | | | (98) | | |
| Short-term investments | Short-term investments | (5) | | | (1,098) | | | Short-term investments | — | | | (5) | | |
| Other | Other | (2,377) | | | (678) | | | Other | (485) | | | (1,783) | | |
| Cash settlements related to derivative instruments, net | Cash settlements related to derivative instruments, net | (6,522) | | | 2,560 | | | Cash settlements related to derivative instruments, net | 761 | | | (6,119) | | |
| Issuance of loans to affiliates | Issuance of loans to affiliates | (1,000) | | | — | | | Issuance of loans to affiliates | — | | | (1,000) | | |
| | Repayments of loans to affiliates | | Repayments of loans to affiliates | — | | | — | | |
| Investment in capitalized software, leasehold improvements and EDP equipment | Investment in capitalized software, leasehold improvements and EDP equipment | (41) | | | (31) | | | Investment in capitalized software, leasehold improvements and EDP equipment | 1 | | | (26) | | |
| Other, net | Other, net | (15) | | | (397) | | | Other, net | 137 | | | (15) | | |
| Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | $ | (10,923) | | | $ | (4,149) | | | Net cash provided by (used in) investing activities | $ | (1,176) | | | $ | (9,051) | | |
| | Cash flows from financing activities: | | | |
See Notes to Consolidated Financial Statements (Unaudited).
10
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
NineSix Months Ended SeptemberJune 30, 20212022 and 20202021 (Unaudited)
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | | 2022 | | 2021 | |
| | (in millions) | | (in millions) |
| Cash flows from financing activities: | | Cash flows from financing activities: | | | | |
| Policyholders’ account balances: | Policyholders’ account balances: | | | Policyholders’ account balances: | | |
| Deposits | Deposits | $ | 12,336 | | | $ | 7,542 | | | Deposits | $ | 6,855 | | | $ | 9,718 | | |
| Withdrawals | Withdrawals | (4,647) | | | (3,144) | | | Withdrawals | (3,006) | | | (3,143) | | |
| Transfer (to) from Separate Accounts | 1,569 | | | 1,966 | | | |
| Transfers (to) from Separate Accounts | | Transfers (to) from Separate Accounts | 937 | | | 1,025 | | |
| | Change in collateralized pledged assets | Change in collateralized pledged assets | 55 | | | 58 | | | Change in collateralized pledged assets | 66 | | | 67 | | |
| Change in collateralized pledged liabilities | Change in collateralized pledged liabilities | 1,492 | | | 1,981 | | | Change in collateralized pledged liabilities | (1,524) | | | 1,266 | | |
| Capital contribution from parent company | Capital contribution from parent company | 750 | | | — | | | Capital contribution from parent company | — | | | 750 | | |
| Shareholder dividend paid | Shareholder dividend paid | (7) | | | (1,200) | | | Shareholder dividend paid | — | | | (7) | | |
| | Purchase (redemption) of noncontrolling interests of consolidated company-sponsored investment funds | Purchase (redemption) of noncontrolling interests of consolidated company-sponsored investment funds | 10 | | | 4 | | | Purchase (redemption) of noncontrolling interests of consolidated company-sponsored investment funds | — | | | 8 | | |
| | Other, net | Other, net | 48 | | | 49 | | | Other, net | (11) | | | 28 | | |
| Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | $ | 11,606 | | | $ | 7,256 | | | Net cash provided by (used in) financing activities | $ | 3,317 | | | $ | 9,712 | | |
| | Change in cash and cash equivalents | Change in cash and cash equivalents | (736) | | | 2,470 | | | Change in cash and cash equivalents | 501 | | | (227) | | |
| Cash and cash equivalents, beginning of year | Cash and cash equivalents, beginning of year | 2,043 | | | 1,492 | | | Cash and cash equivalents, beginning of year | 1,815 | | | 2,043 | | |
| Cash and cash equivalents, end of year | Cash and cash equivalents, end of year | $ | 1,307 | | | $ | 3,962 | | | Cash and cash equivalents, end of year | $ | 2,316 | | | $ | 1,816 | | |
| | | Non-cash transactions from investing and financing activities: | Non-cash transactions from investing and financing activities: | | | Non-cash transactions from investing and financing activities: | | |
| Right-of-use assets obtained in exchange for lease obligations | Right-of-use assets obtained in exchange for lease obligations | $ | 3 | | | $ | 20 | | | Right-of-use assets obtained in exchange for lease obligations | $ | 3 | | | $ | 1 | | |
| | Transfer of assets to reinsurer | Transfer of assets to reinsurer | $ | (9,023) | | | $ | — | | | Transfer of assets to reinsurer | $ | — | | | $ | (9,023) | | |
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___________________________
(1) Amount includes cash paid for Venerable transactionTransaction of $494 million (see.See Note 1 Organization).of the Notes to these Consolidated Financial Statements.
See Notes to Consolidated Financial Statements (Unaudited).
11
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited)
1) ORGANIZATION
Equitable Financial’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 Holdings. Equitable Financial is a stock life insurance company organized in 1859 under the laws of the State of New York.
The Company’s 2 principal subsidiaries include Equitable Distributors, LLC (“Equitable Distributors”) and Equitable Investment Management Group, LLC (“EIMG”), which both are wholly-owned indirect subsidiaries of Holdings.
On June 1, 2021, Holdings completed its previously announcedthe sale (the “Transaction”“Venerable Transaction”) of Corporate SolutionsCS Life Reinsurance Company, an insurance company domiciled in Delaware and wholly owned subsidiary of Holdings (“CSLRC”), to Venerable Insurance and Annuity Company, an insurance company domiciled in Iowa (“VIAC”), pursuant to the Master Transaction Agreement, dated October 27, 2020 (the “Master Transaction Agreement”), among the Company, VIAC and, solely with respect to Article XIV thereof, Venerable Holdings, Inc., a Delaware corporation (“Venerable”). VIAC issued a surplus note in aggregate principal amount of $50$60 million, to Equitable Financial for cash consideration.
Immediately following the closing of the Venerable Transaction, CSLRCCS Life and Equitable Financial entered into a coinsurance and modified coinsurance agreement (the “Reinsurance Agreement”), pursuant to which Equitable Financial ceded to CSLRC,CS Life, on a combined coinsurance and modified coinsurance basis, legacy variable annuity policies sold by Equitable Financial between 2006-2008 (the “Block”),the Block, comprised of non-New York “Accumulator” policies containing fixed rate Guaranteed Minimum Income Benefit and/or Guaranteed Minimum Death Benefit guarantees. At the closing of the Transaction, CSLRCCS Life deposited assets supporting the general account liabilities relating to the Block into a trust account for the benefit of Equitable Financial, which assets will secure its obligations to Equitable Financial under the Reinsurance Agreement. The Company transferred assets of $9.5 billion, including primarily available for sale securities and cash, to a collateral trust account as the consideration for the reinsurance transaction. In addition, the Company recorded $9.6 billion of direct insurance liabilities ceded under the reinsurance contract, of which $5.3 billion is accounted at fair value, as the reinsurance of GMxB with no lapse guarantee riders are embedded derivatives. Additionally, $16.9 billion of Separate Account liabilities were ceded under a modified coinsurance portion of the agreement.
In addition, upon the completion of the Venerable Transaction, EIMG a wholly owned subsidiary of the Company, acquired an approximate 9.09% equity interest in Venerable’s parent holding company, VA Capital Company LLC. In connection with such investment, EIMG designated a member to the Board of Managers of VA Capital Company LLC.
On June 22, 2021, Holdings completed the formation of Equitable Investment Management, LLC, (“EIM”), a wholly owned indirect subsidiary of Holdings. Effective August 1, 2021, following the formation of EIM, EIMG terminated, and EIM, entered into certain administrative agreements with separate accounts held by the Company. In addition, on October 1, 2021, the Company entered into an investment advisory and management agreement in which EIM will become the investment manager for the Company’s general account portfolio.
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 statement 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.nature. 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, 2020.2021.
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 “third“second quarter 2021”2022” and “third“second quarter 2020”2021” refer to the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. The terms “first ninesix months of 2022” and “first six months of 2021” and “first nine months of 2020” refer to the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively.
Certain prior year amounts have been reclassified to conform to the current year’s presentation.
Adoption of NewRecent Accounting Pronouncements
| | | | | |
Description | Effect on the Financial Statement or Other Significant Matters |
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. | On January 1, 2021, the Company adopted the new accounting 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 cash flows as of the adoption date. |
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Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) to the FASB Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs. ASUs listed below include those that have been adopted during the current fiscal year and/or those that have been issued but not yet adopted as of June 30, 2022, and as of the date of this filing. ASUs not listed below were assessed and determined to be either not applicable or not material.
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
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| ASU 2018-12: Financial Services - Insurance (Topic 944); ASU 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 ratesThe ASU also prescribes the discount rate to be used to discountin measuring the liability for future policy benefits for traditional and limited payment long-duration contracts.
2. Measurement of MRBs. MRBs, as defined under the ASU, will needencompass certain GMxB features associated with variable annuity products and other general account annuities with other than nominal market risk.
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 updated quarterly using an upper medium grade (low credit risk) fixed-income instrument yield.amortized on a constant level basis over the expected term of the contracts.
4. Expanded footnote disclosures. The ASU requires additional disclosures including information about significant inputs, judgements, assumptions and methods used in measurement. | In November 2020, the FASB issued ASU 2020-11 which deferred the effective date of the amendments in ASU 2018-12 for all insurance entities. ASU 2018-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is 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”)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.
For MRBs, the ASU should be applied retrospectively as of the beginning of the earliest period presented. | The Company is currently evaluatingcontinues to progress with implementation efforts and the evaluation of the impact that adoption of this guidance will have on the Company’s consolidated financial statements, howeverstatements. Due to its extensive nature, 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,statements, as well as systems, processes and controls. Effective January 1, 2023, the new guidance will be adopted using the modified retrospective approach, except for MRBs which will use the full retrospective approach.
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2. Measurement
The Company has created a governance framework and implementation plan to ensure timely adoption of marketthe guidance. In preparation for implementation, the Company continues to refine key accounting policy decisions, modernize processes and update internal controls. These changes include modifications of actuarial valuation systems, data sourcing, analytical procedures and reporting processes.
The impact on total equity of applying this ASU is estimated to be positive to the current amount of reported total equity as of June 30, 2022. As of June 30, 2022, a positive impact to AOCI is expected due to increases in the Company’s estimate of its non-performance risk benefits (“MRBs”).on variable annuity guarantees accounted for as MRBs as definedfor the first time under the ASU, will encompass certainguidance. The estimated impact to the retained earnings element of total equity as of June 30, 2022, due to accounting for variable annuity guaranteed benefit (“GMxB”) features associated with variable annuity products and other general account annuities with other than nominal market risk. The ASU requiresguarantees as MRBs to bethat are not currently measured at fair value, with changesis mitigated by the Company’s present use of a near industry low interest rate assumption of 2.25% on GMIB business. Because movements in value attributable to changes in instrument-specificequity markets, interest rates and credit risk recognized in Other comprehensive income (“OCI”).3. Amortizationspreads are unpredictable and at times volatile, it is possible that the estimated effects of deferred acquisition costs. The ASU simplifies the amortization of deferred acquisition costsadoption could change materially between June 30, 2022 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.
January 1, 2023. |
|
| For MRBs, the ASU should be applied retrospectively as of the beginning of the earliest period presented. | |
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 |
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 is currently assessing the applicability of the optional expedients and exceptions provided under the ASU. Management is evaluating the impact that the adoption of this guidance will have on the Company’s consolidated financial statements. |
Investments
The carrying values of fixed maturities classified as 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. Changes in credit losses are recognized in Investment gains (losses), net. The redeemable preferred stock investments that are reported in fixed maturities include 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. Integral to this review is an assessment made each quarter, on a security-by-security basis, by the Company’s 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.
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.
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.
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. As of September 30, 2021 and December 31, 2020, the carrying value of COLI was $1.0 billion and $989 million, respectively, and is reported in other invested assets in the consolidated balance sheets.
Derivatives
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, values of securities or commodities, credit spreads, market volatility, expected returns and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior and non-performance risk used in valuation models. Derivative financial instruments generally used by the Company include equity, currency, and interest rate futures, total return and/or other equity swaps, interest rate swaps and floors, swaptions, variance swaps and equity options, all of which may be exchange-traded or contracted in the OTC market. All derivative positions are carried in the consolidated balance sheets at fair value, generally by obtaining quoted market prices or through the use of valuation models.
Freestanding derivative contracts are reported in the consolidated balance sheets either as assets within “other invested assets” or as liabilities within “other liabilities”. The Company nets the fair value of all derivative financial instruments with counterparties for which an ISDA Master Agreement and related CSA have been executed. All changes in the fair value of the Company’s freestanding derivative positions not designated to hedge accounting relationships, including net receipts and payments, are included in “net derivative gains (losses)” without considering changes in the fair value of the economically associated assets or liabilities.
The Company has designated certain derivatives it uses to economically manage asset/liability risk in relationships which qualify for hedge accounting. To qualify for hedge accounting, we formally document our designation at inception of the hedge relationship as a cash flow, fair value or net investment hedge. This documentation includes our risk management objective and strategy for undertaking the hedging transaction. The Company identifies how the hedging instrument is expected to offset the designated risks related to the hedged item and the method that will be used to retrospectively and prospectively assess the hedge effectiveness. To qualify for hedge accounting, a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed and documented at inception and periodically throughout the life of the hedge accounting relationship.
The Company does not exclude any components of the hedging instrument from the effectiveness assessments and therefor does not separately measure or account for any excluded components of the hedging instrument.
While in cash flow hedge relationships, any periodic net receipts and payments from the hedging instrument are included in the income or expense line that the hedged item’s periodic income or expense is recognized. Other changes in the fair value of the hedging instrument while in a cash flow hedging relationship are reported within OCI. These amounts are deferred in AOCI until they are reclassified to Net income (loss). The reclassified amount offsets the effect of the cash flows on Net income (loss) in the same period when the hedged item affects earnings and on the same line as the hedged item.
We discontinue cash flow hedge accounting prospectively when the Company determines: (1) the hedging instrument is no longer highly effective in offsetting changes in the cash flow from the hedged risk, (2) the hedged item is no longer probable of occurring within two months of their forecast, or (3) the hedging instrument is otherwise redesignated from the hedging relationship. Changes in the fair value of the derivative after discontinuation of cash flow hedge accounting are accounted for as freestanding derivative positions not designated to hedge accounting relationships unless and until the derivative is redesignated to a hedge accounting relationship. When cash flow hedge accounting is discontinued the amounts deferred in AOCI during the hedge relationship continue to be deferred in
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
AOCI, as long as the hedged items continue to be probable of occurring within two months of their forecast, until the hedged item affects Net income (loss). Any amount deferred in AOCI for hedged items which are no longer probable of occurring within two months of their forecast will be reclassified to “net derivative gains (losses)” at that time.
The Company is a party to financial instruments and other contracts that contain “embedded” derivative instruments. At inception, the Company assesses whether the economic characteristics of the embedded instrument are “clearly and closely related” to the economic characteristics of the remaining component of the “host contract” and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. Once those criteria are met, the resulting embedded derivative is bifurcated from the host contract, carried in the consolidated balance sheets at fair value, and changes in its fair value are recognized immediately and captioned in the consolidated statements of income (loss) according to the nature of the related host contract. For certain financial instruments that contain an embedded derivative that otherwise would need to be bifurcated and reported at fair value, the Company instead may elect to carry the entire instrument at fair value.
Reinsurance
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. Cessions under reinsurance agreements do not discharge the Company’s obligations as the primary insurer. The Company reviews all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims.
For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference, if any, between the amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered the net cost of reinsurance at the inception of the reinsurance agreement. The net cost of reinsurance is recorded as an adjustment and recognized as a component of other expenses on a basis consistent with the expected life of the underlying reinsured contracts. Subsequent amounts paid (received) on the reinsurance of in-force blocks, as well as amounts paid (received) related to new business, are recorded as premiums ceded (assumed); and amounts due from reinsurers (amounts due to reinsurers) are established.
Assets and liabilities relating to reinsurance agreements with the same reinsurer may be recorded net on the balance sheet, if a right of offset exists within the reinsurance agreement. In the event that reinsurers do not meet their obligations to the Company under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible. Reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance.
Premiums, policy charges and fee income, and policyholders’ benefits include amounts assumed under reinsurance agreements and are net of reinsurance ceded. Amounts received from reinsurers for policy administration are reported in other revenues. With respect to GMIBs, a portion of the directly written GMIBs are accounted for as insurance liabilities, but the associated reinsurance agreements contain embedded derivatives as they are net settled. These embedded derivatives are included in GMIB reinsurance contract asset, at fair value with changes in estimated fair value reported in net derivative gains (losses). Separate Account liabilities that have been ceded on a Modified coinsurance (Modco) basis, receivable and payable have been recognized on a net basis as right of setoff exists.
If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits received are included in other liabilities and deposits made are included within other assets. As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other income or other operating costs and expenses, as appropriate. Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other revenues or other expenses, as appropriate.
For reinsurance contracts other than those accounted for as derivatives, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities.
Accounting and Consolidation of VIEs
For all new investment products and entities developed by the Company, 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
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
VIE, the Company then determines whether it is the primary beneficiary of the 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.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Management of the Company reviews quarterly its investment management agreements and its investments in, and other financial arrangements with, certain entities that hold client 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 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.
Consolidated VIEs
As of SeptemberJune 30, 20212022 and December 31, 2020,2021 , the Company consolidated limited partnerships and LLCs for which it was identified as the primary beneficiary under the VIEVIEs model. Included in Other invested assets and Mortgage loans on real estate in the Company’s consolidated balance sheets at SeptemberJune 30, 20212022 and December 31, 20202021 are total assets of $133$193 million and $12$169 million, respectively related to these VIE.VIEs.
Non-Consolidated VIEs
As of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, the Company held approximately $2.0$2.3 billion and $1.3$2.1 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 other equity investments and applies the equity method of accounting for these positions. The net assets of these non-consolidated VIEs are approximately $240.7$278.0 billion and $165.8$245.7 billion as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively. The Company’s maximum exposure to loss from its direct involvement with these VIEs is the carrying value of its investment of $2.0$2.3 billion and $1.3$2.1 billion and approximately $1.3 billion and $1.2 billion of unfunded commitments as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively. The Company has no further economic interest in these VIEs in the form of guarantees, derivatives, credit enhancements or similar instruments and obligations.
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 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.
Due 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 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.
Annual Update
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
The net impact of assumption changes in the third quarter of 2021 decreased policy charges and fee income by $32 million, decreased policyholders’ benefits by $100 million, decreased net derivative gains by $249 million, and decreased amortization of DAC by $19 million. This resulted in a decrease in income (loss) from operations, before income taxes of $162 million and decreased net income (loss) by $128 million. As part of this annual update, the reference interest rate utilized in our GAAP fair value calculations was updated from the LIBOR swap curve to the US Treasury curve due to the impending cessation of LIBOR and our GAAP fair value liability risk margins were increased, resulting in little impact to overall valuation as our view regarding market participant pricing of our guarantees has not changed at this time.
The net impact of assumption changes in the third quarter of 2020 decreased policy charges and fee income by $21 million, increased policyholders’ benefits by $175 million, increased interest credited to policyholders’ account balances by $8 million, increased net derivative gains by $106 million, and increased amortization of DAC by $26 million. This resulted in a decrease in income (loss) from operations, before income taxes of $124 million and decreased net income (loss) by $98 million.
First Quarter of 2020 Update
The net impact of the economic assumption update in the first quarter of 2020 increased policy charges and fee income by $54 million, increased policyholders’ benefits by $1.3 billion, decreased interest credited to policyholders’ account balances by $6 million, and increased amortization of DAC by $840 million. This resulted in a decrease in income (loss) from continuing operations, before income taxes of $2.1 billion and decreased net income (loss) of $1.7 billion
Model Changes
There were no material assumption updates or model changes in the first nine monthsand second quarters of 2022 or 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 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 (loss) from continuing operations, before income taxes of $165 million, and an increase to net income (loss) of $130 million during the first nine months of 2020.
3) INVESTMENTS
Fixed Maturities AFS
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 other assets. Accrued interest receivable on AFS fixed maturities as of SeptemberJune 30, 2022 and December 31, 2021 was $473 million.$501 million and $470 million, respectively. There was noaccrued interest written off for AFS fixed maturities for the three and ninesix months ended SeptemberJune 30, 2022 and 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
The following tables provide information relating to the Company’s fixed maturities classified as AFS.
AFS Fixed Maturities by Classification
| | | Amortized
Cost | | Allowance for Credit Losses | | 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) |
| September 30, 2021 | | |
| June 30, 2022 | | June 30, 2022 | |
| Fixed Maturities: | Fixed Maturities: | | Fixed Maturities: | |
| Corporate (1) | Corporate (1) | $ | 44,856 | | | $ | 27 | | | $ | 2,787 | | | $ | 164 | | | $ | 47,452 | | Corporate (1) | $ | 47,317 | | | $ | 19 | | | $ | 162 | | | $ | 5,313 | | | $ | 42,147 | |
| U.S. Treasury, government and agency | U.S. Treasury, government and agency | 13,464 | | | — | | | 1,642 | | | 23 | | | 15,083 | | U.S. Treasury, government and agency | 7,431 | | | — | | | 36 | | | 593 | | | 6,874 | |
| States and political subdivisions | States and political subdivisions | 504 | | | — | | | 77 | | | 3 | | | 578 | | States and political subdivisions | 622 | | | — | | | 24 | | | 53 | | | 593 | |
| Foreign governments | Foreign governments | 977 | | | — | | | 43 | | | 17 | | | 1,003 | | Foreign governments | 1,094 | | | — | | | 5 | | | 140 | | | 959 | |
| Residential mortgage-backed (2) | Residential mortgage-backed (2) | 90 | | | — | | | 8 | | | — | | | 98 | | Residential mortgage-backed (2) | 508 | | | — | | | 3 | | | 8 | | | 503 | |
| Asset-backed (3) | Asset-backed (3) | 5,542 | | | — | | | 28 | | | 4 | | | 5,566 | | Asset-backed (3) | 8,681 | | | — | | | 4 | | | 403 | | | 8,282 | |
| Commercial mortgage-backed | Commercial mortgage-backed | 1,858 | | | — | | | 28 | | | 12 | | | 1,874 | | Commercial mortgage-backed | 3,647 | | | — | | | — | | | 375 | | | 3,272 | |
Redeemable preferred stock (4) | Redeemable preferred stock (4) | 41 | | | — | | | 13 | | | — | | | 54 | | Redeemable preferred stock (4) | 40 | | | — | | | 4 | | | — | | | 44 | |
| Total at September 30, 2021 | $ | 67,332 | | | $ | 27 | | | $ | 4,626 | | | $ | 223 | | | $ | 71,708 | | |
| Total at June 30, 2022 | | Total at June 30, 2022 | $ | 69,340 | | | $ | 19 | | | $ | 238 | | | $ | 6,885 | | | $ | 62,674 | |
| | December 31, 2020: | | |
| December 31, 2021: | | December 31, 2021: | |
| Fixed Maturities: | Fixed Maturities: | | Fixed Maturities: | |
| Corporate (1) | Corporate (1) | $ | 48,501 | | | $ | 13 | | | $ | 4,703 | | | $ | 89 | | | $ | 53,102 | | Corporate (1) | $ | 45,578 | | | $ | 22 | | | $ | 2,382 | | | $ | 214 | | | $ | 47,724 | |
| U.S. Treasury, government and agency | U.S. Treasury, government and agency | 12,644 | | | — | | | 3,304 | | | 5 | | | 15,943 | | U.S. Treasury, government and agency | 13,032 | | | — | | | 2,196 | | | 14 | | | 15,214 | |
| States and political subdivisions | States and political subdivisions | 482 | | | — | | | 92 | | | — | | | 574 | | States and political subdivisions | 527 | | | — | | | 73 | | | 3 | | | 597 | |
| Foreign governments | Foreign governments | 1,011 | | | — | | | 98 | | | 6 | | | 1,103 | | Foreign governments | 1,124 | | | — | | | 42 | | | 14 | | | 1,152 | |
| Residential mortgage-backed (2) | Residential mortgage-backed (2) | 119 | | | — | | | 12 | | | — | | | 131 | | Residential mortgage-backed (2) | 82 | | | — | | | 8 | | | — | | | 90 | |
| Asset-backed (3) | Asset-backed (3) | 3,633 | | | — | | | 28 | | | 5 | | | 3,656 | | Asset-backed (3) | 5,904 | | | — | | | 20 | | | 19 | | | 5,905 | |
| Commercial mortgage-backed | Commercial mortgage-backed | 1,148 | | | — | | | 55 | | | — | | | 1,203 | | Commercial mortgage-backed | 2,348 | | | — | | | 19 | | | 26 | | | 2,341 | |
| Redeemable preferred stock | Redeemable preferred stock | 598 | | | — | | | 46 | | | 3 | | | 641 | | Redeemable preferred stock | 41 | | | — | | | 12 | | | — | | | 53 | |
| Total at December 31, 2020 | $ | 68,136 | | | $ | 13 | | | $ | 8,338 | | | $ | 108 | | | $ | 76,353 | | |
| Total at December 31, 2021 | | Total at December 31, 2021 | $ | 68,636 | | | $ | 22 | | | $ | 4,752 | | | $ | 290 | | | $ | 73,076 | |
______________
(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.securities and other asset types.
(4) 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 as of SeptemberJune 30, 20212022 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 | | Amortized Cost (Less Allowance for Credit Losses) | | Fair Value |
| | | (in millions) | | (in millions) |
| September 30, 2021: | | |
| June 30, 2022: | | June 30, 2022: | |
| Contractual maturities: | Contractual maturities: | | Contractual maturities: | |
| Due in one year or less | Due in one year or less | $ | 1,649 | | | $ | 1,660 | | Due in one year or less | $ | 1,071 | | | $ | 1,065 | |
| Due in years two through five | Due in years two through five | 15,999 | | | 16,774 | | Due in years two through five | 12,955 | | | 12,537 | |
| Due in years six through ten | Due in years six through ten | 15,819 | | | 16,848 | | Due in years six through ten | 16,795 | | | 15,442 | |
| Due after ten years | Due after ten years | 26,307 | | | 28,834 | | Due after ten years | 25,624 | | | 21,529 | |
| Subtotal | Subtotal | 59,774 | | | 64,116 | | Subtotal | 56,445 | | | 50,573 | |
| Residential mortgage-backed | Residential mortgage-backed | 90 | | | 98 | | Residential mortgage-backed | 508 | | | 503 | |
| Asset-backed | Asset-backed | 5,542 | | | 5,566 | | Asset-backed | 8,681 | | | 8,282 | |
| Commercial mortgage-backed | Commercial mortgage-backed | 1,858 | | | 1,874 | | Commercial mortgage-backed | 3,647 | | | 3,272 | |
| Redeemable preferred stock | Redeemable preferred stock | 41 | | | 54 | | Redeemable preferred stock | 40 | | | 44 | |
| Total at September 30, 2021 | $ | 67,305 | | | $ | 71,708 | | |
| Total at June 30, 2022 | | Total at June 30, 2022 | $ | 69,321 | | | $ | 62,674 | |
The following table shows proceeds from sales, gross gains (losses) from sales and allowance for credit losses for AFS fixed maturities for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020:2021:
Proceeds from Sales, Gross Gains (Losses) from Sales and Allowance for Credit Losses for AFS Fixed Maturities
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | | |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 | | |
| | | (in millions) | | (in millions) |
| Proceeds from sales | Proceeds from sales | $ | 3,575 | | | $ | 1,399 | | | $ | 20,294 | | | $ | 5,985 | | | Proceeds from sales | $ | 3,298 | | | $ | 9,531 | | | $ | 10,634 | | | $ | 16,719 | | | |
| Gross gains on sales | Gross gains on sales | $ | 172 | | | $ | 23 | | | $ | 1,017 | | | $ | 297 | | | Gross gains on sales | $ | 9 | | | $ | 554 | | | $ | 38 | | | $ | 845 | | | |
| Gross losses on sales | Gross losses on sales | $ | (6) | | | $ | (5) | | | $ | (160) | | | $ | (32) | | | Gross losses on sales | $ | (229) | | | $ | (38) | | | $ | (590) | | | $ | (154) | | | |
| | Credit losses | $ | (2) | | | $ | — | | | $ | (14) | | | $ | (13) | | | |
| Net change in Allowance for Credit losses | | Net change in Allowance for Credit losses | $ | 2 | | | $ | (6) | | | $ | 3 | | | $ | (12) | | | |
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.
AFS Fixed Maturities - Credit Loss Impairments
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 | |
| | (in millions) | | (in millions) | |
| Balance, beginning of period | Balance, beginning of period | $ | 40 | | | $ | 28 | | | $ | 28 | | | $ | 15 | | Balance, beginning of period | $ | 41 | | | $ | 34 | | | $ | 42 | | | $ | 28 | | |
| Previously recognized impairments on securities that matured, paid, prepaid or sold | Previously recognized impairments on securities that matured, paid, prepaid or sold | (2) | | | — | | | (3) | | | — | | Previously recognized impairments on securities that matured, paid, prepaid or sold | (11) | | | (1) | | | (13) | | | (1) | | |
| 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) | — | | | — | | | — | | | — | | |
| 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 | 1 | | | (2) | | | 9 | | | 7 | | Credit losses recognized this period on securities for which credit losses were not previously recognized | 1 | | | 6 | | | 1 | | | 8 | | |
| Additional credit losses this period on securities previously impaired | Additional credit losses this period on securities previously impaired | 1 | | | 2 | | | 6 | | | 6 | | Additional credit losses this period on securities previously impaired | 1 | | | 1 | | | 2 | | | 5 | | |
| 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 | — | | | — | | | — | | | — | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | 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) | — | | | — | | | — | | | — | | |
| Balance at September 30, | $ | 40 | | | $ | 28 | | | $ | 40 | | | $ | 28 | | |
| Balance at June 30, | | Balance at June 30, | $ | 32 | | | $ | 40 | | | $ | 32 | | | $ | 40 | | |
______________
(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.
