NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(Unaudited)
1. Significant Accounting Policies
Consolidation and Basis of Presentation
The accompanying consolidated financial statements of American Equity Investment Life Holding Company ("we", "us", "our" or the "Company") have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated financial statements include variable interest entities (“VIE”) in which we are the primary beneficiary. All of the adjustments in the consolidated financial statements are normal recurring items which are necessary to present fairly our financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for the three month period ended March 31, 2023 are not necessarily indicative of the results that may be expected for any other period, including for the year ended December 31, 2023. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires management estimates and assumptions using subjective and complex judgments that frequently require assumptions about matters that are inherently uncertain. Our actual results could differ from these estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand our financial position and results of operations, refer to the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Adopted Accounting Pronouncements
Troubled Debt Restructurings and Vintage Disclosures
In March 2022, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") on troubled debt restructurings ("TDR") and vintage disclosures related to current period gross write-offs and recoveries. This guidance eliminates the accounting guidance for TDRs by creditors and enhances disclosure requirements for certain refinancing and restructuring of loans by creditors when a borrower is experiencing financial difficulty. The guidance also requires companies to disclosure current-period gross write-offs by year of origination for financing receivables and net investments in leases. This ASU was adopted on January 1, 2023 and will be applied prospectively. This guidance did not have a material impact on our consolidated financial statements.
Targeted Improvements to the Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued an ASU that revises certain aspects of the measurement models and disclosure requirements for long duration insurance and investment contracts. The FASB’s objective in issuing this ASU is to improve, simplify, and enhance the accounting for long-duration contracts. The revisions include updating cash flow assumptions in the calculation of the liability for traditional life products, introducing the term ‘market risk benefit’ (“MRB”) and requiring all contract features meeting the definition of an MRB to be measured at fair value with the change in fair value recognized in net income excluding the change in fair value related to our own-credit risk which is recognized in AOCI and simplifying the method used to amortize deferred policy acquisition costs and deferred sales inducements to a constant level basis over the expected term of the related contracts rather than based on actual and estimated gross profits and enhancing disclosure requirements. While this ASU was effective for us January 1, 2023, the transition date (the remeasurement date) was January 1, 2021. We adopted the guidance for the liability for future policyholder benefits, deferred acquisition costs, and deferred sales inducements on a modified retrospective basis such that those balances were adjusted to conform to ASU 2018-12 on January 1, 2021. The guidance for market risk benefits was applied retrospectively. Below are the transition date impacts for each of these items.
| | | | | |
| Liability for Future Policy Benefits for Payout Annuity With Life Contingency |
| (Dollars in thousands) |
Pre-adoption 12/31/2020 balance | $ | 337,467 | |
Adjustment to opening retained earnings for expected future policy benefits | 2,566 | |
Adjustment for the effect of remeasurement of liability at current single A rate | 68,717 | |
Post adoption 1/1/2021 balance | $ | 408,750 | |
| | | | | |
| Market Risk Benefit Liability |
| (Dollars in thousands) |
Pre-adoption 12/31/2020 carrying amount for features now classified as MRBs | $ | 2,547,231 | |
Adjustment for the removal of shadow adjustments | (584,636) | |
Adjustment for the cumulative effect of the changes in the instrument-specific credit risk between the original contract issuance date and the transition date | 229,108 | |
Adjustment for the remaining difference between previous carrying amount and fair value measurement for the MRB, exclusive of the instrument specific credit risk | 33,781 | |
Post adoption 1/1/2021 MRB balance | $ | 2,225,484 | |
| | | | | |
| Ceded Market Risk Benefit (a) |
| (Dollars in thousands) |
Pre-adoption 12/31/2020 carrying amount for features now classified as MRBs | $ | 62,108 | |
Adjustment for the difference between previous carrying amount and fair value measurement for the MRB, exclusive of the instrument specific credit risk | 27,230 | |
Post adoption 1/1/2021 ceded MRB balance | $ | 89,338 | |
(a)The ceded market risk benefit is recognized in coinsurance deposits on the Consolidated Balance Sheets.
| | | | | |
| Deferred Policy Acquisition Costs |
| Fixed Index Annuities and Fixed Rate Annuities |
| (Dollars in thousands) |
Pre-adoption 12/31/2020 balance | $ | 2,225,199 | |
Adjustments for the removal of shadow adjustments | 1,183,306 | |
Post adoption 1/1/2021 balance | $ | 3,408,505 | |
| | | | | |
| Deferred Sales Inducements |
| Fixed Index Annuities and Fixed Rate Annuities |
| (Dollars in thousands) |
Pre-adoption 12/31/2020 balance | $ | 1,448,375 | |
Adjustments for the removal of shadow adjustments | 768,310 | |
Post adoption 1/1/2021 balance | $ | 2,216,685 | |
For deferred acquisition costs, the Company removed shadow adjustments previously recorded in accumulated other comprehensive income for the impact of unrealized gains and losses that were included in the pre-ASU 2018-12 expected gross profits amortization calculation as of the transition date.
As a result of the adoption of ASU 2018-12, the Company decreased beginning retained earnings by $7.2 million and increased accumulated other comprehensive income by $1.8 billion as of January 1, 2021.
Certain amounts in the prior years' consolidated financial statements and related footnotes thereto have been recast, to the extent impacted by ASU 2018-12, to conform to the new guidance.
Summary of Significant Accounting Policies
Market Risk Benefits
Market risk benefits (MRBs) are contracts or contract features that both provide protection to the policyholder from other-than-nominal capital market risk and expose the Company to other-than-nominal capital market risk. We issue certain fixed indexed annuity and fixed rate annuity contracts that provide minimum guarantees to policyholders including guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum death benefits (GMDB) that are MRBs.