The tables that follow below present a roll-forward of net unrealized investment gains (losses) recognized in AOCI.
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, July 1, 2021 | $ | 4,931 | | | $ | (389) | | | $ | (1,037) | | | $ | (736) | | | $ | 2,769 | |
| Net investment gains (losses) arising during the period | (362) | | | — | | | — | | | — | | | (362) | |
| Reclassification adjustment: | | | | | | | | | — | |
| Included in Net income (loss) | (165) | | | — | | | — | | | — | | | (165) | |
| Excluded from Net income (loss) | — | | | — | | | — | | | — | | | — | |
| Other | — | | | — | | | — | | | — | | | — | |
| Impact of net unrealized investment gains (losses) | — | | | 28 | | | 55 | | | 93 | | | 176 | |
| Net unrealized investment gains (losses) excluding credit losses | 4,404 | | | (361) | | | (982) | | | (643) | | | 2,418 | |
| Net unrealized investment gains (losses) with credit losses | (1) | | | — | | | — | | | — | | | (1) | |
| Balance, September 30, 2021 | $ | 4,403 | | | $ | (361) | | | $ | (982) | | | $ | (643) | | | $ | 2,417 | |
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| Balance, July 1, 2020 | $ | 8,207 | | | $ | (494) | | | $ | (1,801) | | | $ | (1,242) | | | $ | 4,670 | |
| Net investment gains (losses) arising during the period | 345 | | | — | | | — | | | — | | | 345 | |
| Reclassification adjustment: | | | | | | | | | — | |
| Included in Net income (loss) | (18) | | | — | | | — | | | — | | | (18) | |
| Excluded from Net income (loss) | — | | | — | | | — | | | — | | | — | |
| Impact of net unrealized investment gains (losses) | — | | | 54 | | | (6) | | | (79) | | | (31) | |
| Net unrealized investment gains (losses) excluding credit losses | 8,534 | | | (440) | | | (1,807) | | | (1,321) | | | 4,966 | |
| Net unrealized investment gains (losses) with credit losses | 3 | | | — | | | (1) | | | — | | | 2 | |
| Balance, September 30, 2020 | $ | 8,537 | | | $ | (440) | | | $ | (1,808) | | | $ | (1,321) | | | $ | 4,968 | |
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| 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, 2022 | $ | (1,277) | | | $ | 244 | | | $ | (213) | | | $ | 262 | | | $ | (984) | |
| Net investment gains (losses) arising during the period | (5,590) | | | — | | | — | | | — | | | (5,590) | |
| Reclassification adjustment: | | | | | | | | | |
| Included in net income (loss) | 223 | | | — | | | — | | | — | | | 223 | |
| Excluded from net income (loss) | — | | | — | | | — | | | — | | | — | |
| Other | — | | | — | | | — | | | — | | | — | |
| Impact of net unrealized investment gains (losses) | — | | | 607 | | | (38) | | | 1,007 | | | 1,576 | |
| Net unrealized investment gains (losses) excluding credit losses | (6,644) | | | 851 | | | (251) | | | 1,269 | | | (4,775) | |
| Net unrealized investment gains (losses) with credit losses | (3) | | | — | | | 1 | | | 1 | | | (1) | |
| Balance, June 30, 2022 | $ | (6,647) | | | $ | 851 | | | $ | (250) | | | $ | 1,270 | | | $ | (4,776) | |
| | | | | | | | | |
| Balance, April 1, 2021 | $ | 3,124 | | | $ | (301) | | | $ | (811) | | | $ | (423) | | | $ | 1,589 | |
| Net investment gains (losses) arising during the period | 2,196 | | | — | | | — | | | — | | | 2,196 | |
| Reclassification adjustment: | | | | | | | | | — | |
| Included in net income (loss) | (398) | | | — | | | — | | | — | | | (398) | |
| Excluded from net income (loss) | — | | | — | | | — | | | — | | | — | |
| Other (1) | — | | | — | | | — | | | — | | | — | |
| Impact of net unrealized investment gains (losses) | — | | | (87) | | | (224) | | | (312) | | | (623) | |
| Net unrealized investment gains (losses) excluding credit losses | 4,922 | | | (388) | | | (1,035) | | | (735) | | | 2,764 | |
| Net unrealized investment gains (losses) with credit losses | 9 | | | (1) | | | (2) | | | (1) | | | 5 | |
| Balance, June 30, 2021 | $ | 4,931 | | | $ | (389) | | | $ | (1,037) | | | $ | (736) | | | $ | 2,769 | |
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EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes 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) | |
| Balance, January 1, 2021 | $ | 8,230 | | | $ | (466) | | | $ | (1,814) | | | $ | (1,250) | | | $ | 4,700 | | |
| Net investment gains (losses) arising during the period | (3,057) | | | — | | | — | | | — | | | (3,057) | | |
| Reclassification adjustment: | | | | | | | | | — | | |
| Included in net income (loss) | (739) | | | — | | | — | | | — | | | (739) | | |
| Excluded from net income (loss) | — | | | — | | | — | | | — | | | — | | |
| Other (1) | (31) | | | — | | | — | | | — | | | (31) | | |
| Impact of net unrealized investment gains (losses) | — | | | 105 | | | 832 | | | 607 | | | 1,544 | | |
| Net unrealized investment gains (losses) excluding credit losses | 4,403 | | | (361) | | | (982) | | | (643) | | | 2,417 | | |
| Net unrealized investment gains (losses) with credit losses | — | | | — | | | — | | | — | | | — | | |
| Balance, September 30, 2021 | $ | 4,403 | | | $ | (361) | | | $ | (982) | | | $ | (643) | | | $ | 2,417 | | |
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| Balance, January 1, 2020 | $ | 3,084 | | | $ | (826) | | | $ | (192) | | | $ | (433) | | | $ | 1,633 | | |
| Net investment gains (losses) arising during the period | 5,707 | | | — | | | — | | | — | | | 5,707 | | |
| Reclassification adjustment: | | | | | | | | | | |
| Included in net income (loss) | (248) | | | — | | | — | | | — | | | (248) | | |
| Excluded from net income (loss) | — | | | — | | | — | | | — | | | — | | |
| Impact of net unrealized investment gains (losses) | — | | | 386 | | | (1,617) | | | (889) | | | (2,120) | | |
| Net unrealized investment gains (losses) excluding credit losses | 8,543 | | | (440) | | | (1,809) | | | (1,322) | | | 4,972 | | |
| Net unrealized investment gains (losses) with credit losses | (6) | | | — | | | 1 | | | 1 | | | (4) | | |
| Balance, September 30, 2020 | $ | 8,537 | | | $ | (440) | | | $ | (1,808) | | | $ | (1,321) | | | $ | 4,968 | | |
_____________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2022 | $ | 4,462 | | | $ | (284) | | | $ | (977) | | | $ | (673) | | | $ | 2,528 | |
| Net investment gains (losses) arising during the period | (11,655) | | | — | | | — | | | — | | | (11,655) | |
| Reclassification adjustment: | | | | | | | | | — | |
| Included in net income (loss) | 554 | | | — | | | — | | | — | | | 554 | |
| Excluded from net income (loss) | — | | | — | | | — | | | — | | | — | |
| Other | — | | | — | | | — | | | — | | | — | |
| Impact of net unrealized investment gains (losses) | — | | | 1,134 | | | 727 | | | 1,941 | | | 3,802 | |
| Net unrealized investment gains (losses) excluding credit losses | (6,639) | | | 850 | | | (250) | | | 1,268 | | | (4,771) | |
| Net unrealized investment gains (losses) with credit losses | (8) | | | 1 | | | — | | | 2 | | | (5) | |
| Balance, June 30, 2022 | $ | (6,647) | | | $ | 851 | | | $ | (250) | | | $ | 1,270 | | | $ | (4,776) | |
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| Balance, January 1, 2021 | $ | 8,230 | | | $ | (466) | | | $ | (1,814) | | | $ | (1,250) | | | $ | 4,700 | |
| Net investment gains (losses) arising during the period | (2,695) | | | — | | | — | | | — | | | (2,695) | |
| Reclassification adjustment: | | | | | | | | | — | |
| Included in net income (loss) | (574) | | | — | | | — | | | — | | | (574) | |
| Excluded from net income (loss) | — | | | — | | | — | | | — | | | — | |
| Other (1) | (31) | | | — | | | — | | | — | | | (31) | |
| Impact of net unrealized investment gains (losses) | — | | | 77 | | | 777 | | | 514 | | | 1,368 | |
| Net unrealized investment gains (losses) excluding credit losses | 4,930 | | | (389) | | | (1,037) | | | (736) | | | 2,768 | |
| Net unrealized investment gains (losses) with credit losses | 1 | | | — | | | — | | | — | | | 1 | |
| Balance, June 30, 2021 | $ | 4,931 | | | $ | (389) | | | $ | (1,037) | | | $ | (736) | | | $ | 2,769 | |
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(1) Effective January 1, 2021, certain preferred stock have been reclassified to other equity investments (see Note 2 - Significant Accounting Policies – Investments).investments.
The following tables disclose the fair values and gross unrealized losses of the 1,2994,589 issues as of SeptemberJune 30, 20212022 and the 5371,896 issues as of December 31, 20202021 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:
AFS Fixed Maturities in an Unrealized Loss Position for Which No Allowance Is Recorded
| | | | 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) |
| September 30, 2021 | | |
| June 30, 2022 | | June 30, 2022 | |
| Fixed Maturities: | Fixed Maturities: | | Fixed Maturities: | |
| Corporate | Corporate | $ | 7,308 | | | $ | 139 | | | $ | 479 | | | $ | 23 | | | $ | 7,787 | | | $ | 162 | | Corporate | $ | 34,638 | | | $ | 4,892 | | | $ | 2,398 | | | $ | 418 | | | $ | 37,036 | | | $ | 5,310 | |
| U.S. Treasury, government and agency | U.S. Treasury, government and agency | 1,417 | | | 23 | | | — | | | — | | | 1,417 | | | 23 | | U.S. Treasury, government and agency | 5,820 | | | 582 | | | 87 | | | 11 | | | 5,907 | | | 593 | |
| States and political subdivisions | States and political subdivisions | 102 | | | 2 | | | 7 | | | 1 | | | 109 | | | 3 | | States and political subdivisions | 236 | | | 49 | | | 11 | | | 4 | | | 247 | | | 53 | |
| Foreign governments | 380 | | | 11 | | | 42 | | | 6 | | | 422 | | | 17 | | |
| | Asset-backed | 817 | | | 4 | | | 20 | | | — | | | 837 | | | 4 | | |
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) |
| Foreign governments | | Foreign governments | 734 | | | 118 | | | 102 | | | 22 | | | 836 | | | 140 | |
| Residential mortgage-backed | | Residential mortgage-backed | 438 | | | 8 | | | 1 | | | — | | | 439 | | | 8 | |
| Asset-backed | | Asset-backed | 7,710 | | | 391 | | | 205 | | | 12 | | | 7,915 | | | 403 | |
| Commercial mortgage-backed | Commercial mortgage-backed | 887 | | | 12 | | | 2 | | | — | | | 889 | | | 12 | | Commercial mortgage-backed | 3,076 | | | 345 | | | 164 | | | 30 | | | 3,240 | | | 375 | |
| | Total at September 30, 2021 | $ | 10,911 | | | $ | 191 | | | $ | 550 | | | $ | 30 | | | $ | 11,461 | | | $ | 221 | | |
| Total at June 30, 2022 | | Total at June 30, 2022 | $ | 52,652 | | | $ | 6,385 | | | $ | 2,968 | | | $ | 497 | | | $ | 55,620 | | | $ | 6,882 | |
| | December 31, 2020: | | |
| December 31, 2021: | | December 31, 2021: | |
| Fixed Maturities: | Fixed Maturities: | | Fixed Maturities: | |
| Corporate | Corporate | $ | 2,773 | | | $ | 52 | | | $ | 332 | | | $ | 32 | | | $ | 3,105 | | | $ | 84 | | Corporate | $ | 9,497 | | | $ | 150 | | | $ | 1,301 | | | $ | 62 | | | $ | 10,798 | | | $ | 212 | |
| U.S. Treasury, government and agency | U.S. Treasury, government and agency | 881 | | | 5 | | | — | | | — | | | 881 | | | 5 | | U.S. Treasury, government and agency | 947 | | | 10 | | | 103 | | | 4 | | | 1,050 | | | 14 | |
| | States and political subdivisions | | States and political subdivisions | 112 | | | 2 | | | 11 | | | 1 | | | 123 | | | 3 | |
| Foreign governments | Foreign governments | 153 | | | 2 | | | 20 | | | 4 | | | 173 | | | 6 | | Foreign governments | 349 | | | 6 | | | 92 | | | 8 | | | 441 | | | 14 | |
| | Asset-backed | Asset-backed | 809 | | | 4 | | | 76 | | | 1 | | | 885 | | | 5 | | Asset-backed | 3,843 | | | 19 | | | 38 | | | — | | | 3,881 | | | 19 | |
| Commercial mortgage-backed | | Commercial mortgage-backed | 1,515 | | | 22 | | | 96 | | | 4 | | | 1,611 | | | 26 | |
| | Redeemable preferred stock | 53 | | | 1 | | | 11 | | | 2 | | | 64 | | | 3 | | |
| Total at December 31, 2020 | $ | 4,669 | | | $ | 64 | | | $ | 439 | | | $ | 39 | | | $ | 5,108 | | | $ | 103 | | |
| Total at December 31, 2021 | | Total at December 31, 2021 | $ | 16,263 | | | $ | 209 | | | $ | 1,641 | | | $ | 79 | | | $ | 17,904 | | | $ | 288 | |
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%0.5% of total corporate securities. The largest exposures to a single issuer of corporate securities held as of SeptemberJune 30, 20212022 and December 31, 20202021 were $292$219 million and $338$280 million, respectively, representing 3.4%6.3% and 2.9%3.2% 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 NAIC designation of 3 (medium investment grade), 4 or 5 (below investment grade) or 6 (in or near default). As of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, approximately $3.0$2.9 billion and $2.4$2.8 billion, or 4.4%4.2% and 3.6%4.1%, of the $67.3$69.3 billion and $68.1$68.6 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 $20$207 million and $48$18 million as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively.
As of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, the $30$497 million and $39$79 million of gross unrealized losses of twelve months or more were primarily concentrated in corporate securities. In accordance with the policy described in Note 2 of the Notes to these Consolidated Financial Statements, the Company concluded that an adjustment to allowance for credit losses for these securities was not warranted at either SeptemberJune 30, 20212022 or December 31, 2020.2021. As of SeptemberJune 30, 20212022 and December 31, 2020,2021, 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.
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 SeptemberJune 30, 2021,2022, the Company determined that the unrealized loss was primarily due to increases in interest rates, credit spreads and changes in credit ratings.
Mortgage Loans on Real Estate
Accrued interest receivable on commercial and agricultural mortgage loans as of SeptemberJune 30, 2022 and December 31, 2021 was $30$58 million and $29$57 million, respectively. There was no accrued interest written off for commercial and agricultural mortgage loans for the three and ninesix months ended SeptemberJune 30, 2022 and 2021.
As of SeptemberJune 30, 2021,2022, the Company had no loans for which foreclosure was probable included within the individually assessed mortgage loans, and accordingly had no associated allowance for credit losses.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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 ninesix months ended SeptemberJune 30, 20212022 and 20202021 were as follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 | |
| | (in millions) | | | | | | (in millions) | | (in millions) | |
| Allowance for credit losses on mortgage loans: | 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 | $ | 59 | | | $ | 62 | | | $ | 77 | | | $ | 33 | | Balance, beginning of period | $ | 47 | | | $ | 70 | | | $ | 57 | | | $ | 77 | | |
| Current-period provision for expected credit losses | Current-period provision for expected credit losses | 1 | | | 4 | | | (17) | | | 33 | | Current-period provision for expected credit losses | 11 | | | (11) | | | 1 | | | (18) | | |
| Write-offs charged against the allowance | Write-offs charged against the allowance | — | | | — | | | — | | | 0 | Write-offs charged against the allowance | — | | | — | | | — | | | — | | |
| Recoveries of amounts previously written off | Recoveries of amounts previously written off | — | | | — | | | — | | | 0 | Recoveries of amounts previously written off | | — | | | — | | |
| Net change in allowance | Net change in allowance | 1 | | | 4 | | | (17) | | | 33 | | Net change in allowance | 11 | | | (11) | | | 1 | | | (18) | | |
| Balance, end of period | Balance, end of period | $ | 60 | | | $ | 66 | | | $ | 60 | | | $ | 66 | | Balance, end of period | $ | 58 | | | $ | 59 | | | $ | 58 | | | $ | 59 | | |
| | Agricultural mortgages: | Agricultural mortgages: | | Agricultural mortgages: | | |
| Balance, beginning of period | Balance, beginning of period | $ | 4 | | | $ | 4 | | | $ | 4 | | | $ | 3 | | Balance, beginning of period | $ | 6 | | | $ | 4 | | | $ | 5 | | | $ | 4 | | |
| Current-period provision for expected credit losses | Current-period provision for expected credit losses | — | | | — | | | — | | | 1 | | Current-period provision for expected credit losses | — | | | — | | | 1 | | | 0 | |
| Write-offs charged against the allowance | Write-offs charged against the allowance | — | | | ��� | | | — | | | — | | Write-offs charged against the allowance | — | | | — | | | — | | | — | | |
| Recoveries of amounts previously written off | Recoveries of amounts previously written off | — | | | — | | | — | | | — | | Recoveries of amounts previously written off | — | | | — | | | — | | | — | | |
| Net change in allowance | Net change in allowance | — | | | — | | | — | | | 1 | | Net change in allowance | — | | | — | | | 1 | | | — | | |
| Balance, end of period | Balance, end of period | $ | 4 | | | $ | 4 | | | $ | 4 | | | $ | 4 | | Balance, end of period | $ | 6 | | | $ | 4 | | | $ | 6 | | | $ | 4 | | |
| | Total allowance for credit losses | Total allowance for credit losses | $ | 64 | | | $ | 70 | | | $ | 64 | | | $ | 70 | | Total allowance for credit losses | $ | 64 | | | $ | 63 | | | $ | 64 | | | $ | 63 | | |
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;amortization and
•changes in credit quality; andquality.
•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 as of SeptemberJune 30, 20212022 and December 31, 2020.2021.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
LTV Ratios (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| Amortized Cost Basis by Origination Year |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| (in millions) |
| Mortgage loans: | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | |
| 0% - 50% | $ | — | | | $ | 1 | | | $ | — | | | $ | 184 | | | $ | 324 | | | $ | 910 | | | $ | 1,419 | |
| 50% - 70% | 1,286 | | | 1,265 | | | 390 | | | 619 | | | 492 | | | 2,853 | | | 6,905 | |
| 70% - 90% | 97 | | | 320 | | | 413 | | | 451 | | | 275 | | | 748 | | | 2,304 | |
| 90% plus | — | | | — | | | — | | | 12 | | | 5 | | | 207 | | | 224 | |
| Total commercial | $ | 1,383 | | | $ | 1,586 | | | $ | 803 | | | $ | 1,266 | | | $ | 1,096 | | | $ | 4,718 | | | $ | 10,852 | |
| | | | | | | | | | | | | |
| Agricultural: | | | | | | | | | | | | | |
| 0% - 50% | $ | 113 | | | $ | 215 | | | $ | 130 | | | $ | 131 | | | $ | 133 | | | $ | 774 | | | $ | 1,496 | |
| 50% - 70% | 174 | | | 270 | | | 105 | | | 134 | | | 88 | | | 359 | | | 1,130 | |
| 70% - 90% | — | | | — | | | — | | | — | | | — | | | 17 | | | 17 | |
| 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total agricultural | $ | 287 | | | $ | 485 | | | $ | 235 | | | $ | 265 | | | $ | 221 | | | $ | 1,150 | | | $ | 2,643 | |
| | | | | | | | | | | | | |
| Total mortgage loans: | | | | | | | | | | | | | |
| 0% - 50% | $ | 113 | | | $ | 216 | | | $ | 130 | | | $ | 315 | | | $ | 457 | | | $ | 1,684 | | | $ | 2,915 | |
| 50% - 70% | 1,460 | | | 1,535 | | | 495 | | | 753 | | | 580 | | | 3,212 | | | 8,035 | |
| 70% - 90% | 97 | | | 320 | | | 413 | | | 451 | | | 275 | | | 765 | | | 2,321 | |
| 90% plus | — | | | — | | | — | | | 12 | | | 5 | | | 207 | | | 224 | |
| Total mortgage loans | $ | 1,670 | | | $ | 2,071 | | | $ | 1,038 | | | $ | 1,531 | | | $ | 1,317 | | | $ | 5,868 | | | $ | 13,495 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Amortized Cost Basis by Origination Year |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans Amortized Cost Basis | | Total |
| (in millions) |
| Mortgage loans: | | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | |
| 0% - 50% | $ | 188 | | | $ | — | | | $ | — | | | $ | — | | | $ | 119 | | | $ | 1,185 | | | $ | — | | | $ | — | | | $ | 1,492 | |
| 50% - 70% | 575 | | | 1,790 | | | 1,374 | | | 276 | | | 634 | | | 2,969 | | | 221 | | | — | | | 7,839 | |
| 70% - 90% | 136 | | | 328 | | | 147 | | | 411 | | | 450 | | | 1,055 | | | — | | | 35 | | | 2,562 | |
| 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total commercial | $ | 899 | | | $ | 2,118 | | | $ | 1,521 | | | $ | 687 | | | $ | 1,203 | | | $ | 5,209 | | | $ | 221 | | | $ | 35 | | | $ | 11,893 | |
| | | | | | | | | | | | | | | | | |
| Agricultural: | | | | | | | | | | | | | | | | | |
| 0% - 50% | $ | 103 | | | $ | 192 | | | $ | 214 | | | $ | 124 | | | $ | 129 | | | $ | 788 | | | $ | — | | | $ | — | | | $ | 1,550 | |
| 50% - 70% | 166 | | | 180 | | | 241 | | | 87 | | | 94 | | | 300 | | | — | | | — | | | 1,068 | |
| 70% - 90% | — | | | — | | | — | | | — | | | — | | | 16 | | | — | | | — | | | 16 | |
| 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total agricultural | $ | 269 | | | $ | 372 | | | $ | 455 | | | $ | 211 | | | $ | 223 | | | $ | 1,104 | | | $ | — | | | $ | — | | | $ | 2,634 | |
| | | | | | | | | | | | | | | | | |
| Total mortgage loans: | | | | | | | | | | | | | | | | | |
| 0% - 50% | $ | 291 | | | $ | 192 | | | $ | 214 | | | $ | 124 | | | $ | 248 | | | $ | 1,973 | | | $ | — | | | $ | — | | | $ | 3,042 | |
| 50% - 70% | 741 | | | 1,970 | | | 1,615 | | | 363 | | | 728 | | | 3,269 | | | 221 | | | — | | | 8,907 | |
| 70% - 90% | 136 | | | 328 | | | 147 | | | 411 | | | 450 | | | 1,071 | | | — | | | 35 | | | 2,578 | |
| 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total mortgage loans | $ | 1,168 | | | $ | 2,490 | | | $ | 1,976 | | | $ | 898 | | | $ | 1,426 | | | $ | 6,313 | | | $ | 221 | | | $ | 35 | | | $ | 14,527 | |
Debt Service Coverage Ratios (2)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| Amortized Cost Basis by Origination Year |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| (in millions) |
| Mortgage loans: | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | |
| Greater than 2.0x | $ | 705 | | | $ | 1,276 | | | $ | 328 | | | $ | 772 | | | $ | 408 | | | $ | 2,194 | | | $ | 5,683 | |
| 1.8x to 2.0x | 132 | | | 136 | | | 233 | | | 93 | | | 269 | | | 385 | | | 1,248 | |
| 1.5x to 1.8x | 183 | | | 115 | | | 167 | | | 223 | | | 166 | | | 825 | | | 1,679 | |
| 1.2x to 1.5x | 64 | | | 59 | | | 75 | | | 54 | | | 253 | | | 838 | | | 1,343 | |
| 1.0x to 1.2x | 299 | | | — | | | — | | | 88 | | | — | | | 255 | | | 642 | |
| Less than 1.0x | — | | | — | | | — | | | 36 | | | — | | | 221 | | | 257 | |
| Total commercial | $ | 1,383 | | | $ | 1,586 | | | $ | 803 | | | $ | 1,266 | | | $ | 1,096 | | | $ | 4,718 | | | $ | 10,852 | |
| | | | | | | | | | | | | |
| Agricultural: | | | | | | | | | | | | | |
| Greater than 2.0x | $ | 37 | | | $ | 66 | | | $ | 25 | | | $ | 16 | | | $ | 33 | | | $ | 217 | | | $ | 394 | |
| 1.8x to 2.0x | 38 | | | 37 | | | 26 | | | 21 | | | 14 | | | 74 | | | 210 | |
| 1.5x to 1.8x | 50 | | | 114 | | | 29 | | | 28 | | | 44 | | | 198 | | | 463 | |
| 1.2x to 1.5x | 122 | | | 180 | | | 114 | | | 117 | | | 73 | | | 375 | | | 981 | |
| 1.0x to 1.2x | 40 | | | 84 | | | 32 | | | 78 | | | 56 | | | 247 | | | 537 | |
| Less than 1.0x | — | | | 4 | | | 9 | | | 5 | | | 1 | | | 39 | | | 58 | |
| Total agricultural | $ | 287 | | | $ | 485 | | | $ | 235 | | | $ | 265 | | | $ | 221 | | | $ | 1,150 | | | $ | 2,643 | |
| | | | | | | | | | | | | |
| Total mortgage loans: | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Amortized Cost Basis by Origination Year |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans Amortized Cost Basis | | Total |
| (in millions) |
| Mortgage loans: | | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | |
| Greater than 2.0x | $ | 420 | | | $ | 1,143 | | | $ | 1,243 | | | $ | 104 | | | $ | 631 | | | $ | 2,061 | | | $ | — | | | $ | — | | | $ | 5,602 | |
| 1.8x to 2.0x | 94 | | | 187 | | | 134 | | | 262 | | | 186 | | | 660 | | | 124 | | | — | | | 1,647 | |
| 1.5x to 1.8x | 270 | | | 275 | | | 49 | | | 266 | | | 190 | | | 1,051 | | | 68 | | | — | | | 2,169 | |
| 1.2x to 1.5x | 35 | | | 260 | | | 95 | | | 11 | | | 48 | | | 1,006 | | | — | | | — | | | 1,455 | |
| 1.0x to 1.2x | — | | | 253 | | | — | | | 44 | | | 148 | | | 360 | | | 29 | | | 35 | | | 869 | |
| Less than 1.0x | 80 | | | — | | | — | | | — | | | — | | | 71 | | | — | | | — | | | 151 | |
| Total commercial | $ | 899 | | | $ | 2,118 | | | $ | 1,521 | | | $ | 687 | | | $ | 1,203 | | | $ | 5,209 | | | $ | 221 | | | $ | 35 | | | $ | 11,893 | |
| | | | | | | | | | | | | | | | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | | September 30, 2021 | | June 30, 2022 |
| | Amortized Cost Basis by Origination Year | | Amortized Cost Basis by Origination Year |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans Amortized Cost Basis | | Total |
| | (in millions) | | (in millions) |
| Agricultural: | | Agricultural: | |
| Greater than 2.0x | | Greater than 2.0x | $ | 48 | | | $ | 40 | | | $ | 63 | | | $ | 22 | | | $ | 12 | | | $ | 215 | | | $ | — | | | $ | — | | | $ | 400 | |
| 1.8x to 2.0x | | 1.8x to 2.0x | 11 | | | 58 | | | 36 | | | 25 | | | 14 | | | 71 | | | — | | | — | | | 215 | |
| 1.5x to 1.8x | | 1.5x to 1.8x | 38 | | | 43 | | | 112 | | | 28 | | | 23 | | | 209 | | | — | | | — | | | 453 | |
| 1.2x to 1.5x | | 1.2x to 1.5x | 73 | | | 156 | | | 175 | | | 100 | | | 101 | | | 332 | | | — | | | — | | | 937 | |
| 1.0x to 1.2x | | 1.0x to 1.2x | 83 | | | 74 | | | 65 | | | 30 | | | 69 | | | 264 | | | — | | | — | | | 585 | |
| Less than 1.0x | | Less than 1.0x | 16 | | | 1 | | | 4 | | | 6 | | | 4 | | | 13 | | | — | | | — | | | 44 | |
| Total agricultural | | Total agricultural | $ | 269 | | | $ | 372 | | | $ | 455 | | | $ | 211 | | | $ | 223 | | | $ | 1,104 | | | $ | — | | | $ | — | | | $ | 2,634 | |
| | Total mortgage loans: | | Total mortgage loans: | | | | | | | | | | | | | | | | | |
| Greater than 2.0x | Greater than 2.0x | $ | 742 | | | $ | 1,342 | | | $ | 353 | | | $ | 788 | | | $ | 441 | | | $ | 2,411 | | | $ | 6,077 | | Greater than 2.0x | $ | 468 | | | $ | 1,183 | | | $ | 1,306 | | | $ | 126 | | | $ | 643 | | | $ | 2,276 | | | $ | — | | | $ | — | | | $ | 6,002 | |
| 1.8x to 2.0x | 1.8x to 2.0x | 170 | | | 173 | | | 259 | | | 114 | | | 283 | | | 459 | | | 1,458 | | 1.8x to 2.0x | 105 | | | 245 | | | 170 | | | 287 | | | 200 | | | 731 | | | 124 | | | — | | | 1,862 | |
| 1.5x to 1.8x | 1.5x to 1.8x | 233 | | | 229 | | | 196 | | | 251 | | | 210 | | | 1,023 | | | 2,142 | | 1.5x to 1.8x | 308 | | | 318 | | | 161 | | | 294 | | | 213 | | | 1,260 | | | 68 | | | — | | | 2,622 | |
| 1.2x to 1.5x | 1.2x to 1.5x | 186 | | | 239 | | | 189 | | | 171 | | | 326 | | | 1,213 | | | 2,324 | | 1.2x to 1.5x | 108 | | | 416 | | | 270 | | | 111 | | | 149 | | | 1,338 | | | — | | | — | | | 2,392 | |
| 1.0x to 1.2x | 1.0x to 1.2x | 339 | | | 84 | | | 32 | | | 166 | | | 56 | | | 502 | | | 1,179 | | 1.0x to 1.2x | 83 | | | 327 | | | 65 | | | 74 | | | 217 | | | 624 | | | 29 | | | 35 | | | 1,454 | |
| Less than 1.0x | Less than 1.0x | — | | | 4 | | | 9 | | | 41 | | | 1 | | | 260 | | | 315 | | Less than 1.0x | 96 | | | 1 | | | 4 | | | 6 | | | 4 | | | 84 | | | — | | | — | | | 195 | |
| Total mortgage loans | Total mortgage loans | $ | 1,670 | | | $ | 2,071 | | | $ | 1,038 | | | $ | 1,531 | | | $ | 1,317 | | | $ | 5,868 | | | $ | 13,495 | | Total mortgage loans | $ | 1,168 | | | $ | 2,490 | | | $ | 1,976 | | | $ | 898 | | | $ | 1,426 | | | $ | 6,313 | | | $ | 221 | | | $ | 35 | | | $ | 14,527 | |
_____________
(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.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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% | $ | — | | | $ | — | | | $ | — | | | $ | 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 | — | | | — | | | 12 | | | 5 | | | — | | | 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% | — | | | — | | | 3 | | | — | | | — | | | 18 | | | 21 | |
| 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 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 | — | | | — | | | 12 | | | 5 | | | — | | | 288 | | | 305 | |
| Total mortgage loans | $ | 2,110 | | | $ | 1,078 | | | $ | 1,600 | | | $ | 1,463 | | | $ | 2,923 | | | $ | 4,049 | | | $ | 13,223 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost Basis by Origination Year |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans Amortized Cost Basis | | Total |
| (in millions) |
| Mortgage loans: | | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | |
| 0% - 50% | $ | — | | | $ | — | | | $ | — | | | $ | 184 | | | $ | 293 | | | $ | 992 | | | $ | — | | | $ | — | | | $ | 1,469 | |
| 50% - 70% | 1,944 | | | 1,286 | | | 339 | | | 619 | | | 491 | | | 2,533 | | | 139 | | | — | | | 7,351 | |
| 70% - 90% | 190 | | | 236 | | | 412 | | | 415 | | | 276 | | | 972 | | | — | | | — | | | 2,501 | |
| 90% plus | — | | | — | | | — | | | 35 | | | 5 | | | 73 | | | — | | | — | | | 113 | |
| Total commercial | $ | 2,134 | | | $ | 1,522 | | | $ | 751 | | | $ | 1,253 | | | $ | 1,065 | | | $ | 4,570 | | | $ | 139 | | | $ | — | | | $ | 11,434 | |
| | | | | | | | | | | | | | | | | |
| Agricultural: | | | | | | | | | | | | | | | | | |
| 0% - 50% | $ | 180 | | | $ | 212 | | | $ | 128 | | | $ | 129 | | | $ | 119 | | | $ | 738 | | | $ | — | | | $ | — | | | $ | 1,506 | |
| 50% - 70% | 200 | | | 268 | | | 102 | | | 126 | | | 87 | | | 338 | | | — | | | — | | | 1,121 | |
| 70% - 90% | — | | | — | | | — | | | — | | | — | | | 17 | | | — | | | — | | | 17 | |
| 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total agricultural | $ | 380 | | | $ | 480 | | | $ | 230 | | | $ | 255 | | | $ | 206 | | | $ | 1,093 | | | $ | — | | | $ | — | | | $ | 2,644 | |
| | | | | | | | | | | | | | | | | |
| Total mortgage loans: | | | | | | | | | | | | | | | | | |
| 0% - 50% | $ | 180 | | | $ | 212 | | | $ | 128 | | | $ | 313 | | | $ | 412 | | | $ | 1,730 | | | $ | — | | | $ | — | | | $ | 2,975 | |
| 50% - 70% | 2,144 | | | 1,554 | | | 441 | | | 745 | | | 578 | | | 2,871 | | | 139 | | | — | | | 8,472 | |
| 70% - 90% | 190 | | | 236 | | | 412 | | | 415 | | | 276 | | | 989 | | | — | | | — | | | 2,518 | |
| 90% plus | — | | | — | | | — | | | 35 | | | 5 | | | 73 | | | — | | | — | | | 113 | |
| Total mortgage loans | $ | 2,514 | | | $ | 2,002 | | | $ | 981 | | | $ | 1,508 | | | $ | 1,271 | | | $ | 5,663 | | | $ | 139 | | | $ | — | | | $ | 14,078 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Debt Service Coverage Ratios (2)
| | | December 31, 2020 | | December 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 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans Amortized Cost Basis | | Total |
| | (in millions) | | (in millions) |
| Mortgage loans: | Mortgage loans: | | Mortgage loans: | |
| Commercial: | Commercial: | | Commercial: | |
| Greater than 2.0x | Greater than 2.0x | $ | 1,230 | | | $ | 492 | | | $ | 772 | | | $ | 268 | | | $ | 1,942 | | | $ | 1,230 | | | $ | 5,934 | | Greater than 2.0x | $ | 1,143 | | | $ | 1,243 | | | $ | 210 | | | $ | 772 | | | $ | 485 | | | $ | 2,218 | | | $ | — | | | $ | — | | | $ | 6,071 | |
| 1.8x to 2.0x | 1.8x to 2.0x | 227 | | | 83 | | | 118 | | | 378 | | | 184 | | | 329 | | | 1,319 | | 1.8x to 2.0x | 185 | | | 135 | | | 182 | | | 46 | | | 161 | | | 372 | | | 68 | | | — | | | 1,149 | |
| 1.5x to 1.8x | 1.5x to 1.8x | 98 | | | 138 | | | 187 | | | 479 | | | 437 | | | 616 | | | 1,955 | | 1.5x to 1.8x | 275 | | | 49 | | | 284 | | | 211 | | | 166 | | | 919 | | | 48 | | | — | | | 1,952 | |
| 1.2x to 1.5x | 1.2x to 1.5x | 60 | | | 57 | | | 154 | | | 79 | | | — | | | 658 | | | 1,008 | | 1.2x to 1.5x | 264 | | | 95 | | | 75 | | | 101 | | | 253 | | | 701 | | | — | | | — | | | 1,489 | |
| 1.0x to 1.2x | 1.0x to 1.2x | — | | | 44 | | | — | | | — | | | — | | | 123 | | | 167 | | 1.0x to 1.2x | 267 | | | — | | | — | | | 88 | | | — | | | 287 | | | 23 | | | — | | | 665 | |
| Less than 1.0x | Less than 1.0x | — | | | — | | | 36 | | | — | | | — | | | 72 | | | 108 | | Less than 1.0x | — | | | — | | | — | | | 35 | | | — | | | 73 | | | — | | | — | | | 108 | |
| Total commercial | Total commercial | $ | 1,615 | | | $ | 814 | | | $ | 1,267 | | | $ | 1,204 | | | $ | 2,563 | | | $ | 3,028 | | | $ | 10,491 | | Total commercial | $ | 2,134 | | | $ | 1,522 | | | $ | 751 | | | $ | 1,253 | | | $ | 1,065 | | | $ | 4,570 | | | $ | 139 | | | $ | — | | | $ | 11,434 | |
| | Agricultural: | Agricultural: | | Agricultural: | |
| Greater than 2.0x | Greater than 2.0x | $ | 67 | | | $ | 26 | | | $ | 36 | | | $ | 38 | | | $ | 71 | | | $ | 167 | | | $ | 405 | | Greater than 2.0x | $ | 49 | | | $ | 64 | | | $ | 25 | | | $ | 22 | | | $ | 24 | | | $ | 210 | | | $ | — | | | $ | — | | | $ | 394 | |
| 1.8x to 2.0x | 1.8x to 2.0x | 38 | | | 35 | | | 14 | | | 15 | | | 20 | | | 82 | | | 204 | | 1.8x to 2.0x | 52 | | | 37 | | | 25 | | | 14 | | | 14 | | | 70 | | | — | | | — | | | 212 | |
| 1.5x to 1.8x | 1.5x to 1.8x | 117 | | | 38 | | | 41 | | | 45 | | | 52 | | | 209 | | | 502 | | 1.5x to 1.8x | 43 | | | 113 | | | 28 | | | 22 | | | 41 | | | 193 | | | — | | | — | | | 440 | |
| 1.2x to 1.5x | 1.2x to 1.5x | 183 | | | 120 | | | 141 | | | 90 | | | 142 | | | 313 | | | 989 | | 1.2x to 1.5x | 161 | | | 179 | | | 112 | | | 116 | | | 72 | | | 355 | | | — | | | — | | | 995 | |
| 1.0x to 1.2x | 1.0x to 1.2x | 86 | | | 35 | | | 93 | | | 70 | | | 57 | | | 233 | | | 574 | | 1.0x to 1.2x | 75 | | | 83 | | | 31 | | | 77 | | | 54 | | | 226 | | | — | | | — | | | 546 | |
| Less than 1.0x | Less than 1.0x | 4 | | | 10 | | | 8 | | | 1 | | | 18 | | | 17 | | | 58 | | Less than 1.0x | — | | | 4 | | | 9 | | | 4 | | | 1 | | | 39 | | | — | | | — | | | 57 | |
| Total agricultural | Total agricultural | $ | 495 | | | $ | 264 | | | $ | 333 | | | $ | 259 | | | $ | 360 | | | $ | 1,021 | | | $ | 2,732 | | Total agricultural | $ | 380 | | | $ | 480 | | | $ | 230 | | | $ | 255 | | | $ | 206 | | | $ | 1,093 | | | $ | — | | | $ | — | | | $ | 2,644 | |
| | Total mortgage loans: | Total mortgage loans: | | | | | | | | | | | | | | Total mortgage loans: | | | | | | | | | | | | | | | | | |
| Greater than 2.0x | Greater than 2.0x | $ | 1,297 | | | $ | 518 | | | $ | 808 | | | $ | 306 | | | $ | 2,013 | | | $ | 1,397 | | | $ | 6,339 | | Greater than 2.0x | $ | 1,192 | | | $ | 1,307 | | | $ | 235 | | | $ | 794 | | | $ | 509 | | | $ | 2,428 | | | $ | — | | | $ | — | | | $ | 6,465 | |
| 1.8x to 2.0x | 1.8x to 2.0x | 265 | | | 118 | | | 132 | | | 393 | | | 204 | | | 411 | | | 1,523 | | 1.8x to 2.0x | 237 | | | 172 | | | 207 | | | 60 | | | 175 | | | 442 | | | 68 | | | — | | | 1,361 | |
| 1.5x to 1.8x | 1.5x to 1.8x | 215 | | | 176 | | | 228 | | | 524 | | | 489 | | | 825 | | | 2,457 | | 1.5x to 1.8x | 318 | | | 162 | | | 312 | | | 233 | | | 207 | | | 1,112 | | | 48 | | | — | | | 2,392 | |
| 1.2x to 1.5x | 1.2x to 1.5x | 243 | | | 177 | | | 295 | | | 169 | | | 142 | | | 971 | | | 1,997 | | 1.2x to 1.5x | 425 | | | 274 | | | 187 | | | 217 | | | 325 | | | 1,056 | | | — | | | — | | | 2,484 | |
| 1.0x to 1.2x | 1.0x to 1.2x | 86 | | | 79 | | | 93 | | | 70 | | | 57 | | | 356 | | | 741 | | 1.0x to 1.2x | 342 | | | 83 | | | 31 | | | 165 | | | 54 | | | 513 | | | 23 | | | — | | | 1,211 | |
| Less than 1.0x | Less than 1.0x | 4 | | | 10 | | | 44 | | | 1 | | | 18 | | | 89 | | | 166 | | Less than 1.0x | — | | | 4 | | | 9 | | | 39 | | | 1 | | | 112 | | | — | | | — | | | 165 | |
| Total mortgage loans | Total mortgage loans | $ | 2,110 | | | $ | 1,078 | | | $ | 1,600 | | | $ | 1,463 | | | $ | 2,923 | | | $ | 4,049 | | | $ | 13,223 | | Total mortgage loans | $ | 2,514 | | | $ | 2,002 | | | $ | 981 | | | $ | 1,508 | | | $ | 1,271 | | | $ | 5,663 | | | $ | 139 | | | $ | — | | | $ | 14,078 | |
_____________
(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.
The following tables provide information relating to the LTV and DSC ratios for commercial and agricultural mortgage loans as of September 30, 2021 and December 31, 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) |
| 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) |
| September 30, 2021: | | | | | | | | | | | | | |
| Mortgage loans: | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | |
| 0% - 50% | $ | 860 | | | $ | — | | | $ | 390 | | | $ | 31 | | | $ | 40 | | | $ | 98 | | | $ | 1,419 | |
| 50% - 70% | 4,026 | | | 680 | | | 993 | | | 755 | | | 421 | | | 30 | | | 6,905 | |
| 70% - 90% | 797 | | | 568 | | | 210 | | | 492 | | | 181 | | | 56 | | | 2,304 | |
| 90% plus | — | | | — | | | 86 | | | 65 | | | — | | | 73 | | | 224 | |
| Total commercial | $ | 5,683 | | | $ | 1,248 | | | $ | 1,679 | | | $ | 1,343 | | | $ | 642 | | | $ | 257 | | | $ | 10,852 | |
| | | | | | | | | | | | | |
| Agricultural: | | | | | | | | | | | | | |
| 0% - 50% | $ | 289 | | | $ | 98 | | | $ | 283 | | | $ | 501 | | | $ | 296 | | | $ | 29 | | | $ | 1,496 | |
| 50% - 70% | 105 | | | 110 | | | 180 | | | 480 | | | 241 | | | 14 | | | 1,130 | |
| 70% - 90% | — | | | 2 | | | — | | | — | | | — | | | 15 | | | 17 | |
| 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total agricultural | $ | 394 | | | $ | 210 | | | $ | 463 | | | $ | 981 | | | $ | 537 | | | $ | 58 | | | $ | 2,643 | |
| | | | | | | | | | | | | |
| Total mortgage loans: | | | | | | | | | | | | | |
| 0% - 50% | $ | 1,149 | | | $ | 98 | | | $ | 673 | | | $ | 532 | | | $ | 336 | | | $ | 127 | | | $ | 2,915 | |
| 50% - 70% | 4,131 | | | 790 | | | 1,173 | | | 1,235 | | | 662 | | | 44 | | | 8,035 | |
| 70% - 90% | 797 | | | 570 | | | 210 | | | 492 | | | 181 | | | 71 | | | 2,321 | |
| 90% plus | — | | | — | | | 86 | | | 65 | | | — | | | 73 | | | 224 | |
| Total mortgage loans | $ | 6,077 | | | $ | 1,458 | | | $ | 2,142 | | | $ | 2,324 | | | $ | 1,179 | | | $ | 315 | | | $ | 13,495 | |
| | | | | | | | | | | | | |
| December 31, 2020: | | | | | | | | | | | | | |
| Mortgage loans: | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | |
| 0% - 50% | $ | 839 | | | $ | — | | | $ | 160 | | | $ | — | | | $ | — | | | $ | — | | | $ | 999 | |
| 50% - 70% | 4,095 | | | 870 | | | 1,452 | | | 555 | | | 25 | | | — | | | 6,997 | |
| 70% - 90% | 844 | | | 449 | | | 343 | | | 376 | | | 142 | | | 36 | | | 2,190 | |
| 90% plus | 156 | | | — | | | — | | | 77 | | | — | | | 72 | | | 305 | |
| Total commercial | $ | 5,934 | | | $ | 1,319 | | | $ | 1,955 | | | $ | 1,008 | | | $ | 167 | | | $ | 108 | | | $ | 10,491 | |
| | | | | | | | | | | | | |
| Agricultural: | | | | | | | | | | | | | |
| 0% - 50% | $ | 297 | | | $ | 108 | | | $ | 291 | | | $ | 520 | | | $ | 317 | | | $ | 34 | | | $ | 1,567 | |
| 50% - 70% | 108 | | | 94 | | | 211 | | | 450 | | | 257 | | | 24 | | | 1,144 | |
| 70% - 90% | — | | | 2 | | | — | | | 19 | | | — | | | — | | | 21 | |
| 90% plus | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 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) |
| 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) |
| Total mortgage loans: | | | | | | | | | | | | | |
| 0% - 50% | $ | 1,136 | | | $ | 108 | | | $ | 451 | | | $ | 520 | | | $ | 317 | | | $ | 34 | | | $ | 2,566 | |
| 50% - 70% | 4,203 | | | 964 | | | 1,663 | | | 1,005 | | | 282 | | | 24 | | | 8,141 | |
| 70% - 90% | 844 | | | 451 | | | 343 | | | 395 | | | 142 | | | 36 | | | 2,211 | |
| 90% plus | 156 | | | — | | | — | | | 77 | | | — | | | 72 | | | 305 | |
| 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 as of SeptemberJune 30, 20212022 and December 31, 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 |
| Past Due | | Current | | Total | |
| 30-59 Days | | 60-89 Days | | 90 Days or More | | Total |
| (in millions) |
| September 30, 2021: | | | | | | | | | | | | | | | | | | | |
| Mortgage loans: | | | | | | | | | | | | | | | | | | | |
| Commercial | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 10,852 | | | $ | 10,852 | | | $ | — | | | $ | 10,852 | | | $ | — | | | $ | — | |
| Agricultural | 8 | | | 3 | | | 66 | | | 77 | | | 2,566 | | | 2,643 | | | — | | | 2,643 | | | — | | | — | |
| Total | $ | 8 | | | $ | 3 | | | $ | 66 | | | $ | 77 | | | $ | 13,418 | | | $ | 13,495 | | | $ | — | | | $ | 13,495 | | | $ | — | | | $ | — | |
| December 31, 2020: | | | | | | | | | | | | | | | | | | | |
| Mortgage loans: | | | | | | | | | | | | | | | | | | | |
| Commercial | $ | 162 | | | $ | — | | | $ | — | | | $ | 162 | | | $ | 10,329 | | | $ | 10,491 | | | $ | — | | | $ | 10,491 | | | $ | — | | | $ | — | |
| Agricultural | 76 | | | 7 | | | 29 | | | 112 | | | 2,620 | | | 2,732 | | | — | | | 2,732 | | | — | | | — | |
| Total | $ | 238 | | | $ | 7 | | | $ | 29 | | | $ | 274 | | | $ | 12,949 | | | $ | 13,223 | | | $ | — | | | $ | 13,223 | | | $ | — | | | $ | — | |
_______________
(1)Amounts presented at amortized cost basis.2021, respectively.
As of September 30, 2021 and December 31, 2020, the carrying values of problem mortgage loans that had been classified as non-accrual loans were $0 million and $0 million, respectively.
Troubled Debt Restructuring
There were no privately negotiated fixed maturity modifications accounted for as a TDR during the three months ended September 30, 2021. During the nine months ended September 30, 2021, the Company had 1 new privately negotiated fixed maturity TDR with a pre-modification cost basis of $9 million and post-modification carrying value of $4 million. This TDR did not have subsequent payment defaults nor additional commitments to lend. The 1 privately negotiated fixed maturity TDR is 0.004% of the Company’s total invested assets. There were no mortgage loan on real estate modifications accounted for as a TDR during three and nine months ended September 30, 2021.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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 |
| Past Due | | Current | | Total | |
| 30-59 Days | | 60-89 Days | | 90
Days
or More | | Total |
| (in millions) |
| June 30, 2022: | | | | | | | | | | | | | | | | | | | |
| Mortgage loans: | | | | | | | | | | | | | | | | | | | |
| Commercial | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 11,893 | | | $ | 11,893 | | | $ | — | | | $ | 11,893 | | | $ | — | | | $ | — | |
| Agricultural | 9 | | | 1 | | | 19 | | | 29 | | | 2,589 | | | 2,618 | | | 16 | | | 2,634 | | | — | | | — | |
| Total | $ | 9 | | | $ | 1 | | | $ | 19 | | | $ | 29 | | | $ | 14,482 | | | $ | 14,511 | | | $ | 16 | | | $ | 14,527 | | | $ | — | | | $ | — | |
| December 31, 2021: | | | | | | | | | | | | | | | | | | | |
| Mortgage loans: | | | | | | | | | | | | | | | | | | | |
| Commercial | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 11,434 | | | $ | 11,434 | | | $ | — | | | $ | 11,434 | | | $ | — | | | $ | — | |
| Agricultural | 1 | | | 1 | | | 25 | | | 27 | | | 2,601 | | | 2,628 | | | 16 | | | 2,644 | | | — | | | — | |
| Total | $ | 1 | | | $ | 1 | | | $ | 25 | | | $ | 27 | | | $ | 14,035 | | | $ | 14,062 | | | $ | 16 | | | $ | 14,078 | | | $ | — | | | $ | — | |
_______________
(1)Amounts presented at amortized cost basis.
As of June 30, 2022 and December 31, 2021, the carrying values of problem mortgage loans that had been classified as non-accrual loans were $13 million and $14 million, respectively.
Troubled Debt Restructuring
During the three and ninesix months ended SeptemberJune 30, 2020,2022 and 2021, the Company had 2 and 6 new privately negotiated fixed maturity TDRs with a pre-modification cost basisidentified an immaterial amount of $8 million and $50 million and post-modification carrying value of $7 million and $44 million, respectively. These TDRs did not have subsequent payment defaults nor additional commitments to lend. The 6 privately negotiated fixed maturity TDRs were 0.04% of the Company’s total invested assets. During the three and nine months ended September 30, 2020, there was 1 commercial mortgage loan on real estate accounted for as a TDR with pre-modification cost basis of $75 million and post-modification carrying value of $75 million. The 1 commercial mortgage loan TDR was 0.07% of the Company’s total invested assets.TDRs.
Equity Securities
The table below presents a breakdown of unrealized and realized gains and (losses) on equity securities during the three and ninesix months ended SeptemberJune 30, 2022 and 2021.
Unrealized and Realized Gains (Losses) from Equity Securities (1)
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2021 | | 2021 | | | | | | | | |
| (in millions) |
| Net investment gains (losses) recognized during the period on securities held at the end of the period | $ | (1) | | | $ | 19 | | | | | | | | | |
| Net investment gains (losses) recognized on securities sold during the period | (3) | | | 1 | | | | | | | | | |
| Unrealized and realized gains (losses) on equity securities | $ | (4) | | | $ | 20 | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
______________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | | | |
| (in millions) |
| Net investment gains (losses) recognized during the period on securities held at the end of the period | $ | (68) | | | $ | 3 | | | $ | (107) | | | $ | 20 | | | | | | | |
| Net investment gains (losses) recognized on securities sold during the period | 1 | | | 10 | | | (10) | | | 4 | | | | | | | |
| Unrealized and realized gains (losses) on equity securities | $ | (67) | | | $ | 13 | | | $ | (117) | | | $ | 24 | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
(1) Effective January 1, 2021, certain preferred stock have been reclassified to other equity investments (see Note 2 Significant Accounting Policies – Investments).
Trading Securities
As of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, the fair value of the Company’s trading securities was $409$345 million and $5.3 billion.$379 million. As of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, trading securities included the General Account’s investment in Separate Accounts which had carrying values of $43$34 million and $43$44 million.
The table below shows a breakdown of net investment income (loss) from trading securities during the three and ninesix months ended SeptemberJune 30, 20212022 and 2020:2021:
Net Investment Income (Loss) from Trading Securities
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 | | |
| (in millions) |
| Net investment gains (losses) recognized during the period on securities held at the end of the period | $ | (47) | | | $ | (1) | | | $ | (264) | | | $ | 86 | | | |
| Net investment gains (losses) recognized on securities sold during the period | 40 | | | (5) | | | 215 | | | 12 | | | |
| Unrealized and realized gains (losses) on trading securities | (7) | | | (6) | | | (49) | | | 98 | | | |
| Interest and dividend income from trading securities | 4 | | | 58 | | | 80 | | | 152 | | | |
| Net investment income (loss) from trading securities | $ | (3) | | | $ | 52 | | | $ | 31 | | | $ | 250 | | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Net Investment Income (Loss) from Trading Securities
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | |
| (in millions) |
| Net investment gains (losses) recognized during the period on securities held at the end of the period | $ | (29) | | | $ | (168) | | | $ | (45) | | | $ | (217) | | | |
| Net investment gains (losses) recognized on securities sold during the period | (1) | | | 153 | | | (1) | | | 175 | | | |
| Unrealized and realized gains (losses) on trading securities | (30) | | | (15) | | | (46) | | | (42) | | | |
| Interest and dividend income from trading securities | 3 | | | 40 | | | 5 | | | 76 | | | |
| Net investment income (loss) from trading securities | $ | (27) | | | $ | 25 | | | $ | (41) | | | $ | 34 | | | |
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 TIPS and cash flow hedges, which isare 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 (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.)
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. In addition, on June 1, 2021, we ceded legacy variable annuity policies sold by the Company between 2006-2008 (the “Block”), comprised of non-New York “Accumulator” policies containing fixed rate GMIB and/or GMDB guarantees. As this contract provides full risk
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
transfer and therefore has the same risk attributes as the underlying direct contracts, the benefits of this treaty are accounted for in the same manner as the underlying gross reserves and therefore the Amounts Due from Reinsurers related to the GMIB with NLG are accounted for as an embedded derivative.
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 SCS variable annuity, SIO in the EQUI-VEST variable annuity series, MSO in the variable life insurance products and IUL insurance products. These products permit the contract owner to participate in the performance of an index, 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.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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 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 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 net derivative gains (losses).
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 its 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 the CDS that it sold. The maximum potential amount of future payments the Company could be required to make under the 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 or Standard European Corporate Contract 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
Derivatives Utilized to Hedge Exposure to Foreign Currency Denominated Cash Flows
The Company purchases private placement debt securities and issues funding agreements in the FABN program in currencies other than its functional USU.S. dollar currency. The Company enters into cross currency swaps with external counterparties to hedge the exposure of the foreign currency denominated cash flows of these instruments. The foreign currency received from or paid to the cross currency swap counterparty is exchanged for fixed USU.S. dollar amounts with improved net investment yields or net product costs over equivalent USU.S. dollar denominated instruments issued at that time. The transactions are accounted for as cash flow hedges when they are designated in hedging relationships and qualify for hedge accounting. The first cross currency swap hedges were designated and applied hedge accounting during the quarter ended June 30, 2021.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
These cross currency swaps are for the period the foreign currency denominated private placement debt securities and funding agreement are outstanding, with the longest cross currency swap expiring in 2033. Since designation and qualification as cash flow hedges, cross currency swap interest accruals are recognized in Net investment income and in Interest credited to policyholders’ account balances.
The tables below present quantitative disclosures about the Company’s derivative instruments designated in hedging relationships and derivative instruments which have not been designated in hedging relationships, including those embedded in other contracts required to be accounted for as derivative instruments.