MRBs are measured at fair value, at the individual contract level, and can be either an asset or a liability. The fair value is calculated using stochastic models that include a risk margin and incorporate a spread for our nonperformance risk. The MRB assets and liabilities are presented separately on the Consolidated Balance Sheets. Changes in fair value of the MRB are recognized in market risk benefits (gains) losses on the Consolidated Statements of Operations each period with the exception of the portion of the change in fair value related to a changes in our nonperformance risk, which is recognized in other comprehensive income (OCI). Contracts which contain more than one MRB feature are combined into one single MRB.
Deferred Policy Acquisition Costs (DAC) and Deferred Sales Inducements (DSI)
The Company incurs costs in connection with acquiring new and renewal business. The portion of these costs which are incremental and direct to the acquisition of a new or renewal policy are deferred as they are incurred. DAC and DSI are amortized on a constant level basis over the expected term of the contracts using groupings. The grouping are consistent with the grouping used in the estimating of the liability. If the actual experience is different from our expectations, the amortization pattern is adjusted prospectively.
Liability for Future Policy Benefits
A liability for future policy benefits is recorded for our traditional limited-payment insurance contracts and is generally equal to the present value of expected future policy benefit payments. The present value calculation uses assumptions for mortality, morbidity, termination, and expense.
The liability for future policy benefits is discounted using an upper-medium grade fixed-income instrument yield that reflects the duration characteristics of the liabilities. The discount rate is updated each reporting period and any changes resulting from changes in the upper medium grade fixed income instrument yield are recognized in AOCI. Any changes to the liability as a result of assumption changes will be recognized as remeasurement gains (losses) in insurance policy benefits and change in future policy benefits in the Consolidated Statement of Operations.
ASU 2018-12 also requires disaggregated roll forwards for the liability for future policy benefits, MRBs, DAC and DSI. We disaggregated the roll forwards by product type consistent with how we internally view our business.
2. Fair Values of Financial Instruments
The following sets forth a comparison of the carrying amounts and fair values of our financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| (Dollars in thousands) |
Assets | | | | | | | |
Fixed maturity securities, available for sale | $ | 39,555,624 | | | $ | 39,555,624 | | | $ | 39,804,617 | | | $ | 39,804,617 | |
Mortgage loans on real estate | 7,199,225 | | | 6,784,672 | | | 6,949,027 | | | 6,502,463 | |
Real estate investments | 1,053,631 | | | 1,053,631 | | | 1,056,063 | | | 1,056,063 | |
Limited partnerships and limited liability companies | 1,065,627 | | | 1,065,627 | | | 684,835 | | | 684,835 | |
Derivative instruments | 684,033 | | | 684,033 | | | 431,727 | | | 431,727 | |
Other investments | 1,157,162 | | | 1,157,162 | | | 1,817,085 | | | 1,817,085 | |
Cash and cash equivalents | 2,777,852 | | | 2,777,852 | | | 1,919,669 | | | 1,919,669 | |
Coinsurance deposits | 13,710,877 | | | 12,964,585 | | | 13,254,956 | | | 12,640,797 | |
Market risk benefits | 230,304 | | | 230,304 | | | 229,871 | | | 229,871 | |
| | | | | | | |
| | | | | | | |
Liabilities | | | | | | | |
Policy benefit reserves | 58,655,544 | | | 55,469,740 | | | 58,419,911 | | | 55,572,896 | |
Market risk benefits | 2,653,185 | | | 2,653,185 | | | 2,455,492 | | | 2,455,492 | |
Single premium immediate annuity (SPIA) benefit reserves | 205,643 | | | 214,386 | | | 212,119 | | | 221,130 | |
Other policy funds - FHLB | 100,000 | | | 100,000 | | | 300,000 | | | 300,000 | |
Notes and loan payable | 790,413 | | | 794,615 | | | 792,073 | | | 774,220 | |
Subordinated debentures | 78,839 | | | 88,336 | | | 78,753 | | | 87,293 | |
| | | | | | | |
Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.
We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated balance sheets as follows:
Level 1 –Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.
Level 2 –Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are observable.
Level 3 –Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected future cash flows with our own assumptions about what a market participant would use in determining fair value.
NAV –Our consolidated limited partnership funds are typically measured using NAV as a practical expedient in determining fair value and are not classified in the fair value hierarchy. Our carrying value reflects our pro rata ownership percentage as indicated by NAV in the investment fund financial statements and is recorded on a quarter lag due to the timing of when financial statements are available.
Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security.