The following table presents the gross notional amount and estimated fair value of the Company’s derivatives:
Derivative Instruments by Category
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| | | | Fair Value | | | | Fair Value |
| | Notional
Amount | | Derivative Assets | | Derivative
Liabilities | | Notional
Amount | | Derivative Assets | | Derivative
Liabilities |
| (in millions) |
| | | | | | | | | | | |
| Derivatives: Designated for hedge accounting (1) | | | | | | | | | | | |
| Cash flow hedges: | | | | | | | | | | | |
| | | | | | | | | | | |
| Currency swaps | $ | 807 | | | $ | 8 | | | $ | 33 | | | $ | — | | | $ | — | | | $ | — | |
| Interest swaps | 958 | | | — | | | 335 | | | 957 | | | — | | | 219 | |
| Total: designated for hedge accounting | 1,765 | | | 8 | | | 368 | | | 957 | | | — | | | 219 | |
| Derivatives: Not designated for hedge accounting (1) | | | | | | | | | | | |
| Equity contracts: | | | | | | | | | | | |
| Futures (5) | 3,107 | | | — | | | — | | | 4,267 | | | — | | | — | |
| Swaps (5) | 12,879 | | | 4 | | | — | | | 22,404 | | | 6 | | | — | |
| Options | 55,382 | | | 10,394 | | | 4,505 | | | 35,786 | | | 8,383 | | | 3,715 | |
| Interest rate contracts: | | | | | | | | | | | |
| Futures (5) | 10,999 | | | — | | | — | | | 18,161 | | | — | | | — | |
| Swaps (5) | 2,861 | | | — | | | 243 | | | 22,816 | | | 551 | | | 434 | |
| Swaptions | — | | | — | | | — | | | — | | | — | | | — | |
| Credit contracts: | | | | | | | | | | | |
| Credit default swaps | 781 | | | 4 | | | 3 | | | 919 | | | 8 | | | 1 | |
| Currency contracts: | | | | | | | | | | | |
| Currency swaps | 516 | | | 3 | | | — | | | 347 | | | — | | | — | |
| Currency forwards | — | | | — | | | — | | | — | | | — | | | — | |
| Other contracts: | | | | | | | | | | | |
| Margin | — | | | 90 | | | — | | | — | | | 26 | | | 66 | |
| Collateral | — | | | 157 | | | 6,092 | | | — | | | 212 | | | 3,835 | |
| Total: Not designated for hedge accounting | 86,525 | | | 10,652 | | | 10,843 | | | 104,700 | | | 9,186 | | | 8,051 | |
| | | | | | | | | | | |
| Embedded derivatives: | | | | | | | | | | | |
| Amounts due from reinsurers (6) | — | | | 5,869 | | | — | | | — | | | — | | | — | |
| GMIB reinsurance contracts (2) | — | | | 2,156 | | | — | | | — | | | 2,859 | | | — | |
| GMxB derivative features liability (3) | — | | | — | | | 8,938 | | | — | | | — | | | 10,936 | |
| SCS, SIO, MSO and IUL indexed features (4) | — | | | — | | | 5,446 | | | — | | | — | | | 4,378 | |
| Total embedded derivatives | — | | | 8,025 | | | 14,384 | | | — | | | 2,859 | | | 15,314 | |
| Total derivative instruments | $ | 88,290 | | | $ | 18,685 | | | $ | 25,595 | | | $ | 105,657 | | | $ | 12,045 | | | $ | 23,584 | |
______________
(1)Reported in other invested assets in the consolidated balance sheets.
(2) Reported in GMIB reinsurance contract asset in the consolidated balance sheets.
(3) Reported in future policy benefits and other policyholders’ liabilities in the consolidated balance sheets. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| | | | Fair Value | | | | Fair Value |
| | Notional
Amount | | Derivative Assets | | Derivative
Liabilities | | Notional
Amount | | Derivative Assets | | Derivative
Liabilities |
| (in millions) |
| | | | | | | | | | | |
| Derivatives: designated for hedge accounting (1) | | | | | | | | | | | |
| Cash flow hedges: | | | | | | | | | | | |
| | | | | | | | | | | |
| Currency swaps | $ | 1,307 | | | $ | 64 | | | $ | 86 | | | $ | 921 | | | $ | 7 | | | $ | 42 | |
| Interest swaps | 954 | | | — | | | 298 | | | 955 | | | — | | | 395 | |
| Total: designated for hedge accounting | 2,261 | | | 64 | | | 384 | | | 1,876 | | | 7 | | | 437 | |
| Derivatives: not designated for hedge accounting (1) | | | | | | | | | | | |
| Equity contracts: | | | | | | | | | | | |
| Futures | 3,795 | | | — | | | — | | | 2,213 | | | — | | | — | |
| Swaps | 10,276 | | | 13 | | | — | | | 13,310 | | | 5 | | | — | |
| Options | 37,665 | | | 6,557 | | | 3,720 | | | 48,380 | | | 12,015 | | | 5,059 | |
| Interest rate contracts: | | | | | | | | | | | |
| Futures | 9,687 | | | — | | | — | | | 12,455 | | | — | | | — | |
| Swaps | 1,309 | | | 15 | | | 72 | | | 1,876 | | | — | | | 45 | |
| Swaptions | — | | | — | | | — | | | — | | | — | | | — | |
| Credit contracts: | | | | | | | | | | | |
| Credit default swaps | 101 | | | — | | | 2 | | | 619 | | | 2 | | | 3 | |
| Currency contracts: | | | | | | | | | | | |
| Currency swaps | 181 | | | 9 | | | — | | | 541 | | | 1 | | | — | |
| Currency forwards | — | | | — | | | — | | | — | | | — | | | — | |
| Other freestanding contracts: | | | | | | | | | | | |
| Margin | — | | | 204 | | | — | | | — | | | 102 | | | — | |
| Collateral | — | | | 138 | | | 3,696 | | | — | | | 178 | | | 6,154 | |
| Total: Not designated for hedge accounting | 63,014 | | | 6,936 | | | 7,490 | | | 79,394 | | | 12,303 | | | 11,261 | |
| | | | | | | | | | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| | | | Fair Value | | | | Fair Value |
| | Notional
Amount | | Derivative Assets | | Derivative
Liabilities | | Notional
Amount | | Derivative Assets | | Derivative
Liabilities |
| (in millions) |
| Embedded derivatives: | | | | | | | | | | | |
| Amounts due from reinsurers (5) | — | | | 4,681 | | | — | | | — | | | 5,813 | | | — | |
| GMIB reinsurance contracts (2) | — | | | 1,612 | | | — | | | — | | | 2,068 | | | — | |
| GMxB derivative features liability (3) | — | | | — | | | 6,189 | | | — | | | — | | | 8,525 | |
| SCS, SIO, MSO and IUL indexed features (4) | — | | | — | | | 2,602 | | | — | | | — | | | 6,641 | |
| Total embedded derivatives | — | | | 6,293 | | | 8,791 | | | — | | | 7,881 | | | 15,166 | |
| Total derivative instruments | $ | 65,275 | | | $ | 13,293 | | | $ | 16,665 | | | $ | 81,270 | | | $ | 20,191 | | | $ | 26,864 | |
______________
(1)Reported in other invested assets in the consolidated balance sheets.
(2)Reported in GMIB reinsurance contract asset in the consolidated balance sheets.
(3)Reported in future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.
(4)Reported in policyholders’ account balances in the consolidated balance sheets.
(5) Decrease in futures and swaps notional as of September 30, 2021 primarily due to the Venerable transaction (see Note 1 Organization).
(6) Represents GMIB NLG ceded related to the Venerable transaction.Transaction.
The following table presents the effects of derivative instruments on the consolidated statements of income and comprehensive income (loss).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | Three Months Ended June 30, 2022 | | Six Months Ended June 30, 2022 |
| | | | | | | | | | | | | |
| | | Net
Derivatives
Gain(Losses) (1) (2) | | Net Investment Income | | Interest Credited To Policyholders Account Balances | | AOCI | | Net
Derivatives
Gain(Losses) (1) (2) | | Net Investment Income | | Interest Credited To Policyholders Account Balances | | AOCI | | Net
Derivatives
Gain(Losses) (1) (2) | | Net Investment Income | | Interest Credited To Policyholders Account Balances | | AOCI | | Net
Derivatives
Gain(Losses) (1) (2) | | Net Investment Income | | Interest Credited To Policyholders Account Balances | | AOCI |
| | (in millions) | | (in millions) |
| | Derivatives: Designated for hedge accounting | | |
| Derivatives: designated for hedge accounting | | Derivatives: designated for hedge accounting | |
| Cash flow hedges: | Cash flow hedges: | | Cash flow hedges: | |
| | Currency swaps | Currency swaps | $ | — | | | $ | — | | | $ | (15) | | | $ | 7 | | | $ | — | | | $ | — | | | $ | (32) | | | $ | 7 | | Currency swaps | $ | 18 | | | $ | 1 | | | $ | 8 | | | $ | (8) | | | $ | 14 | | | $ | 2 | | | $ | (10) | | | $ | 5 | |
| Interest swaps | Interest swaps | (26) | | | — | | | — | | | (9) | | | (54) | | | — | | | — | | | (42) | | Interest swaps | (27) | | | — | | | — | | | 168 | | | (41) | | | — | | | — | | | 148 | |
| Total: Designated for hedge accounting | (26) | | | — | | | (15) | | | (2) | | | (54) | | | — | | | (32) | | | (35) | | |
| Derivatives: Not designated for hedge accounting | | |
| Total: designated for hedge accounting | | Total: designated for hedge accounting | (9) | | | 1 | | | 8 | | | 160 | | | (27) | | | 2 | | | (10) | | | 153 | |
| Derivatives: not designated for hedge accounting | | Derivatives: not designated for hedge accounting | |
| Equity contracts: | Equity contracts: | | Equity contracts: | |
| Futures | Futures | (6) | | | — | | | — | | | — | | | (466) | | | — | | | — | | | — | | Futures | 455 | | | — | | | — | | | — | | | 515 | | | — | | | — | | | — | |
| Swaps | Swaps | (3) | | | — | | | — | | | — | | | (2,609) | | | — | | | — | | | — | | Swaps | 2,036 | | | — | | | — | | | — | | | 2,762 | | | — | | | — | | | — | |
| Options | Options | (169) | | | — | | | — | | | — | | | 2,175 | | | — | | | — | | | — | | Options | (3,444) | | | — | | | — | | | — | | | (3,731) | | | — | | | — | | | — | |
| Interest rate contracts: | Interest rate contracts: | | Interest rate contracts: | |
| Futures | Futures | (92) | | | — | | | — | | | — | | | (888) | | | — | | | — | | | — | | Futures | (533) | | | — | | | — | | | — | | | (1,034) | | | — | | | — | | | — | |
| Swaps | Swaps | 67 | | | — | | | — | | | — | | | (2,375) | | | — | | | — | | | — | | Swaps | (154) | | | — | | | — | | | — | | | (303) | | | — | | | — | | | — | |
| Swaptions | Swaptions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Swaptions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Credit contracts: | Credit contracts: | | Credit contracts: | |
| Credit default swaps | Credit default swaps | — | | | — | | | — | | | — | | | 2 | | | — | | | — | | | — | | Credit default swaps | 8 | | | — | | | — | | | — | | | 8 | | | — | | | — | | | — | |
| Currency contracts: | Currency contracts: | | Currency contracts: | |
| Currency swaps | Currency swaps | 3 | | | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | Currency swaps | 13 | | | — | | | — | | | — | | | 18 | | | — | | | — | | | — | |
| Currency forwards | Currency forwards | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Currency forwards | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Other contracts: | Other contracts: | | Other contracts: | |
| Margin | Margin | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Margin | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Collateral | Collateral | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Collateral | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total: Not designated for hedge accounting | (200) | | | — | | | — | | | — | | | (4,158) | | | — | | | — | | | — | | |
| Total: not designated for hedge accounting | | Total: not designated for hedge accounting | (1,619) | | | — | | | — | | | — | | | (1,765) | | | — | | | — | | | — | |
| | Embedded derivatives: | Embedded derivatives: | | Embedded derivatives: | |
| Amounts due from reinsurers | Amounts due from reinsurers | 344 | | | — | | | — | | | — | | | 586 | | | — | | | — | | | — | | Amounts due from reinsurers | (376) | | | — | | | — | | | — | | | (1,142) | | | — | | | — | | | — | |
| GMIB reinsurance contracts | GMIB reinsurance contracts | (128) | | | — | | | — | | | — | | | (694) | | | — | | | — | | | — | | GMIB reinsurance contracts | (125) | | | — | | | — | | | — | | | (445) | | | — | | | — | | | — | |
| GMxB derivative features liability | GMxB derivative features liability | (395) | | | — | | | — | | | — | | | 2,291 | | | — | | | — | | | — | | GMxB derivative features liability | 817 | | | — | | | — | | | — | | | 2,505 | | | — | | | — | | | — | |
| SCS, SIO, MSO and IUL indexed features | SCS, SIO, MSO and IUL indexed features | 173 | | | — | | | — | | | — | | | (2,113) | | | — | | | — | | | — | | SCS, SIO, MSO and IUL indexed features | 3,466 | | | — | | | — | | | — | | | 3,776 | | | — | | | — | | | — | |
| Total embedded derivatives | Total embedded derivatives | (6) | | | — | | | — | | | — | | | 70 | | | — | | | — | | | — | | Total embedded derivatives | 3,782 | | | — | | | — | | | — | | | 4,694 | | | — | | | — | | | — | |
| | Total Derivatives | $ | (232) | | | $ | — | | | $ | (15) | | | $ | (2) | | | $ | (4,142) | | | $ | — | | | $ | (32) | | | $ | (35) | | |
| Total derivatives | | Total derivatives | $ | 2,154 | | | $ | 1 | | | $ | 8 | | | $ | 160 | | | $ | 2,902 | | | $ | 2 | | | $ | (10) | | | $ | 153 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 |
| | | | | | | | | | | | | | |
| | Net
Derivatives
Gain(Losses) (1) (2) | | Net Investment Income | | Interest Credited To Policyholders Account Balances | | AOCI | | Net
Derivatives
Gain(Losses) (1) (2) | | Net Investment Income | | Interest Credited To Policyholders Account Balances | | AOCI |
| (in millions) |
| | | | | | | | | | | | | | | |
| Derivatives: designated for hedge accounting | | | | | | | | | | | | | | | |
| Cash flow hedges: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Currency swaps | $ | — | | | $ | — | | | $ | (17) | | | $ | — | | | $ | — | | | $ | — | | | $ | (17) | | | $ | — | |
| Interest swaps | (24) | | | — | | | — | | | 6 | | | (28) | | | $ | — | | | $ | — | | | 33 | |
| Total: designated for hedge accounting | (24) | | | — | | | (17) | | | 6 | | | (28) | | | $ | — | | | $ | (17) | | | 33 | |
| Derivatives: not designated for hedge accounting | | | | | | | | | | | | | | | |
| Equity contracts: | | | | | | | | | | | | | | | |
| Futures | (166) | | | — | | | — | | | — | | | (459) | | | $ | — | | | $ | — | | | — | |
| Swaps | (1,336) | | | — | | | — | | | — | | | (2,606) | | | $ | — | | | $ | — | | | — | |
| Options | 1,201 | | | — | | | — | | | — | | | 2,344 | | | $ | — | | | $ | — | | | — | |
| Interest rate contracts: | | | | | | | | | | | | | | | |
| Futures | — | | | — | | | — | | | — | | | (796) | | | $ | — | | | $ | — | | | — | |
| Swaps | 151 | | | — | | | — | | | — | | | (2,442) | | | $ | — | | | $ | — | | | — | |
| Swaptions | 470 | | | — | | | — | | | — | | | — | | | $ | — | | | $ | — | | | — | |
| Credit contracts: | | | | | | | | | | | | | | | |
| Credit default swaps | 1 | | | — | | | — | | | — | | | 2 | | | $ | — | | | $ | — | | | — | |
| Currency contracts: | | | | | | | | | | | | | | | |
| Currency swaps | — | | | — | | | — | | | — | | | — | | | $ | — | | | $ | — | | | — | |
| Currency forwards | — | | | — | | | — | | | — | | | — | | | $ | — | | | $ | — | | | — | |
| Other contracts: | | | | | | | | | | | | | | | |
| Margin | — | | | — | | | — | | | — | | | — | | | $ | — | | | $ | — | | | — | |
| Collateral | — | | | — | | | — | | | — | | | — | | | $ | — | | | $ | — | | | — | |
| Total: not designated for hedge accounting | 321 | | | — | | | — | | | — | | | (3,957) | | | $ | — | | | $ | — | | | — | |
| | | | | | | | | | | | | | | |
| Embedded derivatives: | | | | | | | | | | | | | | | |
| Amounts due from reinsurers | 242 | | | — | | | — | | | — | | | 242 | | | $ | — | | | $ | — | | | — | |
| GMIB reinsurance contracts | 158 | | | — | | | — | | | — | | | (566) | | | $ | — | | | $ | — | | | — | |
| GMxB derivative features liability | (671) | | | — | | | — | | | — | | | 2,686 | | | $ | — | | | $ | — | | | — | |
| SCS, SIO, MSO and IUL indexed features | (1,160) | | | — | | | — | | | — | | | (2,286) | | | $ | — | | | $ | — | | | — | |
| Total embedded derivatives | (1,431) | | | — | | | — | | | — | | | 76 | | | $ | — | | | $ | — | | | — | |
| | | | | | | | | | | | | | | |
| Total derivatives | $ | (1,134) | | | $ | — | | | $ | (17) | | | $ | 6 | | | $ | (3,909) | | | $ | — | | | $ | (17) | | | $ | 33 | |
_____________
(1)Reported in net derivative gains (losses) in the consolidated statements of income (loss).
(2)For the three and six months ended June 30, 2022 and 2021, investment fees of $4 million and $7 million , $3 million and $6 million respectively, are reported in net derivative gains (losses) in the consolidated statements of income (loss).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 |
| | | | | | | | | | | | | | |
| | Net
Derivatives
Gain(Losses) (1) (2) | | Net Investment Income | | Interest Credited To Policyholders Account Balances | | AOCI | | Net
Derivatives
Gain(Losses) (1) (2) | | Net Investment Income | | Interest Credited To Policyholders Account Balances | | AOCI |
| (in millions) |
| | | | | | | | | | | | | | | |
| Derivatives: Designated for hedge accounting | | | | | | | | | | | | | | | |
| Cash flow hedges: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Interest swaps | $ | (12) | | | $ | — | | | $ | — | | | $ | (65) | | | $ | (4) | | | $ | — | | | $ | — | | | $ | (64) | |
| Total: Designated for hedge accounting | (12) | | | — | | | — | | | (65) | | | (4) | | | — | | | — | | | (64) | |
| Derivatives: Not designated for hedge accounting | | | | | | | | | | | | | | | |
| Equity contracts: | | | | | | | | | | | | | | | |
| Futures | (221) | | | — | | | — | | | — | | | (347) | | | — | | | — | | | — | |
| Swaps | (1,557) | | | — | | | — | | | — | | | (594) | | | — | | | — | | | — | |
| Options | 907 | | | — | | | — | | | — | | | (480) | | | — | | | — | | | — | |
| Interest rate contracts: | | | | | | | | | | | | | | | |
| Futures | (14) | | | — | | | — | | | — | | | 2,058 | | | — | | | — | | | — | |
| Swaps | (59) | | | — | | | — | | | — | | | 3,592 | | | — | | | — | | | — | |
| Swaptions | — | | | — | | | — | | | — | | | 9 | | | — | | | — | | | — | |
| Credit contracts: | | | | | | | | | | | | | | | |
| Credit default swaps | 3 | | | — | | | — | | | — | | | (4) | | | — | | | — | | | — | |
| Currency contracts: | | | | | | | | | | | | | | | |
| Currency swaps | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Currency forwards | — | | | — | | | — | | | — | | | (3) | | | — | | | — | | | — | |
| Other contracts: | | | | | | | | | | | | | | | |
| Margin | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Collateral | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total: Not designated for hedge accounting | (941) | | | — | | | — | | | — | | | 4,231 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| Embedded derivatives: | | | | | | | | | | | | | | | |
| Amounts due from reinsurers | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| GMIB reinsurance contracts | (177) | | | — | | | — | | | — | | | 849 | | | — | | | — | | | — | |
| GMxB derivative features liability | 570 | | | — | | | — | | | — | | | (3,382) | | | — | | | — | | | — | |
| SCS, SIO, MSO and IUL indexed features | (967) | | | — | | | — | | | — | | | 410 | | | — | | | — | | | — | |
| Total embedded derivatives | (574) | | | — | | | — | | | — | | | (2,123) | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| Total Derivatives | $ | (1,527) | | | $ | — | | | $ | — | | | $ | (65) | | | $ | 2,104 | | | $ | — | | | $ | — | | | $ | (64) | |
______________
(1)Reported in net derivative gains (losses) in the consolidated statements of income (loss).
(2)For the three and nine months ended September 30, 2021 and 2020, investment fees of $4 million and $10 million , $3 million and $9 million respectively, are reported in net derivative gains (losses) in the consolidated statements of income (loss).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
The table that follow below present a roll-forward of cash flow hedges recognized in AOCI.
RollforwardRoll-forward of Cash flow hedges in AOCI
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in millions) |
| Balance, beginning of period | $ | (158) | | | $ | 1 | | | $ | (126) | | | $ | (38) | |
| Amount recorded in AOCI | — | | | — | | | — | | | — | |
| Currency Swaps | 7 | | | — | | | 7 | | | — | |
| Interest Swaps | (40) | | | (81) | | | (118) | | | (46) | |
| Total Amount recorded in AOCI | (33) | | | (81) | | | (111) | | | (46) | |
| Amount reclassified from AOCI to income | — | | | — | | | — | | | — | |
| Currency Swaps | — | | | — | | | — | | | — | |
| Interest Swaps | 31 | | | 16 | | | 77 | | | 20 | |
| Total Amount reclassified from AOCI to income | 31 | | | 16 | | | 77 | | | 20 | |
| Ending Balance, September 30 (1) | $ | (160) | | | $ | (64) | | | $ | (160) | | | $ | (64) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 | | |
| (in millions) |
| Balance, beginning of period | $ | (215) | | | $ | (132) | | | $ | (208) | | | $ | (126) | | | |
| Amount recorded in AOCI | — | | | — | | | — | | | — | | | |
| Currency swaps | 3 | | | (17) | | | — | | | (17) | | | |
| Interest swaps | 137 | | | (56) | | | 98 | | | (78) | | | |
| Total amount recorded in AOCI | 140 | | | (73) | | | 98 | | | (95) | | | |
| Amount reclassified from AOCI to income | — | | | — | | | — | | | — | | | |
| Currency swaps | (10) | | | 17 | | | 6 | | | 17 | | | |
| Interest swaps | 31 | | | 30 | | | 50 | | | 46 | | | |
| Total amount reclassified from AOCI to income | 21 | | | 47 | | | 56 | | | 63 | | | |
| Balance, end of period | $ | (54) | | | $ | (158) | | | $ | (54) | | | $ | (158) | | | |
______________
(1) The Company does not estimate the amount of the deferred losses in AOCI at three and ninesix months ended SeptemberJune 30, 20212022 and 20202021 which will be released and reclassified into Net income (loss) over the next 12 months as the amounts cannot be reasonably estimated.
Equity-Based and Treasury Futures Contracts Margin
All outstanding equity-based and treasury futures contracts as of SeptemberJune 30, 20212022 and December 31, 20202021 are exchange-traded and net settled daily in cash. As of SeptemberJune 30, 20212022 and December 31, 2020,2021, 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 $150$192 million and $135$90 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 $116$167 million and $263$196 million, and (iii) the Euro Stoxx, FTSE 100, Topix, ASX 200 and 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 $16$15 million and $35$16 million.
Collateral Arrangements
The Company generally has executed a CSA under the ISDA Master Agreement it maintains with each of its 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 ISDA Master Agreement and related CSA have been executed. As of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, the Company held $6,092 million$3.7 billion and $3.8$6.2 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 other invested assets. The Company posted collateral of $157$138 million and $212$178 million as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, in the normal operation of its collateral arrangements. The Company is exposed to losses in the event of non-performance by counterparties to financial derivative transactions with a positive fair value. The Company manages credit risk by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreements, as applicable; (ii) trading through central clearing and OTC parties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single party credit exposures which are subject to periodic management review.
The following tables presents information aboutSubstantially all of the Company’s offsettingderivative agreements have zero thresholds which require daily full collateralization by the party in a liability position. In addition, certain of financial assets and liabilities andthe Company’s derivative instruments asagreements contain credit-risk related contingent features; if the credit rating of September 30, 2021 and December 31, 2020:
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
fall below a certain level, the party with positive fair value could request termination at the then fair value or demand immediate full collateralization from the party whose credit rating fell and is in a net liability position.
As of June 30, 2022 and December 31, 2021 there were no net liability derivative positions with counterparties with credit risk-related contingent features whose credit rating has fallen. All derivatives have been appropriately collateralized by the Company or the counterparty in accordance with the terms of the derivative agreements.
The following tables presents information about the Company’s offsetting of financial assets and liabilities and derivative instruments as of June 30, 2022 and December 31, 2021:
Offsetting of Financial Assets and Liabilities and Derivative Instruments
As of SeptemberJune 30, 20212022
| | | 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 | $ | 10,660 | | | $ | 9,750 | | | $ | 910 | | | $ | (817) | | | $ | 93 | | Derivative assets | $ | 7,000 | | | $ | 6,785 | | | $ | 215 | | | $ | — | | | $ | 215 | |
| Other financial assets | Other financial assets | 1,429 | | | — | | | 1,429 | | | — | | | 1,429 | | Other financial assets | 1,228 | | | — | | | 1,228 | | | — | | | 1,228 | |
| Other invested assets | Other invested assets | $ | 12,089 | | | $ | 9,750 | | | $ | 2,339 | | | $ | (817) | | | $ | 1,522 | | Other invested assets | $ | 8,228 | | | $ | 6,785 | | | $ | 1,443 | | | $ | — | | | $ | 1,443 | |
| | Liabilities: | Liabilities: | | Liabilities: | |
| Derivative liabilities | Derivative liabilities | $ | 10,393 | | | $ | 9,750 | | | $ | 643 | | | $ | — | | | $ | 643 | | Derivative liabilities | $ | 7,873 | | | $ | 6,785 | | | $ | 1,088 | | | $ | — | | | $ | 1,088 | |
| Other financial liabilities | Other financial liabilities | 1,867 | | | — | | | 1,867 | | | — | | | 1,867 | | Other financial liabilities | 2,228 | | | — | | | 2,228 | | | — | | | 2,228 | |
| Other liabilities | Other liabilities | $ | 12,260 | | | $ | 9,750 | | | $ | 2,510 | | | $ | — | | | $ | 2,510 | | Other liabilities | $ | 10,101 | | | $ | 6,785 | | | $ | 3,316 | | | $ | — | | | $ | 3,316 | |
|
______________
(1)Financial instruments sent (held).
As of December 31, 20202021
| | | 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 | $ | 9,186 | | | $ | 8,206 | | | $ | 980 | | | $ | (53) | | | $ | 927 | | Derivative assets | $ | 12,309 | | | $ | 10,724 | | | $ | 1,585 | | | $ | (961) | | | $ | 624 | |
| Other financial assets | Other financial assets | 1,403 | | | — | | | 1,403 | | | — | | | 1,403 | | Other financial assets | 1,325 | | | — | | | 1,325 | | | — | | | 1,325 | |
| Other invested assets | Other invested assets | $ | 10,589 | | | $ | 8,206 | | | $ | 2,383 | | | $ | (53) | | | $ | 2,330 | | Other invested assets | $ | 13,634 | | | $ | 10,724 | | | $ | 2,910 | | | $ | (961) | | | $ | 1,949 | |
| | Liabilities: | Liabilities: | | Liabilities: | |
| Derivative liabilities | Derivative liabilities | $ | 8,218 | | | $ | 8,206 | | | $ | 12 | | | $ | — | | | $ | 12 | | Derivative liabilities | $ | 10,738 | | | $ | 10,724 | | | $ | 14 | | | $ | — | | | $ | 14 | |
| Other financial liabilities | Other financial liabilities | 1,568 | | | — | | | 1,568 | | | — | | | 1,568 | | Other financial liabilities | 2,064 | | | — | | | 2,064 | | | — | | | 2,064 | |
| Other liabilities | Other liabilities | $ | 9,786 | | | $ | 8,206 | | | $ | 1,580 | | | $ | — | | | $ | 1,580 | | Other liabilities | $ | 12,802 | | | $ | 10,724 | | | $ | 2,078 | | | $ | — | | | $ | 2,078 | |
______________
(1)Financial instruments sent (held).