Our assets and liabilities which are measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 are presented below based on the fair value hierarchy levels:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Fair Value | | NAV | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (Dollars in thousands) |
March 31, 2023 | | | | | | | | | |
Assets | | | | | | | | | |
Fixed maturity securities, available for sale: | | | | | | | | | |
U.S. Government and agencies | $ | 177,878 | | | $ | — | | | $ | 29,978 | | | $ | 147,900 | | | $ | — | |
States, municipalities and territories | 3,665,716 | | | — | | | — | | | 3,568,057 | | | 97,659 | |
Foreign corporate securities and foreign governments | 677,833 | | | — | | | — | | | 677,833 | | | — | |
Corporate securities | 23,401,001 | | | — | | | — | | | 23,025,704 | | | 375,297 | |
Residential mortgage backed securities | 1,355,858 | | | — | | | — | | | 1,355,858 | | | — | |
Commercial mortgage backed securities | 3,677,672 | | | — | | | — | | | 3,677,672 | | | — | |
Other asset backed securities | 6,599,666 | | | — | | | — | | | 5,791,438 | | | 808,228 | |
Other investments | 674,600 | | | — | | | 150,442 | | | 524,158 | | | — | |
Real estate investments | 1,053,631 | | | — | | | — | | | — | | | 1,053,631 | |
Limited partnerships and limited liability companies | 1,065,627 | | | 901,301 | | | — | | | — | | | 164,326 | |
Derivative instruments | 684,033 | | | — | | | — | | | 684,033 | | | — | |
Cash and cash equivalents | 2,777,852 | | | — | | | 2,777,852 | | | — | | | — | |
| | | | | | | | | |
| | | | | | | | | |
Market risk benefits (a) | 230,304 | | | — | | | — | | | — | | | 230,304 | |
| $ | 46,041,671 | | | $ | 901,301 | | | $ | 2,958,272 | | | $ | 39,452,653 | | | $ | 2,729,445 | |
Liabilities | | | | | | | | | |
Funds withheld liability - embedded derivative | $ | (377,484) | | | $ | — | | | $ | — | | | $ | — | | | $ | (377,484) | |
Fixed index annuities - embedded derivatives | 4,905,133 | | | — | | | — | | | — | | | 4,905,133 | |
Market risk benefits (a) | 2,653,185 | | | — | | | — | | | — | | | 2,653,185 | |
| $ | 7,180,834 | | | $ | — | | | $ | — | | | $ | — | | | $ | 7,180,834 | |
| | | | | | | | | |
December 31, 2022 | | | | | | | | | |
Assets | | | | | | | | | |
Fixed maturity securities, available for sale: | | | | | | | | | |
U.S. Government and agencies | $ | 169,071 | | | $ | — | | | $ | 26,184 | | | $ | 142,887 | | | $ | — | |
States, municipalities and territories | 3,822,982 | | | — | | | — | | | 3,822,982 | | | — | |
Foreign corporate securities and foreign governments | 676,852 | | | — | | | — | | | 676,852 | | | — | |
Corporate securities | 24,161,921 | | | — | | | — | | | 23,759,573 | | | 402,348 | |
Residential mortgage backed securities | 1,377,611 | | | — | | | — | | | 1,377,611 | | | — | |
Commercial mortgage backed securities | 3,687,478 | | | — | | | — | | | 3,687,478 | | | — | |
Other asset backed securities | 5,908,702 | | | — | | | — | | | 5,465,784 | | | 442,918 | |
Other investments | 1,013,297 | | | — | | | 398,280 | | | 615,017 | | | — | |
Real estate investments | 940,559 | | | — | | | — | | | — | | | 940,559 | |
Limited partnerships and limited liability companies | 684,835 | | | 620,626 | | | — | | | — | | | 64,209 | |
Derivative instruments | 431,727 | | | — | | | — | | | 431,727 | | | — | |
Cash and cash equivalents | 1,919,669 | | | — | | | 1,919,669 | | | — | | | — | |
| | | | | | | | | |
| | | | | | | | | |
Market risk benefits (a) | 229,871 | | | — | | | — | | | — | | | 229,871 | |
| $ | 45,024,575 | | | $ | 620,626 | | | $ | 2,344,133 | | | $ | 39,979,911 | | | $ | 2,079,905 | |
Liabilities | | | | | | | | | |
Funds withheld liability - embedded derivative | $ | (441,864) | | | $ | — | | | $ | — | | | $ | — | | | $ | (441,864) | |
Fixed index annuities - embedded derivatives | 4,820,845 | | | — | | | — | | | — | | | 4,820,845 | |
Market risk benefits (a) | 2,455,492 | | | — | | | — | | | — | | | 2,455,492 | |
| $ | 6,834,473 | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,834,473 | |
(a)See Note 8 - Policyholder Liabilities for additional information related to market risk benefits, including the balances of and changes in market risk benefits as well as significant inputs and assumptions used in the fair value measurements of market risk benefits.
The following methods and assumptions were used in estimating the fair values of financial instruments during the periods presented in these consolidated financial statements.
Fixed maturity securities
The fair values of fixed maturity securities in an active and orderly market are determined by utilizing independent pricing services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:
•reported trading prices,
•benchmark yields,
•broker-dealer quotes,
•benchmark securities,
•bids and offers,
•credit ratings,
•relative credit information, and
•other reference data.
The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity. When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing service. In situations where a price is not available from this service, we may obtain quotes or prices from additional parties as needed. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, comparison of the prices to a secondary pricing source, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from time to time as a result of these validation procedures, we did not make any significant adjustments as of March 31, 2023 and December 31, 2022.
Fixed maturity security valuations that include at least one significant unobservable input are reflected in Level 3 in the fair value hierarchy and can include fixed maturity securities across all asset classes. Quantitative information about the significant unobservable inputs used are provided below for fixed maturity securities that were either valued internally or were valued by a third party and the inputs were reasonably available. The fair value of corporate securities that utilized at least one significant unobservable input was $85.7 million and $84.7 million as of March 31, 2023 and December 31, 2022, respectively. A discounted cash flow methodology was utilized in the valuation, which included an unobservable liquidity premium of 20 basis points being incorporated along with other observable market data. The fair value of other asset backed securities that utilized at least one significant unobservable input was $650.7 million and $296.8 million as of March 31, 2023 and December 31, 2022, respectively. A discounted cash flow methodology was utilized in the valuation, which included unobservable discount rates and weighted average lives being incorporated along with other observable market data. At March 31, 2023, the discount rates used in the fair value calculations ranged from 3.74% to 25.00% with a weighted average rate of 5.09%. The weighted average lives used in the fair value calculations ranged from 0.63 years to 12.60 years with a weighted average of 7.73 years. At December 31, 2022, the discount rates used in the fair value calculations ranged from 4.04% to 28.58% with a weighted average rate of 4.36%. The weighted average lives used in the fair value calculations ranged from 8.79 years to 12.48 years with an average of 9.29 years.
Mortgage loans on real estate
Mortgage loans on real estate are not measured at fair value on a recurring basis. The fair values of mortgage loans on real estate are calculated using discounted expected cash flows using competitive market interest rates currently being offered for similar loans. The fair values of impaired mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral (based on appraised values) less estimated costs to sell. The inputs utilized to determine fair value of all mortgage loans are unobservable market data (competitive market interest rates); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.
Real estate investments
The fair values of residential real estate investments held through consolidation of investment company VIEs are initially calculated based on the cost to purchase the properties and subsequently calculated based on a discounted cash flow methodology. Under the discounted cash flow method, net operating income is forecasted assuming a 10-year hold period commencing as of the valuation date. An additional year is forecasted in order to determine the residual sale price at the end of the hold period, using a residual (terminal) capitalization rate. The significant inputs into the fair value calculation under the discounted cash flow method include the residual capitalization rate and discount rate. These inputs are unobservable market data; therefore, fair value of residential real estate investments falls into Level 3 in the fair value hierarchy. As of March 31, 2023 and December 31, 2022, the residual capitalization rates used in the fair value calculations ranged from 4.75% to 6.50% with an average rate of 5.44%. As of March 31, 2023, the discount rates used in the fair value calculations ranged from 6.00% to 8.00% with an average rate of 6.90%. As of December 31, 2022, the discount rates used in the fair value calculations ranged from 6.00% to 8.00% with an average rate of 6.91%.
Limited partnerships and limited liability companies
Two of our consolidated variable interest entities, which are fair valued on a recurring basis, invest in limited liability companies that invest in operating entities which hold multifamily real estate properties. The fair value of these variable interest entities were $63.7 million and $64.2 million as of March 31, 2023 and December 31, 2022, respectively, and falls within Level 3 of the fair value hierarchy. The fair value of the limited liability companies was obtained from a third party and is based on the fair value of the underlying real estate held by the various operating entities. The real estate is initially calculated based on the cost to purchase the properties and subsequently calculated based on a discounted cash flow methodology. As of March 31, 2023 and December 31, 2022, the residual capitalization rates used in the fair value calculations of the underlying real estate ranged from 4.25% to 4.75% with a weighted average rate of 4.46%. The discount rates used in the fair value calculations of the underlying real estate ranged from 5.75% to 6.00% with a weighted average rate of 5.86%. The fair value of this investment falls within Level 3 of the fair value hierarchy.
In Q1 2023, we purchased an investment in an infrastructure limited liability company through a consolidated VIE that is measured at fair value on a recurring basis. Due to the proximity of the purchase date to quarter end, the cost to purchase the investment approximates fair value and falls within Level 3 of the fair value hierarchy.
Each of our consolidated limited partnership funds, which are measured using NAV as a practical expedient, are closed-end funds that invest in infrastructure credit assets and tech-centric middle-market loans, respectively. Redemptions are not allowed until the funds’ termination dates and liquidations begin. As of March 31, 2023 and December 31, 2022, our unfunded commitments for our consolidated limited partnership funds were $614.9 million and $926.3 million.
Derivative instruments
The fair values of our call options are based upon the amount of cash that we will receive to settle each derivative instrument on the reporting date. These amounts are determined by our investment team using industry accepted valuation models and are adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index annuity policy liabilities.
The fair values of our pay fixed/receive float interest rate swaps are determined using internal valuation models that generate discounted expected future cash flows by constructing a projected Secured Overnight Financing Rate (SOFR) curve over the term of the swap.
Other investments
Equity securities and short-term debt securities with maturities of greater than three months but less than twelve months when purchased are the only financial instruments included in other investments that are measured at fair value on a recurring basis. The fair value for these investments are determined using the same methods discussed above for fixed maturity securities. Financial instruments included in other investments that are not measured at fair value on a recurring basis are FHLB common stock, short-term loans, collateral loans and company owned life insurance ("COLI"). FHLB common stock is carried at cost which approximates fair value. FHLB common stock was $14.0 million and $22.0 million as of March 31, 2023 and December 31, 2022, respectively, and falls within Level 2 of the fair value hierarchy. Due to the short-term nature of the investments, the fair value of a portion of our short-term loans approximates the carrying value. We had no short-term loans as of March 31, 2023. The fair value of short-term loans was $316.4 million as of December 31, 2022. Our short-term loans fall within Level 2 of the fair value hierarchy. For our collateral loans, we have concluded the carrying value approximates fair value and falls within Level 2 of the fair value hierarchy. The fair value of collateral loans was $64.6 million as of March 31, 2023 and December 31, 2022. The fair value of our COLI approximates the cash surrender value of the policies and falls within Level 2 of the fair value hierarchy. The fair value of COLI was $400.0 million and $397.7 million as of March 31, 2023 and December 31, 2022, respectively.
Cash and cash equivalents
Amounts reported in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.