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 Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the General Account.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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, 2020.2021.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Summarized financial information for the Company’s Closed Block is as follows:
| | | | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | (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 | $ | 6,022 | | | $ | 6,201 | | Future policy benefits, policyholders’ account balances and other | $ | 5,806 | | | $ | 5,928 | |
| Policyholder dividend obligation | Policyholder dividend obligation | 25 | | | 160 | | Policyholder dividend obligation | — | | | — | |
| Other liabilities | Other liabilities | 40 | | | 39 | | Other liabilities | 66 | | | 39 | |
| Total Closed Block liabilities | Total Closed Block liabilities | 6,087 | | | 6,400 | | Total Closed Block liabilities | 5,872 | | | 5,967 | |
| | Assets Designated to the Closed Block: | Assets Designated to the Closed Block: | | Assets Designated to the Closed Block: | |
| Fixed maturities AFS, at fair value (amortized cost of $3,283 and $3,359) (allowance for credit losses of $0) | 3,537 | | | 3,718 | | |
| Mortgage loans on real estate (net of allowance for credit losses of $5 and $6) | 1,770 | | | 1,773 | | |
| Fixed maturities AFS, at fair value (amortized cost of $3,189 and $3,185) (allowance for credit losses of $0 and $0) | | Fixed maturities AFS, at fair value (amortized cost of $3,189 and $3,185) (allowance for credit losses of $0 and $0) | 3,054 | | | 3,390 | |
| Mortgage loans on real estate (net of allowance for credit losses of $3 and $4) | | Mortgage loans on real estate (net of allowance for credit losses of $3 and $4) | 1,693 | | | 1,771 | |
| Policy loans | Policy loans | 615 | | | 648 | | Policy loans | 581 | | | 602 | |
| Cash and other invested assets | Cash and other invested assets | 18 | | | 28 | | Cash and other invested assets | 70 | | | 63 | |
| Other assets | Other assets | 98 | | | 169 | | Other assets | 122 | | | 90 | |
| Total assets designated to the Closed Block | Total assets designated to the Closed Block | 6,038 | | | 6,336 | | Total assets designated to the Closed Block | 5,520 | | | 5,916 | |
| | Excess of Closed Block liabilities over assets designated to the Closed Block | Excess of Closed Block liabilities over assets designated to the Closed Block | 49 | | | 64 | | Excess of Closed Block liabilities over assets designated to the Closed Block | 352 | | | 51 | |
| Amounts included in AOCI: | Amounts included in AOCI: | | Amounts included in AOCI: | |
| Net unrealized investment gains (losses), net of policyholders’ dividend obligation: $25 and $160; and net of income tax: $(48) and $(42) | 191 | | | 167 | | |
| Net unrealized investment gains (losses), net of policyholders’ dividend obligation: $0 and $0; and net of income tax: $28 and $(43) | | Net unrealized investment gains (losses), net of policyholders’ dividend obligation: $0 and $0; and net of income tax: $28 and $(43) | (96) | | | 172 | |
| Maximum future earnings to be recognized from Closed Block assets and liabilities | Maximum future earnings to be recognized from Closed Block assets and liabilities | $ | 240 | | | $ | 231 | | Maximum future earnings to be recognized from Closed Block assets and liabilities | $ | 256 | | | $ | 223 | |
The Company’s Closed Block revenues and expenses were as follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 | |
| | (in millions) | | (in millions) |
| Revenues: | Revenues: | | | Revenues: | | |
| Premiums and other income | Premiums and other income | $ | 33 | | | $ | 36 | | | $ | 109 | | | $ | 118 | | | Premiums and other income | $ | 31 | | | $ | 37 | | | $ | 64 | | | $ | 76 | | |
| Net investment income (loss) | Net investment income (loss) | 59 | | | 61 | | | 179 | | | 190 | | | Net investment income (loss) | 55 | | | 60 | | | 113 | | | 120 | | |
| Investment gains (losses), net | Investment gains (losses), net | — | | | 1 | | | 2 | | | (1) | | | Investment gains (losses), net | (3) | | | 2 | | | (2) | | | 2 | | |
| Total revenues | Total revenues | 92 | | | 98 | | | 290 | | | 307 | | | Total revenues | 83 | | | 99 | | | 175 | | | 198 | | |
| | Benefits and Other Deductions: | Benefits and Other Deductions: | | | Benefits and Other Deductions: | | |
| Policyholders’ benefits and dividends | Policyholders’ benefits and dividends | 108 | | | 96 | | | 304 | | | 302 | | | Policyholders’ benefits and dividends | 80 | | | 90 | | | 156 | | | 196 | | |
| Other operating costs and expenses | Other operating costs and expenses | 2 | | | — | | | 3 | | | 1 | | | Other operating costs and expenses | — | | | — | | | — | | | 1 | | |
| Total benefits and other deductions | Total benefits and other deductions | 110 | | | 96 | | | 307 | | | 303 | | | Total benefits and other deductions | 80 | | | 90 | | | 156 | | | 197 | | |
| Net income (loss), before income taxes | Net income (loss), before income taxes | (18) | | | 2 | | | (17) | | | 4 | | | Net income (loss), before income taxes | 3 | | | 9 | | | 19 | | | 1 | | |
| Income tax (expense) benefit | Income tax (expense) benefit | (2) | | | (1) | | | (3) | | | (2) | | | Income tax (expense) benefit | 3 | | | — | | | 4 | | | (1) | | |
| Net income (loss) | Net income (loss) | $ | (20) | | | $ | 1 | | | $ | (20) | | | $ | 2 | | | Net income (loss) | $ | 6 | | | $ | 9 | | | $ | 23 | | | $ | — | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
A reconciliation of the Company’s policyholder dividend obligation follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 | |
| | (in millions) | | (in millions) |
| Beginning balance | Beginning balance | $ | 72 | | | $ | 2 | | | $ | 160 | | | $ | 2 | | | Beginning balance | $ | — | | | $ | 28 | | | $ | — | | | $ | 160 | | |
| Unrealized investment gains (losses) | Unrealized investment gains (losses) | (47) | | | — | | | (135) | | | — | | | Unrealized investment gains (losses) | — | | | 44 | | | — | | | (88) | | |
| Ending balance | Ending balance | $ | 25 | | | $ | 2 | | | $ | 25 | | | $ | 2 | | | Ending balance | $ | — | | | $ | 72 | | | $ | — | | | $ | 72 | | |
|
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 NLG Rider 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 future policy benefits and other policyholders’ liabilities. The amounts for the ceded contracts are reflected in the consolidated balance sheets in amounts due from reinsurers. The amounts for the ceded IBGMIB that are reflected in the consolidated balance sheets in GMIB reinsurance contract asset are at fair value.
Change in Liability for Variable Annuity Contracts with GMDB and GMIB Features and No NLG Feature
Three and NineSix Months Ended SeptemberJune 30, 20212022 and 20202021
| | | | | | | | | | | | | | | | | | | | | | | |
| GMDB | | GMIB |
| Direct | | Ceded | | Direct | | Ceded |
| (in millions) |
| Balance, July 1, 2021 | $ | 5,140 | | | $ | (2,281) | | | $ | 5,945 | | | $ | (4,444) | |
| Paid guarantee benefits | (104) | | | 42 | | | (87) | | | 15 | |
| Other changes in reserve | 7 | | | (3) | | | 152 | | | 126 | |
| Impact of the Venerable transaction (1) | — | | | — | | | — | | | — | |
| Balance, September 30, 2021 | $ | 5,043 | | | $ | (2,242) | | | $ | 6,010 | | | $ | (4,303) | |
| | | | | | | |
| Balance, July 1, 2020 | $ | 4,998 | | | $ | (99) | | | $ | 6,121 | | | $ | (3,433) | |
| Paid guarantee benefits | (121) | | | 3 | | | (110) | | | 21 | |
| Other changes in reserve | 235 | | | 9 | | | 113 | | | 165 | |
| Balance, September 30, 2020 | $ | 5,112 | | | $ | (87) | | | $ | 6,124 | | | $ | (3,247) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| GMDB | | GMIB |
| Direct | | Ceded | | Direct | | Ceded |
| (in millions) |
| Balance, April 1, 2022 | $ | 5,101 | | | $ | (2,274) | | | $ | 6,081 | | | $ | (3,928) | |
| Paid guarantee benefits | (148) | | | 61 | | | (145) | | | (9) | |
| Other changes in reserve | 200 | | | (82) | | | 281 | | | 99 | |
| | | | | | | |
| Balance, June 30, 2022 | $ | 5,153 | | | $ | (2,295) | | | $ | 6,217 | | | $ | (3,838) | |
| | | | | | | |
| Balance, April 1, 2021 | $ | 5,083 | | | $ | (81) | | | $ | 5,966 | | | $ | (2,133) | |
| Paid guarantee benefits | (114) | | | 19 | | | (93) | | | 13 | |
| Other changes in reserve | 171 | | | (43) | | | 72 | | | (183) | |
| Impact of the Venerable Transaction (1) | — | | | (2,176) | | | — | | | (2,141) | |
| Balance, June 30, 2021 | $ | 5,140 | | | $ | (2,281) | | | $ | 5,945 | | | $ | (4,444) | |
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, January 1, 2022 | | Balance, January 1, 2022 | $ | 5,011 | | | $ | (2,237) | | | $ | 5,952 | | | $ | (4,207) | |
| Paid guarantee benefits | | Paid guarantee benefits | (281) | | | 117 | | | (266) | | | 7 | |
| Other changes in reserve | | Other changes in reserve | 423 | | | (175) | | | 531 | | | 362 | |
| | Balance, June 30, 2022 | | Balance, June 30, 2022 | $ | 5,153 | | | $ | (2,295) | | | $ | 6,217 | | | $ | (3,838) | |
| | Balance, January 1, 2021 | Balance, January 1, 2021 | $ | 5,093 | | | $ | (84) | | | $ | 6,025 | | | $ | (2,859) | | Balance, January 1, 2021 | $ | 5,093 | | | $ | (84) | | | $ | 6,025 | | | $ | (2,859) | |
| Paid guarantee benefits | Paid guarantee benefits | (351) | | | 65 | | | (271) | | | 41 | | Paid guarantee benefits | (247) | | | 23 | | | (184) | | | 26 | |
| Other changes in reserve | Other changes in reserve | 301 | | | (47) | | | 256 | | | 656 | | Other changes in reserve | 294 | | | (44) | | | 104 | | | 530 | |
| Impact of the Venerable transaction (1) | — | | | (2,176) | | | — | | | (2,141) | | |
| Balance, September 30, 2021 | $ | 5,043 | | | $ | (2,242) | | | $ | 6,010 | | | $ | (4,303) | | |
| | Balance, January 1, 2020 | $ | 4,775 | | | $ | (99) | | | $ | 4,671 | | | $ | (2,466) | | |
| Paid guarantee benefits | (372) | | | 12 | | | (287) | | | 58 | | |
| Other changes in reserve | 709 | | | — | | | 1,740 | | | (839) | | |
| Balance, September 30, 2020 | $ | 5,112 | | | $ | (87) | | | $ | 6,124 | | | $ | (3,247) | | |
| Impact of the Venerable Transaction (1) | | Impact of the Venerable Transaction (1) | — | | | (2,176) | | | — | | | (2,141) | |
| Balance, June 30, 2021 | | Balance, June 30, 2021 | $ | 5,140 | | | $ | (2,281) | | | $ | 5,945 | | | $ | (4,444) | |
____________
(1)Includes the impact as of June 1, 2021 on the ceded reserves to Venerable. See Note 1- Organization, for details ofon the Venerable transaction.Transaction.
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 and amounts due from reinsurers related to GMIB NLG product features (GMIB NLG Reinsurance) are considered embedded or freestanding insurance derivatives and 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 Fair Value Disclosures.of the Notes to these Consolidated Financial Statements.
Account Values and Net Amount at Risk
Account Values and NAR for direct variable annuity contracts in force with GMDB and GMIB features as of SeptemberJune 30, 20212022 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
as of SeptemberJune 30, 20212022
| | | 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 | $ | 16,038 | | $ | 85 | | $ | 52 | | $ | 161 | | $ | 16,336 | General Account | $ | 16,501 | | $ | 90 | | $ | 49 | | $ | 153 | | $ | 16,793 |
| Separate Accounts | Separate Accounts | 57,063 | | 9,609 | | 3,325 | | 33,862 | | 103,859 | Separate Accounts | 47,179 | | 7,658 | | 2,577 | | 26,538 | | 83,952 |
| Total Account Values | Total Account Values | $ | 73,101 | | $ | 9,694 | | $ | 3,377 | | $ | 34,023 | | $ | 120,195 | Total Account Values | $ | 63,680 | | $ | 7,748 | | $ | 2,626 | | $ | 26,691 | | $ | 100,745 |
| | NAR, gross | NAR, gross | $ | 104 | | $ | 80 | | $ | 1,441 | | $ | 16,473 | | $ | 18,098 | NAR, gross | $ | 676 | | $ | 1,413 | | $ | 1,848 | | $ | 22,522 | | $ | 26,459 |
| NAR, net of amounts reinsured | NAR, net of amounts reinsured | $ | 102 | | $ | 71 | | $ | 1,013 | | $ | 8,394 | | $ | 9,580 | NAR, net of amounts reinsured | $ | 668 | | $ | 1,274 | | $ | 1,337 | | $ | 12,051 | | $ | 15,330 |
| | Average attained age of policyholders (in years) | Average attained age of policyholders (in years) | 51.5 | | 68.8 | | 75.4 | | 70.6 | | 55.4 | Average attained age of policyholders (in years) | 51.5 | | 69.5 | | 75.8 | | 71.4 | | 55.7 |
| Percentage of policyholders over age 70 | Percentage of policyholders over age 70 | 11.6% | | 50.6% | | 72.0% | | 56.5% | | 20.7% | Percentage of policyholders over age 70 | 12.0% | | 51.9% | | 73.6% | | 59.2% | | 21.0% |
| 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 | $ | — | | $ | — | | $ | 15 | | $ | 210 | | $ | 225 | General Account | $ | — | | $ | — | | $ | 15 | | $ | 199 | | $ | 214 |
| Separate Accounts | Separate Accounts | — | | — | | 25,505 | | 36,152 | | 61,657 | Separate Accounts | — | | — | | 21,091 | | 27,973 | | 49,064 |
| Total Account Values | Total Account Values | $ | — | | $ | — | | $ | 25,520 | | $ | 36,362 | | $ | 61,882 | Total Account Values | $ | — | | $ | — | | $ | 21,106 | | $ | 28,172 | | $ | 49,278 |
| | NAR, gross | NAR, gross | $ | — | | $ | — | | $ | 693 | | $ | 9,492 | | $ | 10,185 | NAR, gross | $ | — | | $ | — | | $ | 652 | | $ | 9,749 | | $ | 10,401 |
| NAR, net of amounts reinsured | NAR, net of amounts reinsured | $ | — | | $ | — | | $ | 223 | | $ | 3,896 | | $ | 4,119 | NAR, net of amounts reinsured | $ | — | | $ | — | | $ | 209 | | $ | 4,023 | | $ | 4,232 |
| | Average attained age of policyholders (in years) | Average attained age of policyholders (in years) | N/A | | N/A | | 64.8 | | 70.7 | | 68.5 | Average attained age of policyholders (in years) | N/A | | N/A | | 65.4 | | 71.1 | | 69.0 |
| Weighted average years remaining until annuitization | Weighted average years remaining until annuitization | N/A | | N/A | | 5.8 | | 0.6 | | 2.6 | Weighted average years remaining until annuitization | N/A | | N/A | | 5.7 | | 0.5 | | 2.5 |
| 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 of the 2020Notes to the Consolidated Financial Statements 2021 Form 10-K.
Separate Accounts Investments by Investment Category Underlying Variable Annuity Contracts with GMDB and GMIB Features
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
| | | | | | September 30, 2021 | | December 31, 2020 | | | June 30, 2022 | | December 31, 2021 |
| Mutual Fund Type | Mutual Fund Type | | GMDB | | GMIB | | GMDB | | GMIB | Mutual Fund Type | | GMDB | | GMIB | | GMDB | | GMIB |
| | | | (in millions) | | | (in millions) |
| Equity | Equity | | $ | 50,042 | | | $ | 19,261 | | | $ | 46,850 | | | $ | 18,771 | | Equity | | $ | 39,753 | | | $ | 14,590 | | | $ | 52,744 | | | $ | 20,009 | |
| Fixed income | Fixed income | | 5,448 | | | 2,569 | | | 5,506 | | | 2,701 | | Fixed income | | 4,730 | | | 2,178 | | | 5,384 | | | 2,505 | |
| Balanced | Balanced | | 47,332 | | | 39,562 | | | 47,053 | | | 39,439 | | Balanced | | 38,348 | | | 32,034 | | | 48,152 | | | 40,228 | |
| Other | Other | | 1,037 | | | 265 | | | 1,111 | | | 275 | | Other | | 1,121 | | | 262 | | | 1,025 | | | 264 | |
| Total | Total | | $ | 103,859 | | | $ | 61,657 | | | $ | 100,520 | | | $ | 61,186 | | Total | | $ | 83,952 | | | $ | 49,064 | | | $ | 107,305 | | | $ | 63,006 | |
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 net 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 future policy benefits and other policyholders’ liabilities in the consolidated balance sheets, is summarized in the table below.
| | | 2021 | | 2020 | | 2022 | | 2021 |
| | Direct Liability | | Reinsurance Ceded | | Net | | Direct Liability | | Reinsurance Ceded | | Net | | Direct Liability | | Reinsurance Ceded | | Net | | Direct Liability | | Reinsurance Ceded | | Net |
| | (in millions) | | (in millions) |
| | | Balance, July 1, | $ | 1,064 | | | $ | (909) | | | $ | 155 | | | $ | 941 | | | $ | (841) | | | $ | 100 | | |
| Paid guarantee benefits | (24) | | | — | | | (24) | | | (6) | | | — | | | (6) | | |
| Other changes in reserves | 38 | | | (11) | | | 27 | | | 61 | | | (31) | | | 30 | | |
| Balance, September 30, | $ | 1,078 | | | $ | (920) | | | $ | 158 | | | $ | 996 | | | $ | (872) | | | $ | 124 | | |
| | Balance, January 1, | $ | 1,016 | | | $ | (883) | | | $ | 133 | | | $ | 894 | | | $ | (808) | | | $ | 86 | | |
| Paid guarantee benefits | (52) | | | — | | | (52) | | | (32) | | | — | | | (32) | | |
| Other changes in reserves | 114 | | | (37) | | | 77 | | | 134 | | | (64) | | | 70 | | |
| Balance, September 30, | $ | 1,078 | | | $ | (920) | | | $ | 158 | | | $ | 996 | | | $ | (872) | | | $ | 124 | | |
| | | Balance, April 1, | | Balance, April 1, | 1,106 | | | (929) | | | 177 | | | 1,045 | | | (901) | | | 144 | |
| Paid guarantee benefits | | Paid guarantee benefits | (8) | | | — | | | (8) | | | (13) | | | — | | | (13) | |
| Other changes in reserves | | Other changes in reserves | 29 | | | (11) | | | 18 | | | 32 | | | (8) | | | 24 | |
| Balance at June 30, | | Balance at June 30, | $ | 1,127 | | | $ | (940) | | | $ | 187 | | | $ | 1,064 | | | $ | (909) | | | $ | 155 | |
| | Balance, January 1, | | Balance, January 1, | 1,090 | | | (928) | | | 162 | | | 1,016 | | | (883) | | | 133 | |
| Paid guarantee benefits | | Paid guarantee benefits | (16) | | | — | | | (16) | | | (28) | | | — | | | (28) | |
| Other changes in reserves | | Other changes in reserves | 53 | | | (12) | | | 41 | | | 76 | | | (26) | | | 50 | |
| Balance at June 30, | | Balance at June 30, | $ | 1,127 | | | $ | (940) | | | $ | 187 | | | $ | 1,064 | | | $ | (909) | | | $ | 155 | |
7) REINSURANCE
The Company assumes and cedes reinsurance with other insurance companies. The Company evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Ceded reinsurance does not relieve the originating insurer of liability.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
On June 1, 2021, Holdings completed the sale of CSLRC to VIAC. Immediately following the closing of the Transaction, CSLRC and Equitable Financial entered into the Reinsurance Agreement, pursuant to which Equitable Financial ceded to CSLRC, on a combined coinsurance and modified coinsurance basis, legacy variable annuity policies sold by Equitable Financial between 2006-2008. See Note 1- Organization for details of the Venerable transactions.
The following table summarizes the effect of reinsurance. The impact of the reinsurance transaction described above results in an increase in reinsurance ceded.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 | | |
| (in millions) |
| Direct premiums | $ | 195 | | | $ | 175 | | | $ | 579 | | | $ | 575 | | | |
| Reinsurance assumed | 47 | | | 45 | | | 136 | | | 145 | | | |
| Reinsurance ceded | (61) | | | (42) | | | (141) | | | (107) | | | |
| Premiums | $ | 181 | | | $ | 178 | | | $ | 574 | | | $ | 613 | | | |
| | | | | | | | | |
| Direct charges and fee income | $ | 986 | | | $ | 945 | | | $ | 2,095 | | | $ | 1,997 | | | |
| Reinsurance ceded | (175) | | | (92) | | | 486 | | | 585 | | | |
| Policy charges and fee income | $ | 811 | | | $ | 853 | | | $ | 2,581 | | | $ | 2,582 | | | |
| | | | | | | | | |
| Direct policyholders’ benefits | $ | 793 | | | $ | 1,006 | | | $ | 2,782 | | | $ | 4,419 | | | |
| Reinsurance assumed | 57 | | | 52 | | | 172 | | | 177 | | | |
| Reinsurance ceded | (142) | | | (108) | | | (571) | | | (329) | | | |
| Policyholders’ benefits | $ | 708 | | | $ | 950 | | | $ | 2,383 | | | $ | 4,267 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Ceded Reinsurance
As of September 30, 2021 and December 31, 2020, the Company had reinsured with non-affiliates in the aggregate approximately 47.1% and 2.6%, respectively, of its current exposure to the GMDB obligation on annuity contracts in-force and, subject to certain maximum amounts or caps in any one period, approximately 59.6% and 13.4% of its current liability exposure, respectively, resulting from the GMIB feature. For additional information, see Note 6.
The following table summarizes the ceded reinsurance GMIB reinsurance contracts, third-party recoverables and amount due to reinsurance.
| | | | | | | | | | | |
| |
| | September 30, 2021 | | December 31, 2020 |
| (in millions) |
| Ceded Reinsurance: | | | |
| Estimated net fair values of ceded GMIB reinsurance contracts, considered derivatives (1) | $ | 2,156 | | | $ | 2,859 | |
| Third-party reinsurance recoverables related to insurance contracts | 12,566 | | | 2,245 | |
| Top reinsurers: | | | |
| Venerable Insurance and Annuity Company (BBB+ SAP rating) | 10,440 | | | N/A |
| Zurich Life Insurance Company, Ltd. (AA- SAP rating) | 1,340 | | | 1,421 | |
| Third-party reinsurance payables related to insurance contracts | 202 | | | 113 | |
| Top reinsurers: | | | |
| Venerable Insurance and Annuity Company | 129 | | | N/A |
| | | |
| | | |
| | | |
______________
(1)The estimated fair values increased $(134) million, $(186) million, $(703) million and $781 million for the three and nine months ended September 30, 2021 and 2020, respectively.
8) 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:
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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.
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. For the periods ended SeptemberAs of June 30, 20212022 and December 31, 2020,2021, 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.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Fair Value Measurements as of SeptemberJune 30, 20212022
| | | 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) | $ | — | | | $ | 46,012 | | | $ | 1,440 | | | $ | 47,452 | | Corporate (1) | $ | — | | | $ | 40,395 | | | $ | 1,752 | | | $ | 42,147 | |
| U.S. Treasury, government and agency | U.S. Treasury, government and agency | — | | | 15,083 | | | — | | | 15,083 | | U.S. Treasury, government and agency | — | | | 6,874 | | | — | | | 6,874 | |
| States and political subdivisions | States and political subdivisions | — | | | 541 | | | 37 | | | 578 | | States and political subdivisions | — | | | 563 | | | 30 | | | 593 | |
| Foreign governments | Foreign governments | — | | | 1,003 | | | — | | | 1,003 | | Foreign governments | — | | | 959 | | | — | | | 959 | |
| Residential mortgage-backed (2) | Residential mortgage-backed (2) | — | | | 98 | | | — | | | 98 | | Residential mortgage-backed (2) | — | | | 503 | | | — | | | 503 | |
| Asset-backed (3) | Asset-backed (3) | — | | | 5,561 | | | 5 | | | 5,566 | | Asset-backed (3) | — | | | 8,264 | | | 18 | | | 8,282 | |
| Commercial mortgage-backed | Commercial mortgage-backed | — | | | 1,864 | | | 10 | | | 1,874 | | Commercial mortgage-backed | — | | | 3,247 | | | 25 | | | 3,272 | |
| Redeemable preferred stock | Redeemable preferred stock | — | | | 54 | | | — | | | 54 | | Redeemable preferred stock | — | | | 44 | | | — | | | 44 | |
| Total fixed maturities, AFS | Total fixed maturities, AFS | — | | | 70,216 | | | 1,492 | | | 71,708 | | Total fixed maturities, AFS | — | | | 60,849 | | | 1,825 | | | 62,674 | |
| Other equity investments | Other equity investments | 307 | | | 392 | | | 5 | | | 704 | | Other equity investments | 196 | | | 476 | | | 12 | | | 684 | |
| Trading securities | Trading securities | 214 | | | 195 | | | — | | | 409 | | Trading securities | 170 | | | 175 | | | — | | | 345 | |
| Other invested assets: | Other invested assets: | | Other invested assets: | |
| Short-term investments | Short-term investments | — | | | 3 | | | — | | | 3 | | Short-term investments | — | | | 14 | | | — | | | 14 | |
| Assets of consolidated VIEs/VOEs | Assets of consolidated VIEs/VOEs | — | | | — | | | 11 | | | 11 | | Assets of consolidated VIEs/VOEs | — | | | — | | | 5 | | | 5 | |
| Swaps | Swaps | — | | | (596) | | | — | | | (596) | | Swaps | — | | | (355) | | | — | | | (355) | |
| Credit default swaps | Credit default swaps | — | | | 1 | | | — | | | 1 | | Credit default swaps | — | | | (2) | | | — | | | (2) | |
| Options | Options | — | | | 5,889 | | | — | | | 5,889 | | Options | — | | | 2,837 | | | — | | | 2,837 | |
| Total other invested assets | Total other invested assets | — | | | 5,297 | |
| 11 | |
| 5,308 | | Total other invested assets | — | | | 2,494 | |
| 5 | |
| 2,499 | |
| Cash equivalents | Cash equivalents | 424 | | | 259 | | | — | | | 683 | | Cash equivalents | 1,097 | | | 520 | | | — | | | 1,617 | |
| Amounts due from reinsurer (5) | Amounts due from reinsurer (5) | — | | | — | | | 5,869 | | | 5,869 | | Amounts due from reinsurer (5) | — | | | — | | | 4,681 | | | 4,681 | |
| GMIB reinsurance contracts asset | GMIB reinsurance contracts asset | — | | | — | | | 2,156 | | | 2,156 | | GMIB reinsurance contracts asset | — | | | — | | | 1,612 | | | 1,612 | |
| Separate Accounts assets (4) | Separate Accounts assets (4) | 135,764 | | | 2,555 | | | — | | | 138,319 | | Separate Accounts assets (4) | 110,410 | | | 2,548 | | | 1 | | | 112,959 | |
| Total Assets | Total Assets | $ | 136,709 | | | $ | 78,914 | | | $ | 9,533 | | | $ | 225,156 | | Total Assets | $ | 111,873 | | | $ | 67,062 | | | $ | 8,136 | | | $ | 187,071 | |
| | Liabilities: | Liabilities: | | Liabilities: | |
| GMxB derivative features’ liability | GMxB derivative features’ liability | $ | — | | | $ | — | | | $ | 8,938 | | | $ | 8,938 | | GMxB derivative features’ liability | $ | — | | | $ | — | | | $ | 6,189 | | | $ | 6,189 | |
| SCS, SIO, MSO and IUL indexed features’ liability | SCS, SIO, MSO and IUL indexed features’ liability | — | | | 5,446 | | | — | | | 5,446 | | SCS, SIO, MSO and IUL indexed features’ liability | — | | | 2,602 | | | — | | | 2,602 | |
| Total Liabilities | Total Liabilities | $ | — | | | $ | 5,446 | | | $ | 8,938 | | | $ | 14,384 | | Total Liabilities | $ | — | | | $ | 2,602 | | | $ | 6,189 | | | $ | 8,791 | |
______________
(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 SeptemberJune 30, 20212022 the fair value of such investments was $379$438 million.