Policy benefit reserves, coinsurance deposits and SPIA benefit reserves
The fair values of the liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated at the cost we would incur to extinguish the liability (i.e., the cash surrender value) as these contracts are generally issued without an annuitization date. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. For period-certain annuity benefit contracts, the fair value is determined by discounting the benefits at the interest rates currently in effect for newly issued immediate annuity contracts. We are not required to and have not estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosures of fair value. Policy benefit reserves, coinsurance deposits and SPIA benefit reserves are not measured at fair value on a recurring basis. All of the fair values presented within these categories fall within Level 3 of the fair value hierarchy as most of the inputs are unobservable market data.
Other policy funds - FHLB
The fair values of the Company's funding agreements with the FHLB are estimated using discounted cash flow calculations based on interest rates currently being offered for similar agreements with similar maturities.
Notes and loan payable
The fair values of our senior unsecured notes are based upon quoted market prices. The carrying value of the term loan approximates fair value as the interest rate is reset on a quarterly basis utilizing SOFR adjusted for a credit spread. Both of these are categorized as Level 2 within the fair value hierarchy, and are not remeasured at fair value on a recurring basis.
Subordinated debentures
Fair values for subordinated debentures are estimated using discounted cash flow calculations based principally on observable inputs including our incremental borrowing rates, which reflect our credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. These fair values are categorized as Level 2 within the fair value hierarchy. Subordinated debentures are not measured at fair value on a recurring basis.
Funds withheld liability - embedded derivative
We estimate the fair value of the embedded derivative based on the fair value of the assets supporting the funds withheld payable under modified coinsurance and funds withheld coinsurance reinsurance agreements. The fair value of the embedded derivative is classified as Level 3 based on valuation methods used for the assets held supporting the reinsurance agreements.
Fixed index annuities - embedded derivatives
We estimate the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each valuation date by (i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (ii) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance risk related to those liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth and future policy decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credit on the next policy anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
Within this determination we have the following significant unobservable inputs: 1) the expected cost of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary and 2) our best estimates for future policy decrements, primarily lapse, partial withdrawal and mortality rates. As of both March 31, 2023 and December 31, 2022, we utilized an estimate of 2.40% for the expected cost of annual call options, which is based on estimated long-term account value growth and a historical review of our actual option costs.
Our best estimate assumptions for lapse, partial withdrawal and mortality rates are based on our actual experience and our outlook as to future expectations for such assumptions. These assumptions are reviewed on a quarterly basis and are updated as our experience develops and/or as future expectations change. The following table presents average lapse rate and partial withdrawal rate assumptions, by contract duration, used in estimating the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each reporting date:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Average Lapse Rates | | Average Partial Withdrawal Rates |
Contract Duration (Years) | | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
1 - 5 | | 2.08% | | 2.17% | | 1.87% | | 1.86% |
6 - 10 | | 3.28% | | 3.28% | | 1.96% | | 1.97% |
11 - 15 | | 3.65% | | 3.63% | | 1.83% | | 1.86% |
16 - 20 | | 9.14% | | 8.55% | | 3.03% | | 2.96% |
20+ | | 4.92% | | 4.90% | | 1.81% | | 1.81% |
Lapse rates are generally expected to increase as surrender charge percentages decrease for policies without a lifetime income benefit rider. Lapse expectations reflect a significant increase in the year in which the surrender charge period on a contract ends.
The following table provides a reconciliation of the beginning and ending balances for our Level 3 assets and liabilities, which are measured at fair value on a recurring basis using significant unobservable inputs for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| | | | | (Dollars in thousands) |
Fixed maturity securities, available for sale - States, municipalities and territories | | | | | | | |
Beginning balance | | | | | $ | — | | | $ | — | |
Purchases and sales, net | | | | | — | | | — | |
Transfers in | | | | | 97,659 | | | — | |
Transfers out | | | | | — | | | — | |
Total realized/unrealized gains (losses) | | | | | | | |
Included in net income | | | | | — | | | — | |
Included in other comprehensive income (loss) | | | | | — | | | — | |
Ending balance | | | | | $ | 97,659 | | | $ | — | |
| | | | | | | |
Fixed maturity securities, available for sale - Corporate securities | | | | | | | |
Beginning balance | | | | | $ | 402,348 | | | $ | — | |
Purchases and sales, net | | | | | (26,278) | | | — | |
Transfers in | | | | | 347 | | | — | |
Transfers out | | | | | — | | | — | |
Total realized/unrealized gains (losses): | | | | | | | |
Included in net income | | | | | — | | | — | |
Included in other comprehensive income (loss) | | | | | (1,120) | | | — | |
Ending balance | | | | | $ | 375,297 | | | $ | — | |
| | | | | | | |
Fixed maturity securities, available for sale - Other asset backed securities | | | | | | | |
Beginning balance | | | | | $ | 442,918 | | | $ | — | |
Purchases and sales, net | | | | | 227,032 | | | — | |
Transfers in | | | | | 130,502 | | | — | |
Transfers out | | | | | — | | | — | |
Total realized/unrealized gains (losses): | | | | | | | |
Included in net income | | | | | — | | | — | |
Included in other comprehensive income (loss) | | | | | 7,776 | | | — | |
Ending balance | | | | | $ | 808,228 | | | $ | — | |
| | | | | | | |
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| | | | | (Dollars in thousands) |
Other investments | | | | | | | |
Beginning balance | | | | | $ | — | | | $ | 6,349 | |
Transfers in | | | | | — | | | — | |
Transfers out | | | | | — | | | — | |
Total realized/unrealized gains (losses): | | | | | | | |
Included in net income | | | | | — | | | (2,482) | |
Included in other comprehensive income (loss) | | | | | — | | | — | |
Ending balance | | | | | $ | — | | | $ | 3,867 | |
| | | | | | | |
Real estate investments | | | | | | | |
Beginning balance | | | | | $ | 940,559 | | | $ | 337,939 | |
Purchases and sales, net | | | | | 120,908 | | | 109,835 | |
Change in fair value | | | | | (7,836) | | | 4,161 | |
Ending balance | | | | | $ | 1,053,631 | | | $ | 451,935 | |
| | | | | | | |
Limited partnerships and limited liability companies | | | | | | | |
Beginning balance | | | | | $ | 64,209 | | | $ | — | |
Purchases and sales, net | | | | | 94,137 | | | 58,253 | |
Change in fair value | | | | | 5,981 | | | — | |
Ending balance | | | | | $ | 164,327 | | | $ | 58,253 | |
| | | | | | | |
Funds withheld liability - embedded derivative | | | | | | | |
Beginning balance | | | | | $ | (441,864) | | | $ | — | |
Transfers in | | | | | — | | | — | |
Change in fair value | | | | | 64,380 | | | — | |
Ending balance | | | | | $ | (377,484) | | | $ | — | |
| | | | | | | |
Fixed index annuities - embedded derivatives | | | | | | | |
Beginning balance | | | | | $ | 4,820,845 | | | $ | 7,964,961 | |
Premiums less benefits | | | | | (121,181) | | | 114,077 | |
Change in fair value, net | | | | | 205,469 | | | (1,308,123) | |
| | | | | | | |
Ending balance | | | | | $ | 4,905,133 | | | $ | 6,770,915 | |
Transfers into Level 3 during the three months ended March 31, 2023 and 2022 were the result of changes in observable pricing information for certain fixed maturity securities.
The fair value of our fixed index annuities embedded derivatives is net of coinsurance ceded of $1,142.0 million and $1,173.4 million as of March 31, 2023 and December 31, 2022, respectively. Change in fair value, net for each period in our embedded derivatives is included in Change in fair value of embedded derivatives in the Consolidated Statements of Operations.
Certain derivatives embedded in our fixed index annuity contracts are our most significant financial instrument measured at fair value that are categorized as Level 3 in the fair value hierarchy. The contractual obligations for future annual index credits within our fixed index annuity contracts are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. We estimate the fair value of these embedded derivatives at each valuation date by the method described above under fixed index annuities - embedded derivatives. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract values at March 31, 2023, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $342.7 million recorded through operations as a decrease in the change in fair value of embedded derivatives. A decrease by 100 basis points in the discount rates used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $394.1 million recorded through operations as an increase in the change in fair value of embedded derivatives.
3. Investments
At March 31, 2023 and December 31, 2022, the amortized cost and fair value of fixed maturity securities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost (1) | | Gross Unrealized Gains | | Gross Unrealized Losses (2) | | Allowance for Credit Losses | | Fair Value |
| (Dollars in thousands) |
March 31, 2023 | | | | | | | | | |
Fixed maturity securities, available for sale: | | | | | | | | | |
U.S. Government and agencies | $ | 179,026 | | | $ | 1,060 | | | $ | (2,208) | | | $ | — | | | $ | 177,878 | |
States, municipalities and territories | 4,066,597 | | | 52,221 | | | (453,102) | | | — | | | 3,665,716 | |
Foreign corporate securities and foreign governments | 738,759 | | | 12,943 | | | (73,869) | | | — | | | 677,833 | |
Corporate securities | 26,338,901 | | | 195,461 | | | (3,131,447) | | | (1,914) | | | 23,401,001 | |
Residential mortgage backed securities | 1,455,263 | | | 9,954 | | | (109,226) | | | (133) | | | 1,355,858 | |
Commercial mortgage backed securities | 4,088,679 | | | 1,125 | | | (412,132) | | | — | | | 3,677,672 | |
Other asset backed securities | 6,917,206 | | | 34,890 | | | (352,430) | | | — | | | 6,599,666 | |
| $ | 43,784,431 | | | $ | 307,654 | | | $ | (4,534,414) | | | $ | (2,047) | | | $ | 39,555,624 | |
| | | | | | | | | |
December 31, 2022 | | | | | | | | | |
Fixed maturity securities, available for sale: | | | | | | | | | |
U.S. Government and agencies | $ | 173,638 | | | $ | 70 | | | $ | (4,637) | | | $ | — | | | $ | 169,071 | |
States, municipalities and territories | 4,356,251 | | | 41,565 | | | (574,834) | | | — | | | 3,822,982 | |
Foreign corporate securities and foreign governments | 748,770 | | | 11,661 | | | (83,579) | | | — | | | 676,852 | |
Corporate securities | 27,706,440 | | | 146,065 | | | (3,687,370) | | | (3,214) | | | 24,161,921 | |
Residential mortgage backed securities | 1,492,242 | | | 11,870 | | | (126,368) | | | (133) | | | 1,377,611 | |
Commercial mortgage backed securities | 4,098,755 | | | 493 | | | (411,770) | | | — | | | 3,687,478 | |
Other asset backed securities | 6,289,923 | | | 14,068 | | | (395,289) | | | — | | | 5,908,702 | |
| $ | 44,866,019 | | | $ | 225,792 | | | $ | (5,283,847) | | | $ | (3,347) | | | $ | 39,804,617 | |
(1)Amortized cost excludes accrued interest receivable of $425.5 million and $425.4 million as of March 31, 2023 and December 31, 2022, respectively.