(5)This represents GMIB NLG ceded reserves related to Venerable transaction.Transaction. See Note 1- Organization1 of the Notes to these Consolidated Financial Statements for details of the Venerable transaction.Transaction.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Fair Value Measurements as of December 31, 20202021
| | | 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) | $ | — | | | $ | 51,415 | | | $ | 1,687 | | | $ | 53,102 | | Corporate (1) | $ | — | | | $ | 46,231 | | | $ | 1,493 | | | $ | 47,724 | |
| U.S. Treasury, government and agency | U.S. Treasury, government and agency | — | | | 15,943 | | | — | | | 15,943 | | U.S. Treasury, government and agency | — | | | 15,214 | | | — | | | 15,214 | |
| States and political subdivisions | States and political subdivisions | — | | | 535 | | | 39 | | | 574 | | States and political subdivisions | — | | | 562 | | | 35 | | | 597 | |
| Foreign governments | Foreign governments | — | | | 1,103 | | | — | | | 1,103 | | Foreign governments | — | | | 1,152 | | | — | | | 1,152 | |
| Residential mortgage-backed (2) | Residential mortgage-backed (2) | — | | | 131 | | | — | | | 131 | | Residential mortgage-backed (2) | — | | | 90 | | | — | | | 90 | |
| Asset-backed (3) | Asset-backed (3) | — | | | 3,636 | | | 20 | | | 3,656 | | Asset-backed (3) | — | | | 5,897 | | | 8 | | | 5,905 | |
| Commercial mortgage-backed | Commercial mortgage-backed | — | | | 1,203 | | | — | | | 1,203 | | Commercial mortgage-backed | — | | | 2,321 | | | 20 | | | 2,341 | |
| Redeemable preferred stock | Redeemable preferred stock | 402 | | | 239 | | | — | | | 641 | | Redeemable preferred stock | — | | | 53 | | | — | | | 53 | |
| Total fixed maturities, AFS | Total fixed maturities, AFS | 402 | | | 74,205 | | | 1,746 | | | 76,353 | | Total fixed maturities, AFS | — | | | 71,520 | | | 1,556 | | | 73,076 | |
| Other equity investments | Other equity investments | 13 | | | — | | | 2 | | | 15 | | Other equity investments | 243 | | | 434 | | | 5 | | | 682 | |
| Trading securities | Trading securities | 285 | | | 5,055 | | | — | | | 5,340 | | Trading securities | 193 | | | 186 | | | — | | | 379 | |
| Other invested assets: | Other invested assets: | | Other invested assets: | |
| Short-term investments | Short-term investments | — | | | 82 | | | 1 | | | 83 | | Short-term investments | — | | | — | | | — | | | — | |
| Assets of consolidated VIEs/VOEs | Assets of consolidated VIEs/VOEs | — | | | — | | | 12 | | | 12 | | Assets of consolidated VIEs/VOEs | — | | | — | | | 8 | | | 8 | |
| Swaps | Swaps | — | | | (96) | | | — | | | (96) | | Swaps | — | | | (469) | | | — | | | (469) | |
| Credit default swaps | Credit default swaps | — | | | 7 | | | — | | | 7 | | Credit default swaps | — | | | (1) | | | — | | | (1) | |
| Options | Options | — | | | 4,668 | | | — | | | 4,668 | | Options | — | | | 6,956 | | | — | | | 6,956 | |
| Total other invested assets | Total other invested assets | — | | | 4,661 | | | 13 | | | 4,674 | | Total other invested assets | — | | | 6,486 | | | 8 | | | 6,494 | |
| Cash equivalents | Cash equivalents | 1,183 | | | 287 | | | — | | | 1,470 | | Cash equivalents | 1,109 | | | 273 | | | — | | | 1,382 | |
| Amounts due from reinsurer (5) | | Amounts due from reinsurer (5) | — | | | — | | | 5,813 | | | 5,813 | |
| GMIB reinsurance contracts asset | GMIB reinsurance contracts asset | — | | | — | | | 2,859 | | | 2,859 | | GMIB reinsurance contracts asset | — | | | — | | | 2,068 | | | 2,068 | |
| Separate Accounts assets (4) | Separate Accounts assets (4) | 130,106 | | | 2,668 | | | 1 | | | 132,775 | | Separate Accounts assets (4) | 140,740 | | | 2,565 | | | 1 | | | 143,306 | |
| Total Assets | Total Assets | $ | 131,989 | | | $ | 86,876 | | | $ | 4,621 | | | $ | 223,486 | | Total Assets | $ | 142,285 | | | $ | 81,464 | | | $ | 9,451 | | | $ | 233,200 | |
| | Liabilities: | Liabilities: | | Liabilities: | |
| GMxB derivative features’ liability | GMxB derivative features’ liability | $ | — | | | $ | — | | | $ | 10,936 | | | $ | 10,936 | | GMxB derivative features’ liability | $ | — | | | $ | — | | | $ | 8,525 | | | $ | 8,525 | |
| SCS, SIO, MSO and IUL indexed features’ liability | SCS, SIO, MSO and IUL indexed features’ liability | — | | | 4,378 | | | — | | | 4,378 | | SCS, SIO, MSO and IUL indexed features’ liability | — | | | 6,641 | | | — | | | 6,641 | |
| Total Liabilities | Total Liabilities | $ | — | | | $ | 4,378 | | | $ | 10,936 | | | $ | 15,314 | | Total Liabilities | $ | — | | | $ | 6,641 | | | $ | 8,525 | | | $ | 15,166 | |
______________
(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. As of December 31, 20202021 the fair value of such investments was $356$404 million.
(5)This represents GMIB NLG ceded reserves related to Venerable Transaction. See Note 1 of the Notes to these Consolidated Financial Statements for details of the Venerable Transaction.
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
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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 of the Notes to these Consolidated Financial Statements 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 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, 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
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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
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 classified 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 GMIBNLGGMIB NLG 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, net 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.
Also included are the Amounts due from Reinsurers related to the GMIB NLG product features (GMIB NLG Reinsurance). The fair value reflects the present value of reinsurance premiums, net of recoveries, adjusted for risk margins and nonperformance risk over a range of market consistent economic scenarios.
The valuations of the GMIB reinsurance contract asset, GMIB NLG Reinsurance and GMxB derivative features liability incorporate significant non-observable assumptions related to policyholder behavior, risk margins and equity projections of equity Separate AccountsAccount funds. The credit risks of the counterparty and of the Company are considered in determining the fair values of its GMIB reinsurance contract asset, GMIB NLG Reinsurance and GMxB derivative features liability positions, respectively, after taking into account the effects of collateral arrangements. Incremental adjustment to the swapU.S. Treasury curve for non-performance risk is made to the fair values of the GMIB reinsurance contract asset, GMIB NLG Reinsurance and GMIBNLGGMIB NLG 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 GMIBNLGGMIB NLG feature and GMIB NLG Reinsurance, , 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 GMIBNLGGMIB NLG valuations.
After giving consideration to collateral arrangements, the Company reduced the fair value of its GMIB reinsurance contract asset by $123$184 million and $160$148 million as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, to recognize incremental counterparty non-performance risk.
After giving consideration to collateral arrangements, the Company reduced the fair value of its Amounts due from Reinsurers by $195$213 million and $210 million at SeptemberJune 30, 2022 and December 31, 2021 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
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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 ninesix months ended SeptemberJune 30, 2022, fixed maturities with fair values of $115 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, fixed maturities with fair value of $65 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 5.1% of total equity as of June 30, 2022.
During the six months ended June 30, 2021, fixed maturities with fair values of $713 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, fixed maturities with fair value of $0$2 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 8.3% of total equity as of SeptemberJune 30, 2021.
During the nine months ended September 30, 2020, fixed maturities with fair values of $103 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, fixed maturities with fair value of $189 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 2.0% of total equity as of September 30, 2020.
The tables below present reconciliations for all Level 3 assets and liabilities and changes in unrealized gains (losses) for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Level 3 Instruments - Fair Value Measurements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Corporate | | State and Political Subdivisions | | CMBS | | Asset-backed | | | | |
| (in millions) |
| Balance, July 1, 2021 | $ | 1,249 | | | $ | 37 | | | $ | 11 | | | $ | 127 | | | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | 1 | | | — | | | — | | | — | | | | | |
| Investment gains (losses), net | (1) | | | — | | | — | | | — | | | | | |
| Subtotal | — | | | — | | | — | | | — | | | | | |
| Other comprehensive income (loss) | 4 | | | — | | | — | | | — | | | | | |
| Purchases | 259 | | | — | | | (1) | | | (120) | | | | | |
| Sales | (70) | | | — | | | — | | | (2) | | | | | |
| Activity related to consolidated VIEs/VOEs | — | | | — | | | — | | | — | | | | | |
| Transfers into Level 3 (1) | (2) | | | — | | | — | | | — | | | | | |
| Transfers out of Level 3 (1) | — | | | — | | | — | | | — | | | | | |
| Balance, September 30, 2021 | $ | 1,440 | | | $ | 37 | | | $ | 10 | | | $ | 5 | | | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (2) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (2) | $ | 4 | | | $ | — | | | $ | — | | | $ | — | | | | | |
| | | | | | | | | | | |
| Balance, July 1, 2020 | $ | 1,652 | | | $ | 40 | | | $ | — | | | $ | — | | | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | — | | | — | | | — | | | — | | | | | |
| Investment gains (losses), net | (1) | | | — | | | — | | | — | | | | | |
| Subtotal | (1) | | | — | | | — | | | — | | | | | |
| Other comprehensive income (loss) | 18 | | | (1) | | | — | | | — | | | | | |
| Purchases | (138) | | | — | | | — | | | 13 | | | | | |
| Sales | (22) | | | — | | | — | | | — | | | | | |
| Activity related to consolidated VIEs/VOEs | — | | | — | | | — | | | — | | | | | |
| Transfers into Level 3 (1) | (30) | | | — | | | — | | | — | | | | | |
| Transfers out of Level 3 (1) | 0 | | — | | | — | | | — | | | | | |
| Balance, September 30, 2020 | $ | 1,479 | | | $ | 39 | | | $ | — | | | $ | 13 | | | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (2) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (2) | $ | 18 | | | $ | (1) | | | $ | — | | | $ | — | | | | | |
| | | | | | | | | | | |
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| | | | | | | | | | | |
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| | | | | | | | | | | |
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| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Corporate | | State and Political Subdivisions | | CMBS | | Asset-backed | | | | |
| (in millions) |
| Balance, April 1, 2022 | $ | 1,672 | | | $ | 32 | | | $ | 238 | | | $ | 332 | | | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | 1 | | | — | | | — | | | — | | | | | |
| Investment gains (losses), net | (1) | | | — | | | — | | | — | | | | | |
| Subtotal | — | | | — | | | — | | | — | | | | | |
| Other comprehensive income (loss) | (51) | | | (1) | | | (1) | | | — | | | | | |
| Purchases | 317 | | | — | | | (212) | | | (314) | | | | | |
| Sales | (74) | | | (1) | | | — | | | — | | | | | |
| Activity related to consolidated VIEs/VOEs | — | | | — | | | — | | | — | | | | | |
| Transfers into Level 3 (1) | (5) | | | — | | | — | | | — | | | | | |
| Transfers out of Level 3 (1) | (107) | | | — | | | — | | | — | | | | | |
| Balance, June 30, 2022 | $ | 1,752 | | | $ | 30 | | | $ | 25 | | | $ | 18 | | | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (2) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (2) | $ | (51) | | | $ | (1) | | | $ | — | | | $ | — | | | | | |
| | | | | | | | | | | |
| Balance, April 1, 2021 | $ | 1,242 | | | $ | 38 | | | $ | 4 | | | $ | 65 | | | | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | State and Political Subdivisions | | CMBS | | Asset-backed | | |
| (in millions) |
| Balance, January 1, 2021 | $ | 1,687 | | | $ | 39 | | | $ | — | | | $ | 20 | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | |
| Net investment income (loss) | 4 | | | — | | | — | | | — | | | |
| Investment gains (losses), net | (14) | | | — | | | — | | | — | | | |
| Subtotal | (10) | | | — | | | — | | | — | | | |
| Other comprehensive income (loss) | 30 | | | (1) | | | — | | | — | | | |
| Purchases | 718 | | | — | | | 10 | | | 3 | | | |
| Sales | (272) | | | (1) | | | — | | | (18) | | | |
| Activity related to consolidated VIEs/VOEs | — | | | — | | | 0 | | — | | | |
| Transfers into Level 3 (1) | — | | | — | | | — | | | — | | | |
| Transfers out of Level 3 (1) | (713) | | | — | | | — | | | — | | | |
| Balance, September 30, 2021 | $ | 1,440 | | | $ | 37 | | | $ | 10 | | | $ | 5 | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (2) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (2) | $ | 30 | | | $ | (2) | | | $ | — | | | $ | — | | | |
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| 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 | (14) | | | — | | | — | | | — | | | |
| Subtotal | (12) | | | — | | | — | | | — | | | |
| Other comprehensive income (loss) | (36) | | | 1 | | | — | | | — | | | |
| Purchases | 207 | | | — | | | — | | | 13 | | | |
| Sales | (112) | | | (1) | | | — | | | — | | | |
| Activity related to consolidated VIEs/VOEs | — | | | — | | | — | | | — | | | |
| Transfers into Level 3 (1) | 189 | | | — | | | — | | | — | | | |
| Transfers out of Level 3 (1) | (3) | | | — | | | — | | | (100) | | | |
| Balance, September 30, 2020 | $ | 1,479 | | | $ | 39 | | | $ | — | | | $ | 13 | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (2) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (2) | $ | (36) | | | $ | 1 | | | $ | — | | | $ | — | | | |
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______________
(1)Transfers into/out of the Level 3 classification are reflected at beginning-of-period fair values.
(2)For instruments held as of September 30, 2021 or September 30, 2020, amounts are included in net investment income or net derivative gains (losses) in the consolidated statements of income (loss) or unrealized gains (losses) on investments in the consolidated statements of comprehensive income. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | 2 | | | 0 | | — | | | — | | | | | |
| Investment gains (losses), net | (7) | | | 0 | | — | | | — | | | | | |
| Subtotal | (5) | | | — | | | — | | | — | | | | | |
| Other comprehensive income (loss) | 17 | | | — | | | — | | | — | | | | | |
| Purchases | 294 | | | — | | | 7 | | | 73 | | | | | |
| Sales | (135) | | | (1) | | | — | | | (11) | | | | | |
| Activity related to consolidated VIEs/VOEs | — | | | — | | | — | | | — | | | | | |
| Transfers into Level 3 (1) | — | | | — | | | — | | | — | | | | | |
| Transfers out of Level 3 (1) | (164) | | | — | | | — | | | — | | | | | |
| Balance, June 30, 2021 | $ | 1,249 | | | $ | 37 | | | $ | 11 | | | $ | 127 | | | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (2) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (2) | $ | 17 | | | $ | — | | | $ | — | | | $ | — | | | | | |
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EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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| Other Equity Investments (7) | | Amounts Due from Reinsurers | | GMIB Reinsurance Contract Asset | | Separate Accounts Assets | | GMxB Derivative Features Liability | | | | |
| (in millions) | | |
| Balance, July 1, 2021 | $ | 13 | | | $ | 5,510 | | | $ | 2,290 | | | $ | 1 | | | $ | (8,455) | | | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | | | | | |
| Investment gains (losses), reported in net investment income | 1 | | | — | | | — | | | — | | | — | | | | | |
| Net derivative gains (losses) (1) | — | | | 344 | | | (128) | | | — | | | (395) | | | | | |
| Total realized and unrealized gains (losses) | 1 | |
| 344 | | | (128) | |
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| (395) | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | | | |
| Purchases (2) | — | | | 31 | | | 10 | | | (1) | | | (109) | | | | | |
| Sales (3) | (1) | | | (16) | | | (16) | | | — | | | 21 | | | | | |
| Other (5) | — | | | — | | | — | | | — | | | — | | | | | |
| Activity related to consolidated VIEs/VOEs | 1 | | | — | | | — | | | — | | | — | | | | | |
| Transfers into Level 3 (4) | — | | | — | | | — | | | — | | | — | | | | | |
| Transfers out of Level 3 (4) | 1 | | | — | | | — | | | — | | | — | | | | | |
| Balance, September 30, 2021 | $ | 15 | | | $ | 5,869 | | | $ | 2,156 | | | $ | — | | | $ | (8,938) | | | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (6) | $ | 1 | | | $ | 344 | | | $ | (128) | | | $ | — | | | $ | (395) | | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (6) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
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| Balance, July 1, 2020 | $ | 16 | | | $ | — | | | $ | 3,433 | | | $ | — | | | $ | (12,458) | | | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | | | | | |
| Investment gains (losses), reported in net investment income | — | | | — | | | — | | | — | | | — | | | | | |
| Net derivative gains (losses) | — | | | — | | | (177) | | | — | | | 570 | | | | | |
| Total realized and unrealized gains (losses) | — | |
| — | | | (177) | |
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| 570 | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | | | |
| Purchases (2) | 3 | | | — | | | 11 | | | — | | | (113) | | | | | |
| Sales (3) | — | | | — | | | (21) | | | — | | | 16 | | | | | |
| Change in estimate (4) | — | | | — | | | 1 | | | — | | | — | | | | | |
| Activity related to consolidated VIEs/VOEs | (3) | | | — | | | — | | | — | | | — | | | | | |
| Transfers into Level 3 (4) | — | | | — | | | — | | | — | | | — | | | | | |
| Transfers out of Level 3 (4) | — | | | — | | | — | | | — | | | — | | | | | |
| Balance, September 30, 2020 | $ | 16 | | | $ | — | | | $ | 3,247 | | | $ | — | | | $ | (11,985) | | | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (6) | $ | — | | | $ | — | | | $ | (177) | | | $ | — | | | $ | 570 | | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (6) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
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| Corporate | | State and Political Subdivisions | | CMBS | | Asset-backed | | | | |
| (in millions) |
| Balance, January 1, 2022 | $ | 1,493 | | | $ | 35 | | | $ | 20 | | | $ | 8 | | | | | |
| 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) | (81) | | | (4) | | | (2) | | | — | | | | | |
| Purchases | 548 | | | — | | | 7 | | | 11 | | | | | |
| Sales | (160) | | | (1) | | | — | | | (1) | | | | | |
| Activity related to consolidated VIEs/VOEs | — | | | — | | | — | | | — | | | | | |
| Transfers into Level 3 (1) | 65 | | | — | | | — | | | — | | | | | |
| Transfers out of Level 3 (1) | (115) | | | — | | | — | | | — | | | | | |
| Balance, June 30, 2022 | $ | 1,752 | | | $ | 30 | | | $ | 25 | | | $ | 18 | | | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (2) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (2) | $ | (78) | | | $ | (4) | | | $ | (2) | | | $ | — | | | | | |
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| Balance, January 1, 2021 | $ | 1,687 | | | $ | 39 | | | $ | — | | | $ | 20 | | | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | 3 | | | — | | | — | | | — | | | | | |
| Investment gains (losses), net | (13) | | | — | | | — | | | — | | | | | |
| Subtotal | (10) | | | — | | | — | | | — | | | | | |
| Other comprehensive income (loss) | 26 | | | (1) | | | — | | | — | | | | | |
| Purchases | 459 | | | — | | | 11 | | | 123 | | | | | |
| Sales | (202) | | | (1) | | | — | | | (16) | | | | | |
| Activity related to consolidated VIEs/VOEs | — | | | — | | | — | | | — | | | | | |
| Transfers into Level 3 (1) | 2 | | | — | | | — | | | — | | | | | |
| Transfers out of Level 3 (1) | (713) | | | — | | | — | | | — | | | | | |
| Balance, June 30, 2021 | $ | 1,249 | | | $ | 37 | | | $ | 11 | | | $ | 127 | | | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (2) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (2) | $ | 26 | | | $ | (1) | | | $ | — | | | $ | — | | | | | |
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| Other Equity Investments (6) | | Amounts Due from Reinsurers | | GMIB Reinsurance Contract Asset | | Separate Accounts Assets | | GMxB Derivative Features Liability | | | | |
| (in millions) | | |
| Balance, April 1, 2022 | $ | 11 | | | $ | 5,056 | | | $ | 1,742 | | | $ | — | | | $ | (6,924) | | | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | | | | | |
| Investment gains (losses), reported in net investment income | — | | | — | | | — | | | — | | | — | | | | | |
| Net derivative gains (losses) (1) | — | | | (375) | | | (125) | | | — | | | 817 | | | | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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| Other Equity Investments (7) | | Amounts Due from Reinsurers | | GMIB Reinsurance Contract Asset | | Separate Accounts Assets | | GMxB Derivative Features Liability | | |
| (in millions) | | |
| Balance, January 1, 2021 | $ | 15 | | | $ | — | | | $ | 2,859 | | | $ | 1 | | | $ | (10,936) | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | | | |
| Investment gains (losses), reported in net investment income | 2 | | | 0 | | — | | | — | | | — | | | |
| Net derivative gains (losses) (1) | — | | | 586 | | | (694) | | | — | | | 2,291 | | | |
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| Total realized and unrealized gains (losses) | 2 | |
| 586 | | | (694) | |
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| 2,291 | | | |
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| Purchases (2) | — | | | 40 | | | 32 | | | — | | | (344) | | | |
| Sales (3) | (1) | | | (16) | | | (41) | | | — | | | 51 | | | |
| Settlements | — | | | — | | | — | | | — | | | — | | | |
| Other (5) | — | | | 5,259 | | | — | | | — | | | — | | | |
| Activity related to consolidated VIEs/VOEs | (1) | | | — | | | — | | | — | | | — | | | |
| Transfers into Level 3 (4) | — | | | — | | | — | | | — | | | — | | | |
| Transfers out of Level 3 (4) | — | | | — | | | — | | | (1) | | | — | | | |
| Balance, September 30, 2021 | $ | 15 | | | $ | 5,869 | | | $ | 2,156 | | | $ | — | | | $ | (8,938) | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (6) | $ | 2 | | | $ | 586 | | | $ | (694) | | | $ | — | | | $ | 2,291 | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (6) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
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| Balance, January 1, 2020 | $ | 16 | | | $ | — | | | $ | 2,466 | | | $ | — | | | $ | (8,316) | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | | | |
| Investment gains (losses), reported in net investment income | — | | | — | | | — | | | — | | | — | | | |
| Net derivative gains (losses) | — | | | — | | | 849 | | | — | | | (3,382) | | | |
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| Total realized and unrealized gains (losses) | — | | | — | | | 849 | | | — | | | (3,382) | | | |
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| Purchases (2) | 4 | | | — | | | 34 | | | — | | | (328) | | | |
| Sales (3) | — | | | — | | | (58) | | | — | | | 41 | | | |
| Settlements | — | | | — | | | — | | | — | | | — | | | |
| Change in estimate | — | | | — | | | (44) | | | — | | | — | | | |
| Activity related to consolidated VIEs/VOEs | (4) | | | — | | | — | | | — | | | — | | | |
Transfers into Level 3 (4) | — | | | — | | | — | | | — | | | — | | | |
| Transfers out of Level 3 (4) | — | | | — | | | — | | | — | | | — | | | |
| Balance, September 30, 2020 | $ | 16 | | | $ | — | | | $ | 3,247 | | | $ | — | | | $ | (11,985) | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (6) | $ | — | | | $ | — | | | $ | 849 | | | $ | — | | | $ | (3,382) | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (6) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
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| Total realized and unrealized gains (losses) | — | |
| (375) | | | (125) | |
| — | |
| 817 | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | | | |
| Purchases (2) | 8 | | | 27 | | | 11 | | | — | | | (117) | | | | | |
| Sales (3) | — | | | (27) | | | (16) | | | 1 | | | 35 | | | | | |
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| Activity related to consolidated VIEs/VOEs | (1) | | | — | | | — | | | — | | | — | | | | | |
| Transfers into Level 3 (4) | — | | | — | | | — | | | — | | | — | | | | | |
| Transfers out of Level 3 (4) | — | | | — | | | — | | | — | | | — | | | | | |
| Balance, June 30, 2022 | $ | 18 | | | $ | 4,681 | | | $ | 1,612 | | | $ | 1 | | | $ | (6,189) | | | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (5) | $ | — | | | $ | (375) | | | $ | (125) | | | $ | — | | | $ | 817 | | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (5) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
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| Balance, April 1, 2021 | $ | 12 | | | $ | — | | | $ | 2,133 | | | $ | — | | | $ | (7,681) | | | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | | | | | |
| Investment gains (losses), reported in net investment income | 1 | | | 0 | | — | | | — | | | — | | | | | |
| Net derivative gains (losses) | — | | | 242 | | | 158 | | | — | | | (671) | | | | | |
| Total realized and unrealized gains (losses) | 1 | |
| 242 | | | 158 | |
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| (671) | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | | | |
| Purchases (2) | — | | | 10 | | | 10 | | | 1 | | | (118) | | | | | |
| Sales (3) | 1 | | | (1) | | | (11) | | | — | | | 15 | | | | | |
| Other | — | | | 5,259 | | | — | | | — | | | — | | | | | |
| Activity related to consolidated VIEs/VOEs | — | | | — | | | — | | | — | | | — | | | | | |
| Transfers into Level 3 (4) | — | | | — | | | — | | | — | | | — | | | | | |
| Transfers out of Level 3 (4) | (1) | | | — | | | — | | | — | | | — | | | | | |
| Balance, June 30, 2021 | $ | 13 | | | $ | 5,510 | | | $ | 2,290 | | | $ | 1 | | | $ | (8,455) | | | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (5) | $ | 1 | | | $ | 242 | | | $ | 158 | | | $ | — | | | $ | (671) | | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (5) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
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(1)For the three and nine months ended September 30, 2021, the Company’s non-performance risk impact of $(92) million and $(68) million for the GMxB Derivative Features Liability, $8 million and $9 million for the GMIB Reinsurance Contract Asset, and $(19) million and $(7) million for the Amounts due from Reinsurers, respectively, is recorded through Net derivative gains (losses).
(2)For the GMIB reinsurance contract asset, Amounts Due from Reinsurers and GMxB derivative features liability, represents attributed fee.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Other Equity Investments (6) | | Amounts Due from Reinsurers | | GMIB Reinsurance Contract Asset | | Separate Accounts Assets | | GMxB Derivative Features Liability | | | | |
| (in millions) | | |
| Balance, January 1, 2022 | $ | 13 | | | $ | 5,815 | | | $ | 2,068 | | | $ | 1 | | | $ | (8,525) | | | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | | | | | |
| Investment gains (losses), reported in net investment income | — | | | 0 | | — | | | — | | | — | | | | | |
| Net derivative gains (losses) (1) | — | | | (1,142) | | | (445) | | | — | | | 2,505 | | | | | |
| Total realized and unrealized gains (losses) | — | |
| (1,142) | | | (445) | |
| — | |
| 2,505 | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | | | |
| Purchases (2) | 8 | | | 61 | | | 21 | | | — | | | (235) | | | | | |
| Sales (3) | — | | | (53) | | | (32) | | | — | | | 66 | | | | | |
| | | | | | | | | | | | | |
| Activity related to consolidated VIEs/VOEs | (3) | | | — | | | — | | | — | | | — | | | | | |
| Transfers into Level 3 (4) | — | | | — | | | — | | | — | | | — | | | | | |
| Transfers out of Level 3 (4) | — | | | — | | | — | | | — | | | — | | | | | |
| Balance, June 30, 2022 | $ | 18 | | | $ | 4,681 | | | $ | 1,612 | | | $ | 1 | | | $ | (6,189) | | | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (5) | $ | — | | | $ | (1,142) | | | $ | (445) | | | $ | — | | | $ | 2,505 | | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (5) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
| | | | | | | | | | | | | |
| Balance, January 1, 2021 | $ | 15 | | | $ | — | | | $ | 2,859 | | | $ | 1 | | | $ | (10,936) | | | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | | | | | |
| Investment gains (losses), reported in net investment income | 1 | | | 0 | | — | | | — | | | — | | | | | |
| Net derivative gains (losses) | — | | | 242 | | | (566) | | | — | | | 2,686 | | | | | |
| Total realized and unrealized gains (losses) | 1 | |
| 242 | | | (566) | |
| — | |
| 2,686 | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | | | |
| Purchases (2) | — | | | 10 | | | 22 | | | 1 | | | (235) | | | | | |
| Sales (3) | — | | | (1) | | | (25) | | | — | | | 30 | | | | | |
| Other | — | | | 5,259 | | | — | | | — | | | — | | | | | |
| Activity related to consolidated VIEs/VOEs | (2) | | | — | | | — | | | — | | | — | | | | | |
| Transfers into Level 3 (4) | — | | | — | | | — | | | — | | | — | | | | | |
| Transfers out of Level 3 (4) | (1) | | | — | | | 0 | | (1) | | | — | | | | | |
| Balance, June 30, 2021 | $ | 13 | | | $ | 5,510 | | | $ | 2,290 | | | $ | 1 | | | $ | (8,455) | | | | | |
| Change in unrealized gains or losses for the period included in earnings for instruments held at the end of the reporting period (5) | $ | 1 | | | $ | 242 | | | $ | (566) | | | $ | — | | | $ | 2,686 | | | | | |
| Change in unrealized gains or losses for the period included in other comprehensive income for instruments held at the end of the reporting period (5) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
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______________
(1)For the three and six months ended June 30, 2022 and 2021, the Company’s non-performance risk impact of $392 million , (60) million, $876 million and 24 million for the GMxB Derivative Features Liability, $(44) million, 17 million, $(88) million and 1 million for the GMIB Reinsurance Contract Asset, and $(35) million, 12 million, $(77) million and 12 million for the Amounts due from Reinsurers, respectively, is recorded through Net derivative gains (losses).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
(2)For the GMIB reinsurance contract asset, Amounts Due from Reinsurers and GMxB derivative features liability, represents attributed fee.
(3)For the GMIB reinsurance contract asset and Amounts Due from Reinsurers, represents recoveries from reinsurers and for GMxB derivative features liability represents benefits paid.
(4)Transfers into/out of the Level 3 classification are reflected at beginning-of-period fair values.
(5)Represents the opening ceded balance from the Venerable transaction of the GMxB with no lapse guarantee riders.
(6)For instruments held as of SeptemberJune 30, 2021 or September2022 and June 30, 2020,2021, amounts are included in net investment income or net derivative gains (losses) in the consolidated statements of income (loss) or unrealized gains (losses) on investments in the consolidated statements of comprehensive income.
(7)(6)Other Equity Investments include other invested assets.
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 as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively.