(2)Gross unrealized losses are net of allowance for credit losses.
The amortized cost and fair value of fixed maturity securities at March 31, 2023, by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their lives and are shown below as separate lines.
| | | | | | | | | | | |
| Available for sale |
| Amortized Cost | | Fair Value |
| (Dollars in thousands) |
Due in one year or less | $ | 702,112 | | | $ | 696,244 | |
Due after one year through five years | 6,122,055 | | | 5,914,199 | |
Due after five years through ten years | 6,116,836 | | | 5,639,129 | |
Due after ten years through twenty years | 8,790,928 | | | 8,046,303 | |
Due after twenty years | 9,591,352 | | | 7,626,553 | |
| 31,323,283 | | | 27,922,428 | |
Residential mortgage backed securities | 1,455,263 | | | 1,355,858 | |
Commercial mortgage backed securities | 4,088,679 | | | 3,677,672 | |
Other asset backed securities | 6,917,206 | | | 6,599,666 | |
| $ | 43,784,431 | | | $ | 39,555,624 | |
Net unrealized losses on investments reported as a separate component of stockholders' equity were comprised of the following:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (Dollars in thousands) |
Net unrealized losses on investments | $ | (4,232,154) | | | $ | (5,065,422) | |
Deferred income tax valuation allowance reversal | 22,534 | | | 22,534 | |
Deferred income tax expense | 888,455 | | | 1,063,441 | |
Net unrealized losses reported as accumulated other comprehensive loss | $ | (3,321,165) | | | $ | (3,979,447) | |
The National Association of Insurance Commissioners ("NAIC") assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given by the Nationally Recognized Statistical Rating Organizations ("NRSRO’s"). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 designations are considered "investment grade" while NAIC Class 3 through 6 designations are considered "non-investment grade." Based on the NAIC designations, we had 98% of our fixed maturity portfolio rated investment grade at both March 31, 2023 and December 31, 2022, respectively.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
NAIC Designation | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | (Dollars in thousands) |
1 | | $ | 26,409,209 | | | $ | 24,052,838 | | | $ | 27,061,903 | | | $ | 24,211,086 | |
2 | | 16,575,461 | | | 14,833,109 | | | 17,023,157 | | | 14,944,131 | |
3 | | 629,526 | | | 537,044 | | | 595,193 | | | 510,392 | |
4 | | 151,368 | | | 116,504 | | | 109,409 | | | 91,495 | |
5 | | 7,171 | | | 7,595 | | | 61,721 | | | 36,738 | |
6 | | 11,696 | | | 8,534 | | | 14,636 | | | 10,775 | |
| | $ | 43,784,431 | | | $ | 39,555,624 | | | $ | 44,866,019 | | | $ | 39,804,617 | |
The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 4,175 and 4,510 securities, respectively) have been in a continuous unrealized loss position, at March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Unrealized Losses (1) | | Fair Value | | Unrealized Losses (1) | | Fair Value | | Unrealized Losses (1) |
| (Dollars in thousands) |
March 31, 2023 | | | | | | | | | | | |
Fixed maturity securities, available for sale: | | | | | | | | | | | |
U.S. Government and agencies | $ | 40,919 | | | $ | (905) | | | $ | 22,400 | | | $ | (1,303) | | | $ | 63,319 | | | $ | (2,208) | |
States, municipalities and territories | 1,487,593 | | | (160,979) | | | 1,128,425 | | | (292,123) | | | 2,616,018 | | | (453,102) | |
Foreign corporate securities and foreign governments | 372,316 | | | (26,076) | | | 159,696 | | | (47,793) | | | 532,012 | | | (73,869) | |
Corporate securities | 10,860,843 | | | (1,149,693) | | | 7,844,602 | | | (1,981,754) | | | 18,705,445 | | | (3,131,447) | |
Residential mortgage backed securities | 730,911 | | | (45,375) | | | 368,307 | | | (63,851) | | | 1,099,218 | | | (109,226) | |
Commercial mortgage backed securities | 1,116,038 | | | (82,985) | | | 2,485,544 | | | (329,147) | | | 3,601,582 | | | (412,132) | |
Other asset backed securities | 1,701,535 | | | (68,465) | | | 3,050,769 | | | (283,965) | | | 4,752,304 | | | (352,430) | |
| $ | 16,310,155 | | | $ | (1,534,478) | | | $ | 15,059,743 | | | $ | (2,999,936) | | | $ | 31,369,898 | | | $ | (4,534,414) | |
| | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | |
Fixed maturity securities, available for sale: | | | | | | | | | | | |
U.S. Government and agencies | $ | 160,201 | | | $ | (4,512) | | | $ | 908 | | | $ | (125) | | | $ | 161,109 | | | $ | (4,637) | |
States, municipalities and territories | 2,595,122 | | | (537,313) | | | 95,184 | | | (37,521) | | | 2,690,306 | | | (574,834) | |
Foreign corporate securities and foreign governments | 522,826 | | | (76,957) | | | 21,816 | | | (6,622) | | | 544,642 | | | (83,579) | |
Corporate securities | 18,784,181 | | | (3,218,323) | | | 1,411,177 | | | (469,047) | | | 20,195,358 | | | (3,687,370) | |
Residential mortgage backed securities | 992,783 | | | (101,100) | | | 116,388 | | | (25,268) | | | 1,109,171 | | | (126,368) | |
Commercial mortgage backed securities | 2,941,293 | | | (302,513) | | | 651,923 | | | (109,257) | | | 3,593,216 | | | (411,770) | |
Other asset backed securities | 2,561,390 | | | (162,821) | | | 1,924,026 | | | (232,468) | | | 4,485,416 | | | (395,289) | |
| $ | 28,557,796 | | | $ | (4,403,539) | | | $ | 4,221,422 | | | $ | (880,308) | | | $ | 32,779,218 | | | $ | (5,283,847) | |
(1)Unrealized losses have not been reduced to reflect the allowance for credit losses of $2.0 million and $3.3 million as of March 31, 2023 and December 31, 2022, respectively.