Quantitative Information about Level 3 Fair Value Measurements as of SeptemberJune 30, 20212022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair
Value | | Valuation Technique | | Significant
Unobservable Input | | Range | | Weighted Average (2) |
| (in millions) | | |
| Assets: | | | | | | | | | |
| Investments: | | | | | | | | | |
| Fixed maturities, AFS: | | | | | | | | | |
| Corporate | $ | 197243 | | | Matrix pricing model | | Spread over Benchmark | | 20 bps - 295803 bps | | 162150 bps |
| 820885 | | | Market comparable companies | | EBITDA multiples Discount Rate Cashflow Multiples Loan to Value | | 4.9x5.2x - 73.7x31.8x
5.9%8.0% - 15.0%38.5%
0.0x1.2x - 9.0x11.6x
0.0% - 60.8%44.4% | | 12.3x13.4x
9.0%10.2%
6.0x6.6x
30.4%25.9%
|
| Other equity investments | 4 | | | Market comparable companies | | Revenue multiple | | 8.2x7.1x - 9.5x | | 8.5x |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair
Value | | Valuation Technique | | Significant
Unobservable Input | | Range | | Weighted Average (2) |
| GMIB reinsurance contract asset | 2,1561,612 | | | 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 | | 0.45% - 20.86% 0.27% - 8.66% 0.04% - 60.44% 40111 bps - 78169 bps
10%15% - 32%34%
0.01% - 0.17% 0.06% - 0.53% 0.31% - 40.00% | | 2.56%2.80%
0.93%0.98%
5.43%5.87%
44113 bps
24% 2.76%2.83%
(same for all ages) (same for all ages) |
Amount Due from Reinsurers
| 5,8694,681 | | | Discounted Cash Flow | | Lapse rates Withdrawal Rates GMIB Utilization Rates Non-performance risk (bps) Volatility rates - Equity Mortality: Ages 0-40 Ages 41-60 Ages 61-115 | | 0.45% - 20.86% 0.27% - 8.66% 0.04% - 60.44% 34 bps - 3459 bps
10%15% - 32%34%
0.01% - 0.17% 0.06% - 0.53% 0.31% - 40.00% | | 1.67%1.80%
1.17%1.24%
7.34%8.19%
3459 bps
24% 2.13% (same for all ages) (same for all ages) |
| Liabilities: | | | | | | | | | |
GMIBNLGGMIB NLG | 8,8966,207 | | | Discounted cash flow | | Non-performance risk Lapse Withdrawal Annuitization Mortality (1): Ages 0-40 Ages 41-60 Ages 61-115 | |
92 bps - 92191 bps
1.04% - 23.57% 0.27% - 8.66% 0.03% - 100.00% 0.01% - 0.19% 0.07% - 0.57% 0.44% - 43.60%
| | 92191 bps
3.51%3.73%
1.03%1.14%
5.35%5.94%
1.60% (same for all ages) (same for all ages) |
| GWBL/GMWB | 10465 | | | Discounted cash flow | | Lapse rates Withdrawal Rates Utilization Rates Volatility rates - Equity Non-performance risk | | 0.60% - 20.86% 0.00% - 8.00% 100% once starting 10%15% - 32%34%
92 bps - 92191 bps
| | 2.56%2.80%
0.93%0.98%
24% |
| GIB | (60)(82) | | | Discounted cash flow | | Lapse rates Withdrawal Rates Utilization Rates Volatility rates - Equity Non-performance risk | | 0.60% - 20.86% 0.13% - 8.66% 0.04% - 100.00% 10%15% - 32%34%
92 bps - 92191 bps
| | 2.56%2.80%
0.93%0.98%
5.43%5.87%
24% |
| GMAB | (3)(1) | | | Discounted cash flow | | Lapse rates Volatility rates - Equity Non-performance risk | |
0.60% - 20.86% 10%15% - 32%34%
92 bps - 92191 bps
| | 2.56%2.80%
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, and utilizations the rates were weighted by counts, for mortality weighted average rates are shown for all ages combined and for withdrawals 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 as of December 31, 20202021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | Weighted Average (2) |
| (in millions) | | |
| Assets: | | | | | | | | | |
| Investments: | | | | | | | | | |
| Fixed maturities, AFS: | | | | | | | | | |
| Corporate | $ | 28248 | | | Matrix pricing model | | Spread over benchmark | | 4520 - 195270 bps | | 152146 bps |
| 1,148888 | | | Market comparable companies | | EBITDA multiples
Discount rate Cash flow multiples | | 3.5x - 33.1x
5.6% - 28.4%
1.9x -25.0xLoan to Value
| | 10.8x4.9x - 62.3x
8.6%6.2% - 21.5%
6.8x0.5x -10.0x
3.1%-63.4% | | 13.0x 9.1% 5.5x 30.8% |
| | | | | | | | | |
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
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other equity investments | 4 | | | Market comparable companies | | Revenue multiple | | 7.8x - 10.3x | | 9.5x |
| GMIB reinsurance contract asset | 2,8592,068 | | | 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 61 - 115 | | 4357 bps - 8593 bps
0.6%-16%0.45%-20.86%
0%-2%0.27%-8.66%
0%-61%0.04%-60.44%
7%-32%11%-31%
0.01%-0.18%-0.17% 0.07%-0.54%0.06%-0.53%
0.42%-42.20%0.31%-40.00%
| | 5060 bps
1.69%2.65%
0.91%0.93%
5.82%5.27%
24%
2.80%2.79%
(same for all ages) (same for all ages) |
| Amount Due from Reinsurers | 5,813 | | | 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 61 - 115 | | 37 bps 0.45%-20.86% 0.27%-8.66% 0.04%-60.44% 11%-31%
0.01%-0.17% 0.06%-0.53% 0.31%-40.00%
| | 37 bps 1.70% 1.18% 7.20% 24%
2.17% (same for all ages) (same for all ages) |
| Liabilities: | | | | | | | | | |
GMIBNLGGMIB NLG | 10,7138,503 | | | Discounted cash flow | | Non-performance risk Lapse rates Withdrawal rates Annuitization rates Mortality rates (1): Ages 0 - 40 Ages 41 - 60 Ages 61 - 115 | | 96.0111 bps
1.1%-25.7%1.04%-23.57%
0.4%-2%0.27%-8.66%
0%-100%0.03%-100.00%
0.01%-0.19% 0.06%-0.53%0.07%-0.57%
0.41%-41.39%0.44%-43.60%
| |
3.19%3.55%
0.93%1.04%
5.51%5.24%
1.56%1.62%
(same for all ages) (same for all ages) |
| GWBL/GMWB | 19099 | | | Discounted cash flow | | Non-performance risk Lapse rates Withdrawal rates Utilization rates Volatility rates - Equity | | 96.0111 bps
0.8%-16%0.60%-20.86%
0%-8%0.00%-8.00%
100% once starting 7%-32%11%-31%
| |
1.69%2.65%
0.91%0.93%
24% |
| GIB | 31 (75) | | | Discounted cash flow | | Non-performance risk Lapse rates Withdrawal rates Utilization rates Volatility rates - Equity | | 96.0111 bps
0.8%-15.6%0.60%-20.86%
0%-2%0.13%-8.66%
0%-100%0.04%-100.00%
7%-32%11%-31%
| |
1.69%2.65%
0.91%0.93%
5.82%5.27%
24% |
| GMAB | 2 (3) | | | Discounted cash flow | | Non-performance risk Lapse rates Volatility rates - Equity | | 96.0111 bps
0.8%-16%0.60%-20.86%
7%-32%11%-31%
| |
1.69%2.65%
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, and utilizations the rates were weighted by counts, for mortality weighted average rates are shown for all ages combined and for withdrawals the weighted averages were based on an estimated split of partial withdrawal and dollar-for-dollar withdrawals.
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 as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, are approximately $487$711 million and $586$430 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
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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 as of SeptemberJune 30, 20212022 and December 31, 2020,2021, 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 risk transfer securities, and equipment financings. Included in the tables above as of SeptemberJune 30, 20212022 and December 31, 2020,2021, 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, Amounts Due from Reinsurers and GMxB Derivative Features
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 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, GMIB NLG Reinsurance and liabilities includes dynamic lapse and GMIB utilization assumptions whereby projected contractual lapses and GMIB utilization reflect the projected net amount of 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 GMIBNLGGMIB NLG liability and GMIB NLG Reinsurance are lapse rates, withdrawal rates, GMIB utilization rates, adjustment for non-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 GMIBNLGGMIB NLG liability and GMIB NLG Reinsurance, while decreases in withdrawal rates and volatility rates would tend to decrease the GMIBNLGGMIB NLG liability and GMIB NLG Reinsurance.
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 4of the Notes to these Consolidated Financial Statements
The carrying values and fair values as of SeptemberJune 30, 20212022 and December 31, 20202021 for financial instruments not otherwise disclosed in Note 3 and Note 4 of the Notes to these Consolidated Financial Statements 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) |
| September 30, 2021: | | | | | | | | | |
| Mortgage loans on real estate | $ | 13,431 | | | $ | — | | | $ | — | | | $ | 13,757 | | | $ | 13,757 | |
| Policy loans | $ | 3,541 | | | $ | — | | | $ | — | | | $ | 4,559 | | | $ | 4,559 | |
| Loans to affiliates | $ | 1,900 | | | $ | — | | | $ | 1,998 | | | $ | — | | | $ | 1,998 | |
| Policyholders’ liabilities: Investment contracts (1) | $ | 1,935 | | | $ | — | | | $ | — | | | $ | 2,056 | | | $ | 2,056 | |
| FHLB funding agreements | $ | 6,807 | | | $ | — | | | $ | 6,864 | | | $ | — | | | $ | 6,864 | |
| FABN funding agreements | $ | 5,732 | | | $ | — | | | $ | 5,733 | | | $ | — | | | $ | 5,733 | |
| Separate Accounts liabilities | $ | 11,092 | | | $ | — | | | $ | — | | | $ | 11,092 | | | $ | 11,092 | |
| | | | | | | | | |
| December 31, 2020: | | | | | | | | | |
| Mortgage loans on real estate | $ | 13,142 | | | $ | — | | | $ | — | | | $ | 13,474 | | | $ | 13,474 | |
| Policy loans | $ | 3,635 | | | $ | — | | | $ | — | | | $ | 4,794 | | | $ | 4,794 | |
| Loans to affiliates | $ | 900 | | | $ | — | | | $ | 938 | | | $ | — | | | $ | 938 | |
| Policyholders’ liabilities: Investment contracts | $ | 2,069 | | | $ | — | | | $ | — | | | $ | 2,275 | | | $ | 2,275 | |
| FHLB funding agreements | $ | 6,897 | | | $ | — | | | $ | 6,990 | | | $ | — | | | $ | 6,990 | |
| FABN funding agreements | $ | 1,939 | | | $ | — | | | $ | 1,971 | | | $ | — | | | $ | 1,971 | |
| Separate Accounts liabilities | $ | 10,081 | | | $ | — | | | $ | — | | | $ | 10,081 | | | $ | 10,081 | |
_____________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Value | | Fair Value |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) |
| June 30, 2022: | | | | | | | | | |
| Mortgage loans on real estate | $ | 14,463 | | | $ | — | | | $ | — | | | $ | 13,242 | | | $ | 13,242 | |
| Policy loans | $ | 3,544 | | | $ | — | | | $ | — | | | $ | 4,456 | | | $ | 4,456 | |
| Loans to affiliates | $ | 1,900 | | | $ | — | | | $ | 1,782 | | | $ | — | | | $ | 1,782 | |
| Policyholders’ liabilities: Investment contracts | $ | 1,912 | | | $ | — | | | $ | — | | | $ | 1,803 | | | $ | 1,803 | |
| FHLB funding agreements | $ | 7,287 | | | $ | — | | | $ | 7,241 | | | $ | — | | | $ | 7,241 | |
| FABN funding agreements | $ | 6,671 | | | $ | — | | | $ | 6,077 | | | $ | — | | | $ | 6,077 | |
| Separate Accounts liabilities | $ | 10,292 | | | $ | — | | | $ | — | | | $ | 10,292 | | | $ | 10,292 | |
| | | | | | | | | |
| December 31, 2021: | | | | | | | | | |
| Mortgage loans on real estate | $ | 14,016 | | | $ | — | | | $ | — | | | $ | 14,291 | | | $ | 14,291 | |
| Policy loans | $ | 3,540 | | | $ | — | | | $ | — | | | $ | 4,512 | | | $ | 4,512 | |
| Loans to affiliates | $ | 1,900 | | | $ | — | | | $ | 1,974 | | | $ | — | | | $ | 1,974 | |
| Policyholders’ liabilities: Investment contracts | $ | 1,916 | | | $ | — | | | $ | — | | | $ | 1,980 | | | $ | 1,980 | |
| FHLB funding agreements | $ | 6,647 | | | $ | — | | | $ | 6,679 | | | $ | — | | | $ | 6,679 | |
| FABN funding agreements | $ | 6,689 | | | $ | — | | | $ | 6,626 | | | $ | — | | | $ | 6,626 | |
| Separate Accounts liabilities | $ | 11,620 | | | $ | — | | | $ | — | | | $ | 11,620 | | | $ | 11,620 | |
(1) As of September 30, 2021, reflects transfer of certain policyholders account balances to future policyholder benefits and other policyholders liabilities related to structured settlement contracts.
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.
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.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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, 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 COLI policies are recorded at their cash surrender value and are therefore not required to be included in the table above. See Note 2 toof the Notes to these Consolidated Financial Statements for details of investments in COLI policies.
9)8) INCOME TAXES
Income tax expense for the three and ninesix months ended SeptemberJune 30, 20212022 and 20202021 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
InThe Company did not enter into any new significant transactions with related parties during the three and six months ended June 2021, Equitable Life made a $1.0 billion 10-year term loan to Holdings. The loan has an interest rate of 3.23% and matures in June 2031.30, 2022.
11)10) EQUITY
AOCI represents cumulative gains (losses) on items that are not reflected in net income (loss). The balances as of SeptemberJune 30, 20212022 and December 31, 20202021 follow:
| | | | September 30, | | December 31, | | | June 30, | | December 31, | |
| | | 2021 | | 2020 | | | 2022 | | 2021 | |
| | (in millions) | | (in millions) |
| Unrealized gains (losses) on investments | Unrealized gains (losses) on investments | $ | 2,291 | | | $ | 4,600 | | | Unrealized gains (losses) on investments | $ | (4,830) | | | $ | 2,362 | | |
| Defined benefit pension plans | Defined benefit pension plans | (5) | | | (5) | | | Defined benefit pension plans | (4) | | | (5) | | |
| Accumulated other comprehensive income (loss) attributable to Equitable Financial | Accumulated other comprehensive income (loss) attributable to Equitable Financial | $ | 2,286 | | | $ | 4,595 | | | Accumulated other comprehensive income (loss) attributable to Equitable Financial | $ | (4,834) | | | $ | 2,357 | | |
The components of OCI, net of taxes for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, follow:
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 | |
| | (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 | $ | (285) | | | $ | 295 | | | $ | (2,409) | | | $ | 4,524 | | | Net unrealized gains (losses) arising during the period | $ | (4,419) | | | $ | 1,744 | | | $ | (9,214) | | | $ | (2,124) | | |
| (Gains) losses reclassified into net income (loss) during the period (1) | (Gains) losses reclassified into net income (loss) during the period (1) | (130) | | | (23) | | | (608) | | | (205) | | | (Gains) losses reclassified into net income (loss) during the period (1) | 177 | | | (314) | | | 438 | | | (478) | | |
| Net unrealized gains (losses) on investments | Net unrealized gains (losses) on investments | (415) | | | 271 | | | (3,017) | | | 4,318 | | | Net unrealized gains (losses) on investments | (4,242) | | | 1,430 | | | (8,776) | | | (2,602) | | |
| Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other | Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other | 61 | | | (24) | | | 708 | | | (992) | | | Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other | 567 | | | (271) | | | 1,585 | | | 647 | | |
| Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of $(94), $66, $(614) and $884) | (354) | | | 247 | | | (2,309) | | | 3,327 | | | |
| Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of $(976), $308, $(1911) and $(520)) | | Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of $(976), $308, $(1911) and $(520)) | (3,675) | | | 1,159 | | | (7,191) | | | (1,955) | | |
| | Other comprehensive income (loss), attributable to Equitable Financial | Other comprehensive income (loss), attributable to Equitable Financial | $ | (354) | | | $ | 247 | | | $ | (2,309) | | | $ | 3,327 | | | Other comprehensive income (loss), attributable to Equitable Financial | $ | (3,675) | | | $ | 1,159 | | | $ | (7,191) | | | $ | (1,955) | | |
____________
(1)See “Reclassification adjustments” in Note 3.3 of the Notes to these Consolidated Financial Statements. Reclassification amounts presented net of income tax expense (benefit) of $35$(46) million, $(6)$83 million, , $162$(116) million and $(55)$127 million for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively.
Investment gains and losses reclassified from AOCI to net income (loss) primarily consist of realized gains (losses) on sales and credit losses of AFS securities and are included in total investment gains (losses), net on the consolidated statements of income (loss). Amounts reclassified from AOCI to net 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 compensation and benefits in the consolidated statements of income (loss). Amounts presented in the table above are net of tax.
Permitted Statutory Accounting Practices
Equitable Financial was granted a permitted practice by the NYDFS to apply SSAP 108, Derivatives Hedging Variable Annuity Guarantees on a retroactive basis from January 1, 2021 through June 30, 2021, after reflecting the impacts of our reinsurance transaction with Venerable. The permitted practice was amended to also permit Equitable Financial to adopt SSAP 108 prospectively as of July 1, 2021. Application of the permitted practice partially mitigates the Regulation 213 impact of the Venerable transaction on Equitable Financial’s statutory capital and surplus. The impact of the application of this permitted practice was an increase of approximately $1.5 billion in statutory special surplus funds and an increase of $1.6 billion in statutory net income as of September 30, 2021 and for the nine-month period then ended, which will be amortized over 5 years for each of the retrospective and prospective components. The permitted practice also resets Equitable Financial’s unassigned surplus to zero as of June 30, 2021 to reflect the transformative nature of the Venerable transaction.
12)11) REDEEMABLE NONCONTROLLING INTEREST
The changes in the components of redeemable noncontrolling interests are presented in the table that follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 | |
| | | (in millions) | | (in millions) |
| Balance, beginning of period | Balance, beginning of period | $ | 24 | | | $ | 36 | | | $ | 41 | | | $ | 39 | | | Balance, beginning of period | $ | 29 | | | $ | 48 | | | $ | 28 | | | $ | 41 | | |
| Net earnings (loss) attributable to redeemable noncontrolling interests | Net earnings (loss) attributable to redeemable noncontrolling interests | — | | | 3 | | | 1 | | | — | | | Net earnings (loss) attributable to redeemable noncontrolling interests | (3) | | | 1 | | | (4) | | | $ | 1 | | |
| Purchase/change of redeemable noncontrolling interests | Purchase/change of redeemable noncontrolling interests | 1 | | | (1) | | | (17) | | | (1) | | | Purchase/change of redeemable noncontrolling interests | (5) | | | (25) | | | (3) | | | $ | (18) | | |
| Balance, end of period | Balance, end of period | $ | 25 | | | $ | 38 | | | $ | 25 | | | $ | 38 | | | Balance, end of period | $ | 21 | | | $ | 24 | | | $ | 21 | | | $ | 24 | | |
13)12) COMMITMENTS AND CONTINGENT LIABILITIES
Litigation and Regulatory Matters
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,
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
benefits and the reporting and escheatment of unclaimed property, alleged breach of fiduciary duties, alleged mismanagement of client funds and other 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 SeptemberJune 30, 2021,2022, the 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 $150$250 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 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, in which were subsequently subjected to the volatility management strategytool was subsequently implemented and who claim to have 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 2015, the case was transferred to the Southern District of New York and, in 2018, transferred back to Connecticut Superior Court. In August 2019, the court granted Equitable Financial’s motion to strike, which sought dismissal of the complaint, and in September 2019, Plaintiff filed an Amended Class Action Complaint. Equitable Financial filed renewed motions to strike and to dismiss and for an entry of judgment in October 2019. In August 2020, the court granted Equitable Financial’s motion for entry of judgment. Plaintiff filed a notice of appeal.appeal and in February 2022, the Connecticut Appellate Court reversed the Superior Court’s entry of judgement. In April 2022, the Connecticut Supreme Court granted Equitable Financial’s petition to review the decision of the Connecticut Appellate Court. We are vigorously defending this matter.
In February 2016, a lawsuit was filed in 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 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 2008, 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 the District of Arizona in 2017 and consolidated with the Brach matter.matter in federal court in New York. The consolidated amended class action complaint alleges the following claims: breach of contract;
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
misrepresentations 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: (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. In August 2020, the federal district court issued a decision certifying nationwide breach of contract and Section 4226 classes, and a New York State Section 349 class. Owners of a substantial number of policies
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
opted out of the Brach class action. Most opt-out policies are not yet the subject of litigation. Others filed suit previously, including five federal actions that have been coordinated with the Brach action and contain similar allegations along with additional allegations for violations of state consumer protection statutes and common law fraud. In March 2022, the federal district court issued a summary judgment decision, denying in significant part but granting in part Equitable Financial’s motion and denying the motion filed by plaintiffs in the coordinated actions. In July 2022, the federal district court granted Equitable Financial’s motion to reconsider its summary judgment decision in part and granted summary judgment as to a portion of the Section 4226 class. The federal district court also agreed to consider whether it should decertify the Section 4226 class and set a briefing schedule. Equitable Financial has commenced settlement discussions with the Brach class action plaintiffs through a non-binding mediation process.and plaintiffs in the coordinated actions. 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 actionthose settlement discussions. Equitable Financial has settled actual and are not participating in that mediation process. Most have not yet filed suit. Others filed suit previously. They include 5 other federal actionsthreatened litigations challenging the COI rate increase by individual policyowners and one entity 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 thoseinvested in numerous policies purchased in the Brach action as well as additional allegations for violations of various states’ consumer protection statutes and common law fraud.life settlement market. NaN actions are also pending against Equitable Financial in New York state court. In July 2022, the trial court in one of the New York state court actions, Hobish v. AXA Equitable Life Insurance Company, granted in significant part Equitable Financial’s motion for summary judgment and denied plaintiff’s cross motion. That plaintiff filed a notice of appeal. Equitable Financial is vigorously defending each of these matters.
As with other financial services companies, the CompanyEquitable Financial 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. For example, among other matters,In July 2022, the SEC issued an order with findings that daily separate account and portfolio operating expenses disclosed in customer prospectuses for the EQUI-VEST variable annuity product and incorporated in the calculation of net investment portfolio results in EQUI-VEST quarterly account statements were not properly presented or referenced in those account statements. The Company neither admitted nor denied the findings, but agreed to prospectively modify the relevant account statements and cross-reference the relevant prospectus disclosures, and pay a civil monetary penalty of $50 million, to be distributed to plan participants. The Company has been cooperating withfully accrued for the U.S. Securitiescost of the settlement and Exchange Commission (the “SEC”) concerning the SEC’s investigation into the Company’s non-ERISA K-12 403(b) and 457 sales and disclosure practices.its implementation.
Obligations under Funding Agreements
Federal Home Loan Bank (“FHLB”)
As a member of the FHLB, Equitable Financial has access to collateralized borrowings. It also may issue funding agreements to the 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 FHLB and uses the funds for asset, liability, and cash management purposes. Equitable Financial issues long-term funding agreements to the FHLB and uses the funds for spread lending purposes.
Entering into FHLB membership, borrowings and funding agreements requires the ownership of FHLB stock and the pledge of assets as collateral. Equitable Financial has purchased FHLB stock of $318$339 million and pledged collateral with a carrying value of $10.4$10.2 billion as of SeptemberJune 30, 2021.2022.
Funding agreements are reported in 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 4.4 of the Notes to these Consolidated Financial Statements. The table below summarizes the Company’s activity of funding agreements with the FHLB.
Change in FHLB Funding Agreements during the NineSix Months Ended SeptemberJune 30, 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 September 30, 2021 |
| (in millions) |
| Short-term funding agreements: | | | | | | | | | | | |
| Due in one year or less | $ | 5,634 | | | $ | 46,301 | | | $ | 46,389 | | | $ | 322 | | | $ | — | | | $ | 5,868 | |
| Long-term funding agreements: | | | | | | | | | | | |
| Due in years two through five | 722 | | | — | | | — | | | (322) | | | 409 | | | 809 | |
| Due in more than five years | 534 | | | — | | | — | | | — | | | (409) | | | 125 | |
| Total long-term funding agreements | 1,256 | | | — | | | — | | | (322) | | | — | | | 934 | |
| Total funding agreements (1) | $ | 6,890 | | | $ | 46,301 | | | $ | 46,389 | | | $ | — | | | $ | — | | | $ | 6,802 | |
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EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
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| Outstanding Balance at December 31, 2021 | | 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 June 30, 2022 |
| (in millions) |
| Short-term funding agreements: | | | | | | | | | | | |
| Due in one year or less | $ | 5,353 | | | $ | 27,407 | | | $ | 27,488 | | | $ | 153 | | | $ | — | | | $ | 5,425 | |
| Long-term funding agreements: | | | | | | | | | | | |
| Due in years two through five | 1,290 | | | 309 | | | — | | | (153) | | | — | | | 1,446 | |
| Due in more than five years | — | | | 412 | | | — | | | — | | | — | | | 412 | |
| Total long-term funding agreements | 1,290 | | | 721 | | | — | | | (153) | | | — | | | 1,858 | |
| Total funding agreements (1) | $ | 6,643 | | | $ | 28,128 | | | $ | 27,488 | | | $ | — | | | $ | — | | | $ | 7,283 | |
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(1)The $5$4 million and $7$4 million difference between the funding agreements carrying value shown in fair value table for SeptemberJune 30, 20212022 and December 31, 2020,2021, 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 program, Equitable Financial may issue funding agreements in U.S. dollar or other foreign currencies 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”Notes”). The funding agreements have matching interest, maturity and currency payment terms to the applicable Trust notes.Notes. The Company hedges the foreign currency exposure of foreign currency denominated funding agreements using cross currency swaps as discussed in Note 4.4 of the Notes to these Consolidated Financial Statements. As of May 2021,June 30, 2022, the maximum aggregate principal amount of Trust notesNotes permitted to be outstanding at any one time is $10 billion. Funding agreements issued to the Trust, including any foreign currency transaction adjustments, are reported in policyholders’ account balances in the consolidated balance sheets. Foreign currency transaction adjustments to policyholder’s account balances are recognized in net income (loss) as an adjustment to interest credited to policyholders’ account balances and are offset in interest credited to policyholders’ account balances by a release of AOCI from deferred changes in fair value of designated and qualifying cross currency swap cash flow hedges. The table below summarizes Equitable Financial’s issuances of funding agreements under the FABN.FABN program.
Change in FABN Funding Agreements during the NineSix Months Ended SeptemberJune 30, 20212022
| | | 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 | | Foreign Currency Transaction Adjustment | | Outstanding Balance at September 30, 2021 | | Outstanding Balance at December 31, 2021 | | Issued During the Period | | Repaid During the Period | | Long-term Agreements Maturing Within One Year | | Long-term Agreements Maturing Within Five Years | | | Foreign Currency Transaction Adjustment | | Outstanding Balance at June 30, 2022 |
| | (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 | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Due in one year or less | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,000 | | | | $ | — | | | $ | 1,000 | |
| Long-term funding agreements: | Long-term funding agreements: | | Long-term funding agreements: | | | |
| Due in years two through five | Due in years two through five | 1,150 | | | 2,450 | | | — | | | — | | | — | | | — | | | 3,600 | | Due in years two through five | 4,600 | | | — | | | — | | | — | | | (1,000) | | | | — | | | 3,600 | |
| Due in more than five years | Due in more than five years | 800 | | | 1,359 | | | — | | | — | | | — | | | (30) | | | 2,129 | | Due in more than five years | 2,119 | | | — | | | — | | | — | | | — | | | | (45) | | | 2,074 | |
| Total long-term funding agreements | Total long-term funding agreements | 1,950 | | | 3,809 | | | — | | | — | | | — | | | (30) | | | 5,729 | | Total long-term funding agreements | 6,719 | | | — | | | — | | | — | | | (1,000) | | | | (45) | | | 5,674 | |
| Total funding agreements (1) | Total funding agreements (1) | $ | 1,950 | | | $ | 3,809 | | | $ | — | | | $ | — | | | $ | — | | | $ | (30) | | | $ | 5,729 | | Total funding agreements (1) | $ | 6,719 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | $ | (45) | | | $ | 6,674 | |
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(1)The $27$3 million and $11$70 million difference between the funding agreements notional value shown and carrying value table as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, reflects the remaining amortization of the issuance cost of the funding agreements and the foreign currency transaction adjustment.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Guarantees and Other Commitments
The Company provides certain guarantees or commitments to affiliates and others. As of SeptemberJune 30, 2021,2022, these arrangements include commitments by the Company to provide equity financing of $1.4$1.3 billion (including $380 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 SeptemberJune 30, 2021.2022. The Company had $714$830 million of commitments under existing mortgage loan agreements as of SeptemberJune 30, 2021.2022.
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.
13) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
Prescribed and Permitted Accounting Practices
As of June 30, 2022, the following 3 prescribed and permitted practices resulted in net income (loss) and capital and surplus that is different from the statutory surplus that would have been reported had NAIC statutory accounting practices been applied.
Equitable Financial was granted a permitted practice by the NYDFS to apply SSAP 108, Derivatives Hedging Variable Annuity Guarantees on a retroactive basis from January 1, 2021 through June 30, 2021, after reflecting the impacts of our reinsurance transaction with Venerable. The permitted practice was amended to also permit Equitable Financial to adopt SSAP 108 prospectively as of July 1, 2021 and to consider the impact of both the interest rate derivatives and the general account assets used to fully hedge the interest rate risk inherent in its variable annuity guarantees when determining the amount of the deferred asset or liability under SSAP 108. Application of the permitted practice partially mitigates the New York Insurance Regulation 213 (“Reg 213”) impact of the Venerable Transaction on Equitable Financial’s statutory capital and surplus and enables Equitable Financial to more effectively neutralize the impact of interest rates on its statutory surplus and to better align with our economic hedging program. The impact of applying this permitted practice relative to SSAP 108 as written was an increase of approximately $461 million in statutory special surplus funds and a decrease of $527 million and $900 million in statutory net income as of and for the three and six months ended June 30, 2022, respectively, which will be amortized over five years for each of the retrospective and prospective components. The permitted practice also reset Equitable Financial’s unassigned surplus to zero as of June 30, 2021 to reflect the transformative nature of the Venerable Transaction.
The NAIC Accounting Practices and Procedures manual (“NAIC SAP”) has been adopted as a component of prescribed or permitted practices by the State of New York. However, Reg 213 adopted in May of 2019 and as amended in February 2020 and March 2021, differs from the NAIC variable annuity reserve and capital framework. Reg 213 requires 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 in current market conditions imposes more conservative reserving requirements for variable annuity contracts than the NAIC standard.
The impact of the application of Reg 213 was a decrease of approximately $3.1 billion in statutory surplus as of June 30, 2022 compared to statutory surplus under the NAIC variable annuity framework. Our hedging program is designed to hedge the economics of our insurance liabilities and largely offsets Reg 213 and NAIC framework reserve movements due to interest rates and equities. The NYDFS allows domestic insurance companies a five year phase-in provision for Reg 213 reserves. As of June 30, 2022, Equitable Financial’s Reg 213 reserves are phased-in at 60% and are very close to Reg 213 reserves with a 100% phase-in. Additionally, as of June 30, 2022, Reg 213 when 100% phased-in result in redundant reserves over the US RBC CTE 98 total asset requirement (“TAR”) of approximately $0.5 billion to $1.0 billion, which the Company intends to mitigate during the phase-in period. Finally, the continued application of Reg 213 resulted in a corresponding decrease of $1.2 billion and $1.8 billion in statutory net income for the three and six months ended June 30, 2022, which was largely offset by net income gains on our hedging program during the same period as noted.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements (Unaudited), Continued
Pursuant to certain assumption agreements (the “Assumption Agreements”), AXA Financial legally assumed primary liabilityDuring the fourth quarter of 2020, the Company received approval 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 liableNYDFS for its obligations underproposed amended Plan of Operation for Separate Account No. 68 (“SA 68”) for our Structured Capital Strategies product and Separate Account No. 69 (“SA 69”) for our Equi-Vest product Structured Investment Option, to change the accounting basis of these plans and would recognize such liabilitiestwo non-insulated Separate Accounts from fair value to book value in the event AXA Financial does not perform under the termsaccordance with Section 1414 of the Assumption Agreements. On October 1, 2018, AXA Financial mergedInsurance Law to align with how we manage and into its direct parent, Holdings,measure our overall general account asset portfolio. In order to facilitate this change and comply with Holdings continuing as the surviving entity.
14) SUBSEQUENT EVENTS
Coinsurance Funds Withheld Reinsurance Agreement
Effective October 1, 2021,Section 4240(a)(10), the Company enteredalso sought approval to amend the Plans to remove the requirement to comply with Swiss Re Life & Health America Inc (“Swiss Re” ), intoSection 4240(a)(5)(iii) and substitute it with a coinsurancecommitment to comply with funds withheld reinsurance agreement under whichSection 4240(a)(5)(i). Similarly, the Company retainsupdated the assets relatedreserves section of each Plan to reflect the underlying policies, term life insurance policies issued between 2009fact that Regulation 128 would no longer be applicable upon the change in accounting basis. We applied this change effective January 1, 2021. The impact of the application is an increase of approximately $1.8 billion in statutory surplus and 2020. While the associated interest and credit risk of these assets has been transferred to Swiss Re, reinsurance agreements that do not indemnify the Company against loss or liability relating to insurance risk are recorded using the deposit method of accounting. There was no cash or assets exchanged upon entering into this agreement, so no deposit liability has yet been recorded.
The coinsurance with funds withheld agreement contains embedded derivatives related to the withheld assets, which were immaterialan increase in statutory net income as of and for the effective datethree and six months ended June 30, 2022 of the agreement. Embedded derivatives are recorded at estimated fair value with changes in estimated fair value reported in net income.
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, 20202021 (“20202021 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.
Reinsurance of Legacy Variable Annuity Block and Sale of Runoff Variable Annuity Reinsurance Entity
On June 1, 2021, Holdings completed its previously announced sale (the “Transaction”) of Corporate Solutions Life Reinsurance Company, an insurance company domiciled in Delaware and wholly owned subsidiary of Holdings (“CSLRC”), to Venerable Insurance and Annuity Company, an insurance company domiciled in Iowa (“VIAC”), pursuant to the Master Transaction Agreement, dated October 27, 2020 (the “Master Transaction Agreement”), among the Company, VIAC and, solely with respect to Article XIV thereof, Venerable Holdings, Inc., a Delaware corporation (“Venerable”). VIAC issued a surplus note in aggregate principal amount of $50 million to Equitable Financial for cash consideration.
Immediately following the closing of the Transaction, CSLRC and Equitable Financial entered into a coinsurance and modified coinsurance agreement (the “Reinsurance Agreement”), pursuant to which Equitable Financial ceded to CSLRC, on a combined coinsurance and modified coinsurance basis, legacy variable annuity policies sold by Equitable Financial between 2006-2008 (the “Block”), comprised of non-New York “Accumulator” policies containing fixed rate Guaranteed Minimum Income Benefit and/or Guaranteed Minimum Death Benefit guarantees. At the closing of the Transaction, CSLRC deposited assets supporting the general account liabilities relating to the Block into a trust account for the benefit of Equitable Financial, which assets will secure its obligations to Equitable Financial under the Reinsurance Agreement. The Company transferred assets of $9.5 billion, including primarily available for sale securities and cash, to a collateral trust account as the consideration for the reinsurance transaction. In addition, the Company recorded $9.6 billion of direct insurance liabilities ceded under the reinsurance contract, of which $5.3 billion is accounted at fair value, as the reinsurance of GMxB with no lapse guarantee riders are embedded derivatives. Additionally, $16.9 billion of Separate Account liabilities were ceded under a modified coinsurance portion of the agreement.
In addition, upon the completion of the Transaction, Equitable Investment Management Group, LLC (“EIMG”), a wholly owned subsidiary of the Company, acquired an approximate 9.09% equity interest in Venerable’s parent holding company, VA Capital Company LLC. In connection with such investment, EIMG designated a member to the Board of Managers of VA Capital Company LLC.
Transfer of Investment Management and Administration Agreements to EIM
On June 22, 2021, Holdings formed Equitable Investment Management, LLC (“EIM”), a wholly owned indirect subsidiary of Holdings. Effective August 1, 2021, EIMG terminated, and EIM, entered into certain administrative agreements with separate accounts held by Equitable Financial. In addition, on October 1, 2021, Equitable Financial entered into an investment advisory and management agreement in which EIM will become the investment manager for the Equitable Financial’s general account portfolio. The impact in future net earnings is expected to be immaterial.
COVID-19 Impact
We continue to closely monitor COVID-19 developments related toand the COVID-19 pandemic.impact on our business, operations and investment portfolio. The extent of the pandemic’s impact on us will dependdepends on future developments that remainare highly uncertain.uncertain, including the scope and duration of the pandemic and any recovery period, the emergence and spread of COVID-19 variants, the availability, adoption and efficacy of COVID-19 treatments and vaccines, and future actions taken by governmental authorities, central banks and other parties in response to COVID-19. It is not possible to predict or estimate the longer-term effects of the pandemic, or any additional actions taken to contain or address theCOVID-19 pandemic, on the economy and on our business, results of operations, and financial condition, including the impact on our investment portfolio or the need for us to revisit or revise targets previously provided to the markets and/or aspects of our business model. For additional information regarding the actual and 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 coronavirus (COVID-19) pandemic” and, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—COVID-19 Impact” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Account Investment Portfolio” in the 20202021 Form 10-K.
Revenues
Our revenues come from three principal sources:
•fee income derived from our products;
•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 GMIBGMxB 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 net income (loss) volatility is the impact of the Company’s annual actuarial assumption review. See “—Significant Factors Impacting Our Results—Effect of Assumption Updates and Model Changes”on Operating Results”, for further detail of the impact of assumption updates on net income (loss) in first quarter 2020.2022.
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 GMxB 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.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-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.
•GMxB 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. In addition, on June 1, 2021, we ceded legacy variable annuity policies sold by EFLIC between 2006-2008 (the “Block”),the Block, comprised of non-New York “Accumulator” policies containing fixed rate GMIB and/or GMDB guarantees. As this contract provides full risk transfer and thus has the same risk attributes as the underlying direct contracts, the benefits of this treaty are accounted for in the same manner as the underlying gross reserves.
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) areis 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 of the Notes to the Consolidated Financial Statements and “Summary of Critical Accounting Estimates—Liability for Future Policy Benefits”Benefits included in the 20202021 Form 10-K.
Assumption Updates and Model Changes
We conduct our annual review of our assumptions and models during the third quarter of each year. We also update our assumptions as needed in the event we become aware of economic conditions or events that could require a change in 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 impact of our actuarial assumption update during the three and nine months ended September 30, 2021 and 2020 to our income (loss) from continuing operations, before income taxes and net income (loss).
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, (1) |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in millions) |
| Impact of assumption update on Net income (loss): | | | | | | | |
| Variable annuity product features related assumption update | $ | (146) | | | $ | (41) | | | $ | (146) | | | $ | (1,496) | |
| All other assumption updates | (16) | | | (83) | | | (16) | | | (750) | |
| Impact of assumption updates on Income (loss) from continuing operations, before income tax | (162) | | | (124) | | | (162) | | | (2,246) | |
| Income tax (expense) benefit on assumption update | 34 | | | 26 | | | 34 | | | 472 | |
| Net income (loss) impact of assumption update | $ | (128) | | | $ | (98) | | | $ | (128) | | | $ | (1,774) | |
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(1)During the first quarter of 2020, we updated interest rate assumption and the impact was a decrease to Net income (loss) of $1.7 billion. See Note 2 for further details on the assumption update.
2021 Assumption Updates
The impact of the economic assumption update in the third quarter of 2021 was a decrease of $162 million to income (loss) from continuing operations, before income taxes and a decrease to net income (loss) of $128 million. As part of this annual update, the reference interest rate utilized in our GAAP fair value calculations was updated from the LIBOR swap curve to the US Treasury curve due to the impending cessation of LIBOR and our GAAP fair value liability risk margins were increased, resulting in little impact to overall valuation as our view regarding market participant pricing of our guarantees has not changed at this time.
The net impact of this assumption update on income (loss) from continuing operations, before income taxes of $162 million consisted of a decrease in policy charges and fee income of $32 million, a decrease in policyholders’ benefits of $100 million, a decrease in net derivative gains of $249 million and a decrease in the amortization of DAC of $19 million.
2020 Assumption Updates
Annual Update
The impact of the economic assumption update in the third quarter of 2020 was a decrease of $124 million to income (loss) from continuing operations, before income taxes and a decrease to net income (loss) of $98 million.
The net impact of this assumption update on income (loss) from continuing operations, before income taxes of $124 million consisted of a decrease in policy charges and fee income of $21 million, an increase in policyholders’ benefits of $175 million, an increase in interest credited to policyholders’ account balances of $8 million, an increase in net derivative gains of $106 million and an increase in the amortization of DAC of $26 million.
Our annual review in 2020 resulted in the removal of the credit risk adjustment from our fair value scenario calibration to reflect our revised view of market participant practices, offset by updates to our mortality and policyholder behavior assumptions to reflect emerging experience.
First Quarter 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 curve 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 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.
The impact of the economic assumption update in the first quarter of 2020 was a decrease of $2.1 billion to income (loss) from continuing operations, before income taxes and a decrease to net income (loss) of $1.7 billion.
The net impact of this assumption update on income (loss) from continuing operations, before income taxes of $2.1 billion consisted of an increase in policy charges and fee income of $54 million, an increase in policyholders’ benefits of $1.3 billion, a decrease in interest credited to policyholders’ account balances of $6 million and an increase in the amortization of DAC of $840 million.
2021 Model Changes
There were no material model changes in the first nine months of 2021.
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 for scenario production. The economic scenario generator allows for a tighter calibration of U.S. indices, better reflecting our actual portfolio. The net impact of the 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 for the nine months ended September 30, 2020. There were no other model changes that made a material impact to our income (loss) from continuing operations, before income taxes or net income (loss)10-K”.
Impact of Assumption Update and COVID-19 Impacts on Income from Continuing Operations before income taxes and Net income (loss)
The table below presents the COVID-19 pandemic related impacts on income (loss) from continuing operations, before income taxes and on net income (loss) during the nine months ended September 30, 2020:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| COVID-19 Impacts |
| Interest Rate Assumption Update | | Impacts other than Interest Rate Assumption
Update (1) | | Total |
| (in millions) |
| Net income (loss) from continuing operations, before income taxes | $ | (2,122) | | | $ | (105) | | | $ | (2,227) | |
| Income tax (expense) benefit | 446 | | | 22 | | | 468 | |
| Net income (loss) from continuing operations, net of taxes | $ | (1,676) | | | $ | (83) | | | $ | (1,759) | |
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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 loss recognition in the first half of 2020 resulting from first quarter 2020 interest rate assumption update.
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
A wide variety of factors continue to impact financial and economic conditions. These factors include, among others, significant volatility in financialthe capital markets, low interest rates, inflationary pressures, economic growth, inflation rates,fuel and energy costs, supply chain disruptions, continued low interest rates and changes in fiscal or monetary policy.policy and geopolitical tensions.
The invasion of Ukraine by Russia and the sanctions and other measures imposed in response to this conflict significantly increased the level of volatility in the financial markets and have increased the level of economic and political uncertainty.
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 andportfolio. In addition, our insurance liabilities and derivatives are sensitive to changing market factors.factors, including equity market performance and interest rates. During the second quarter 2022, equity markets continued their decline and interest rates continued to rise, and are anticipated to continue to rise throughout the year based on statements of members of the Board of Governors of the Federal Reserve System. 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 AUM and 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 falling and/or remaining below historical averages despite inflationary pressures, 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 and AUM fluctuate, hedging costs increase and revenues decline due to reduced sales and increased outflows.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, despite recent interest rate increases, also may subject us to increased hedging costs or an increase in the amount of statutory reserves that our insurance subsidiaries arereserve required to hold for GMxB features, lowering their statutory surplus, which would adversely affect theirthe ability to pay dividends to us.dividends. 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 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. For additional information on the regulatory developments and risk we face, see “Business—Regulation” and “Risk Factors—Legal and Regulatory Risks” in the 20202021 Form 10-K, as amended or
supplemented in our subsequently filed Quarterly Reports on Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Macroeconomic and Industry Trends—Regulatory Developments.”10-K.
Regulation 213Climate Risks.. In New York, Regulation 213, adopted in May of 2019 and as subsequently amended, differs fromMarch 2022, the NAIC variable annuity reserve and capital framework. Regulation 213, as amended, will not materially affect Holdings’ U.S. GAAP financial condition, results of operationsSEC released proposed rule changes on climate-related disclosure. The proposed rule changes would require companies to include certain climate-related disclosures including information about climate-related risks that have had or stockholders’ equity. However, Regulation 213, absent management action, requires 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 in current market conditions imposes more conservative reserving requirements for variable annuity contracts than the NAIC standard. Absent management action, Regulation 213 will (i) negatively impact Equitable Financial’s surplus level and RBC 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, as was the case following the equity market appreciation in the second half of 2020 and the nine months of 2021. Such impacts were exacerbated upon closing of the Venerable transaction. Equitable Financial was granted a permitted practice by the NYDFS which partially mitigates the Regulation 213 impact of the Venerable transaction to make the regulation’s application to Equitable Financial more consistent with the NAIC reserve and capital framework. Equitable Financial also entered into a reinsurance agreement with Swiss Re Life & Health America Inc. (“Swiss Re”) effective October 1, 2021, and we completed certain internal restructurings that increase cash flows to Holdings from non-life insurance entities, which further mitigate the impacts from Regulation 213. We are considering additional management actions intended to reduce the impact of the regulation which could include seeking further amendment of Regulation 213 or exemptive relief therefrom, changing our underwriting practices to emphasize issuing variable annuity products out of affiliates which are not domiciled in New York, increasing the use of reinsurance and pursuing other corporate transactions. 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 that differ from the NAIC framework. See Note 10 of the Notes to the Consolidated Financial Statements for additional detail on the permitted practice granted by the NYDFS and Note 17 of the Notes to the Consolidated Financial Statements for additional detail on the reinsurance agreement with Swiss Re.
Fiduciary Rules / “Best Interest” Standards of Conduct
In December 2020, the DOL finalized a “best interest” prohibited transaction exemption (“PTE 2020-02”) for investment advice fiduciaries under ERISA, with an enforcement date of December 20, 2021. The new 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 PTE 2020-02 extends to rollover transactions if they constitute “investment advice” under the five-part test. If fiduciary status is triggered, 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 devoting significant time and resources towards coming into compliance with PTE 2020-02 but do not expect the new rulesreasonably likely to have a material impact on our business. However,their business, results of operations, or financial condition, and certain climate-related financial statement metrics in June 2021a note to the DOL updated its formal regulatory agenda toaudited financial statements. Among other things, the required information about climate-related risks also would include issuancedisclosure of a company’s greenhouse gas emissions, information about climate-related targets and goals, and if a transition plan, has been adopted as part of climate-related risk management strategy, and requires extensive attestation requirements. If adopted as proposed, the rule making by year-end 2021 that would further amend its fiduciary regulations, including PTE 2020-02changes are expected to result in additional compliance and possibly, other existing prohibited transaction exemptions.
In April 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. In June 2021, the NYDFS appealed this ruling to the New York State Court of Appeals, which automatically granted a stay, meaning that Regulation 187 remains in effect pending a decision by the Court of Appeals.reporting costs.
Climate RisksPrivacy and Security of Customer Information and Cybersecurity Regulation. In September 2020,March 2022, the NYDFS announcedSEC released proposed rules enhancing cybersecurity risk and management disclosure requirements for companies. If enacted, the proposed rules would, among other things, require disclosure of any material cybersecurity incident on its Form 8-K within four business days of determining that the incident it expects insurers to integrate financial risks from climate change into theirhas experienced is material. They would also require periodic disclosures of, among other things, (i) details on the company’s cybersecurity policies and procedures, (ii) cybersecurity governance, frameworks,oversight policies and risk management processes,policies, including the board of directors’ oversight of cybersecurity risks, (iii) the relevant expertise of members of the board of directors with respect to cybersecurity issues and business strategies, and(iv) details of any cybersecurity incident that it will integrate questionswas previously disclosed on this topic into their examinations in 2021. In March 2021, the NYDFS issued for public comment proposed guidance for New York domestic insurers, suchForm 8-K, as Equitable Financial, which stateswell as any undisclosed incidents 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 provided comments after reviewing the NYDFS’ proposed guidance designed to ensure that such guidance is consistent with our existing risk management framework. The NYDFS intends to formally adopt the guidance, as modified by the comment process,were non-material, but have become material in the fourth quarter of 2021.aggregate.
On July 14, 2021, the NYDFS published notice of the adoption of amendments to the regulation governing enterprise risk management, effective August 13, 2021. The amendments require that certain additional risks, including climate change, be included in an insurance group’s enterprise risk management function, among other requirements.
NYDFS Guidance on Diversity and Corporate Governance. In March 2021, the NYDFS issued a circular letter which states that the NYDFS expects the insurers that it regulates to make diversity of their leadership a business priority and a key element of their corporate governance. The NYDFS is collecting data from New York domestic and authorized foreign insurers that meet certain premium thresholds, including Equitable Financial, regarding the diversity of corporate boards and management, and it will include diversity-related questions in its examination process starting in 2022. We are considering the NYDFS’ guidance as part of our commitment to diversity and inclusion.
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 risk of movements in the equity markets and interest rates. The volatility in net 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; (ii) the change in fair value of products with the GMIB feature that have a no-lapse guarantee; and (iii) our hedging and reinsurance programs.
The following table summarizes our consolidated statements of income (loss) for the ninesix months ended SeptemberJune 30, 20212022 and 2020:2021:
Consolidated Statement of Income (Loss)
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | | 2022 | | 2021 | |
| | (in millions) | | (in millions) |
| REVENUES | REVENUES | | | REVENUES | | |
| Policy charges and fee income | Policy charges and fee income | $ | 2,581 | | | $ | 2,582 | | | Policy charges and fee income | $ | 1,502 | | | $ | 1,770 | | |
| Premiums | Premiums | 574 | | | 613 | | | Premiums | 355 | | | 393 | | |
| Net derivative gains (losses) | Net derivative gains (losses) | (4,152) | | | 2,097 | | | Net derivative gains (losses) | 2,895 | | | (3,916) | | |
| Net investment income (loss) | Net investment income (loss) | 2,655 | | | 2,334 | | | Net investment income (loss) | 1,450 | | | 1,770 | | |
| 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 | 4 | | | (47) | | | Credit losses on AFS debt securities and loans | 1 | | | 6 | | |
| Other investment gains (losses), net | Other investment gains (losses), net | 753 | | | 262 | | | Other investment gains (losses), net | (565) | | | 587 | | |
| Total investment gains (losses), net | Total investment gains (losses), net | 757 | | | 215 | | | Total investment gains (losses), net | (564) | | | 593 | | |
| Investment management and service fees | Investment management and service fees | 791 | | | 744 | | | Investment management and service fees | 374 | | | 563 | | |
| Other income | Other income | 65 | | | 43 | | | Other income | 47 | | | 41 | | |
| Total revenues | Total revenues | 3,271 | | | 8,628 | | | Total revenues | 6,059 | | | 1,214 | | |
| | BENEFITS AND OTHER DEDUCTIONS | BENEFITS AND OTHER DEDUCTIONS | | | BENEFITS AND OTHER DEDUCTIONS | | |
| Policyholders’ benefits | Policyholders’ benefits | 2,383 | | | 4,267 | | | Policyholders’ benefits | 1,750 | | | 1,675 | | |
| Interest credited to policyholders’ account balances | Interest credited to policyholders’ account balances | 841 | | | 845 | | | Interest credited to policyholders’ account balances | 579 | | | 556 | | |
| Compensation and benefits | Compensation and benefits | 246 | | | 210 | | | Compensation and benefits | 89 | | | 135 | | |
| Commissions | Commissions | 494 | | | 462 | | | Commissions | 335 | | | 354 | | |
| Interest expense | Interest expense | 1 | | | — | | | Interest expense | — | | | 1 | | |
| Amortization of deferred policy acquisition costs | Amortization of deferred policy acquisition costs | 342 | | | 1,290 | | | Amortization of deferred policy acquisition costs | 285 | | | 249 | | |
| Other operating costs and expenses | Other operating costs and expenses | 847 | | | 653 | | | Other operating costs and expenses | 572 | | | 624 | | |
| Total benefits and other deductions | Total benefits and other deductions | 5,154 | | | 7,727 | | | Total benefits and other deductions | 3,610 | | | 3,594 | | |
| Income (loss) from continuing operations, before income taxes | Income (loss) from continuing operations, before income taxes | (1,883) | | | 901 | | | Income (loss) from continuing operations, before income taxes | 2,449 | | | (2,380) | | |
| Income tax (expense) benefit | Income tax (expense) benefit | 500 | | | (181) | | | Income tax (expense) benefit | (453) | | | 599 | | |
| Net income (loss) | Net income (loss) | (1,383) | | | 720 | | | Net income (loss) | 1,996 | | | (1,781) | | |
| Less: Net income (loss) attributable to the noncontrolling interest | Less: Net income (loss) attributable to the noncontrolling interest | 1 | | | (1) | | | Less: Net income (loss) attributable to the noncontrolling interest | (4) | | | 1 | | |
| Net income (loss) attributable to Equitable Financial | Net income (loss) attributable to Equitable Financial | $ | (1,384) | | | $ | 721 | | | Net income (loss) attributable to Equitable Financial | $ | 2,000 | | | $ | (1,782) | | |
The following discussion compares the results for the ninesix months ended SeptemberJune 30, 20212022 to the ninesix months ended SeptemberJune 30, 2020.2021.
NineSix Months Ended SeptemberJune 30, 20212022 Compared to the NineSix Months Ended SeptemberJune 30, 20202021
Net Income (Loss) Attributable to Equitable Financial
Net loss attributable to Equitable Financial decreased by $3.8 billion, to a Net income of $2.0 billion for the six months ended June 30, 2022 from a Net loss of $1.8 billion for the six months ended June 30, 2021, primarily driven by the following notable items:
Favorable items included:
•Net derivative gains increased by $6.8 billion from a $3.9 billion loss in the prior period due to equity market depreciation in the second quarter 2022 and impacts from non-performance risk and credit spreads due to spread widening during second quarter 2022.
•Compensation, benefits and other operating expenses decreased by $98 million mainly due to the completion of separation costs, reduced incentive compensation and overall total company expense efficiency.
•Commissions decreased by $19 million mainly due to a decrease in deferred commissions and lower AV in our Individual Annuity products due to H1 2022 equity performance.
Net income (loss) attributable to Equitable Financial decreased by $2.1 billion, to a net loss of $1.4 billion for the nine months ended September 30, 2021 from a net income of $721 million for the nine months ended September 30, 2020, primarily driven by the following notable items:
Unfavorable items included:
•Net derivative gains decreased by $6.2 billion mainly due to a decrease in interest rates during 2020 compared to an increase in interest rates during 2021 and greater equity market appreciation in 2021 compared to 2020, as well as non-performance risk and credit spreads widening during 2020.
•Other operating costs and expenses increased by $194 million primarily driven by legal accruals related to the COI litigation.
•Commissions increased by $32 million mainly due to higher asset balance.
These were partially offset by the following favorable unfavorable items:
•Policyholders’ benefits decreased by $1.9 billion mainly due to the non-recurrence of the interest rate assumption update in the first quarter of 2020 and equity markets appreciation in the nine months ended September 30, 2021. This was partially offset by an increase in death claims.
•Amortization of DAC decreased by $948 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 experienced loss recognition resulting in an acceleration of DAC amortization in the first nine months of 2020.
•Net investment gains increaseddecreased by $542 million$1.2 billion primarily due to the rebalancing in the General Account portfolio associated with the Venerable transaction.Transaction and the rebalancing program to reduce duration during the first half of 2022.
•Fee-type revenue decreased by $489 million mainly due to lower equity markets and the impacts of fee-income ceded to Venerable.
•Net investment income increaseddecreased by $321$320 million mainly driven by higher prepayments, higher asset balances and higherlower alternatives investment income, from our alternative investment portfolio partially offset bylower average assets related to the Venerable transaction.Transaction and lower prepayments.
•Fee-type revenuePolicyholders’ benefits increased by $29$75 million mainly due to equity market depreciation in the first half of 2022 compared to equity market appreciation during the first half of 2021(offset in Net Derivative gains). This impact in the first half of 2022 was mitigated by the Venerable Transaction.
•higher base fees, performance feesAmortization of DAC increased by $36 million mainly due to unfavorable markets during first half of 2022 compared to favorable markets during first half of 2021 and distribution revenues as a resultone-time adjustment and refinements from the first half of higher average AUM revenues and higher fees as a result of higher average Separate Accounts AV.2021.
•Interest credited to policyholders’ account balances increased by $23 million mainly due to new business growth related to our SCS products.
•Income tax expense decreasedincreased by $681 million$1.1 billion primarily driven bydue to pre-tax income in the first half of 2022 compared to a pre-tax loss in the first nine monthshalf of 2021 compared to pre-tax income in the first nine months of 2020.2021.
See “—Significant Factors Impacting Our Results—Assumption Updates and Model Changes” for more information regarding the 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 20202021 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;DAC;
•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
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, 20202021 in "Quantitative and Qualitative Disclosures About Market Risk".
Item 4. Controls and Procedures
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of SeptemberJune 30, 2021,2022, the Company’s disclosure controls and procedures were effective.
During the first quarter 2022, we implemented a new accounting and financial reporting system, including the general ledger. We have modified our existing controls infrastructure, as well as added other processes and internal controls, to adapt to our new general ledger. There are no other changes in the Company’sour internal control over financial reporting as(as defined in Exchange Act Rule 13a-15(f), and Rule 15d-15(f) under the Exchange Act) that occurred during the ninesix months ended SeptemberJune 30, 2021,2022, that hashave materially affected, or isare reasonably likely to materially affect, the Company’sour 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. Also see “Risk Factors—Legal and Regulatory Risks—Legal and regulatory actions” included in our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
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, 2020, as amended or supplemented in our subsequently filed Quarterly Reports on Form 10-Q.2021. Risks to which we are subject also 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.
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
| | | | | | | | | | | |
| Number | | Description | |
| # | 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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| 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���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
•“Holdings” 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.
•“EIMG” means Equitable Investment Management Group, LLC, a Delaware limited liability company and a wholly-owned indirect subsidiary of Holdings.
•“EIM” means Equitable Investment Management, LLC, a Delaware limited liability company and 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: NovemberAugust 4, 20212022 | EQUITABLE FINANCIAL LIFE INSURANCE COMPANY |
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| By: | /s/ Robin M. Raju |
| | Name: | Robin M. Raju |
| | Title: | Chief Financial Officer
(Principal Financial Officer) |
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Date: NovemberAugust 4, 20212022 | | /s/ William Eckert |
| | Name: | William Eckert |
| | Title: | Chief Accounting Officer
(Principal Accounting Officer)
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