The unrealized losses at March 31, 2023 are principally related to the timing of the purchases of certain securities, which carry less yield than those available at March 31, 2023. Approximately 97% and 98% of the unrealized losses on fixed maturity securities shown in the above table for March 31, 2023 and December 31, 2022, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations.
We expect to recover our amortized cost on all securities except for those securities on which we recognized an allowance for credit loss. In addition, because we did not have the intent to sell fixed maturity securities with unrealized losses and it was not more likely than not that we would be required to sell these securities prior to recovery of the amortized cost, which may be maturity, we did not write down these investments to fair value through the consolidated statements of operations.
Changes in net unrealized gains/losses on investments for the three months ended March 31, 2023 and 2022 are as follows:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| | | | | (Dollars in thousands) |
Fixed maturity securities available for sale carried at fair value | | | | | $ | 833,268 | | | $ | (4,014,371) | |
| | | | | | | |
Adjustment for effect on other balance sheet accounts: | | | | | | | |
Deferred income tax asset/liability | | | | | (174,986) | | | 842,782 | |
| | | | | (174,986) | | | 842,782 | |
Change in net unrealized gains/losses on investments carried at fair value | | | | | $ | 658,282 | | | $ | (3,171,589) | |
Proceeds from sales of available for sale fixed maturity securities for the three months ended March 31, 2023 and 2022 were $2.3 billion and $1.2 billion, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the three months ended March 31, 2023 and 2022 were $0.9 billion and $0.6 billion, respectively.
Net realized losses on investments for the three months ended March 31, 2023 and 2022, are as follows:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| | | | | (Dollars in thousands) |
Available for sale fixed maturity securities: | | | | | | | |
Gross realized gains | | | | | $ | 25,988 | | | $ | 3,465 | |
Gross realized losses | | | | | (44,451) | | | (2,006) | |
Net credit loss (provision) release | | | | | (829) | | | (7,356) | |
| | | | | (19,292) | | | (5,897) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other investments: | | | | | | | |
Gross realized gains | | | | | 1,777 | | | — | |
Gross realized losses | | | | | (432) | | | — | |
| | | | | 1,345 | | | — | |
Mortgage loans on real estate: | | | | | | | |
Increase in allowance for credit losses | | | | | (8,654) | | | (5,245) | |
Recovery of specific allowance | | | | | — | | | — | |
Loss on sale of mortgage loans | | | | | (1,186) | | | (1,985) | |
| | | | | (9,840) | | | (7,230) | |
| | | | | $ | (27,787) | | | $ | (13,127) | |
Realized losses on available for sale fixed maturity securities in 2023 and 2022 were realized primarily due to strategies to reposition the fixed maturity security portfolio that result in improved net investment income, credit risk or duration profiles as they pertain to our asset liability management. Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date.
We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes analyzing our ability to recover the amortized cost basis of each investment that has a fair value that is materially lower than its amortized cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for credit loss is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process to identify securities that could potentially have credit loss. This process involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
•the extent to which the fair value has been less than amortized cost or cost;
•whether the issuer is current on all payments and all contractual payments have been made as agreed;
•the remaining payment terms and the financial condition and near-term prospects of the issuer;
•the lack of ability to refinance due to liquidity problems in the credit market;
•the fair value of any underlying collateral;
•the existence of any credit protection available;
•our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;
•consideration of rating agency actions; and
•changes in estimated cash flows of mortgage and asset backed securities.
We determine whether an allowance for credit loss should be established for debt securities by assessing pertinent facts and circumstances surrounding each security. Where the decline in fair value of debt securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider these investments to have credit loss because we do not intend to sell these investments and it is not more likely than not we will be required to sell these investments before a recovery of amortized cost, which may be maturity.
If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized cost basis, credit loss has occurred and the difference between amortized cost and fair value will be recognized as a loss in operations.
If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the entire amortized cost basis of the security, a credit loss would be recognized in operations for the amount of the expected credit loss. We determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in operations. The recognized credit loss is limited to the total unrealized loss on the security (i.e., the fair value floor).
The determination of the credit loss component of a mortgage backed security is based on a number of factors. The primary consideration in this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase. Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default, loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.
We utilize models from a leading structured product software specialist serving institutional investors. These models incorporate each security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future, we use the "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of the expected recovery when compared to the amortized cost of the security will be recorded as credit loss.
The determination of the credit loss component of a corporate bond is based on the underlying financial performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited to, credit rating changes, financial statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of financial covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer appears unlikely to meet its future obligation, an estimate of credit loss is determined. Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the amount of credit loss associated with the security.
We do not measure a credit loss allowance on accrued interest receivable as we write off any accrued interest receivable balance to net investment income in a timely manner when we have concerns regarding collectability.
Amounts on available for sale fixed maturities that are deemed to be uncollectible are written off and removed from the allowance for credit loss. A write-off may also occur if we intend to sell a security or when it is more likely than not we will be required to sell the security before the recovery of its amortized cost.
The following table provides a rollforward of the allowance for credit loss:
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| Three Months Ended March 31, 2023 |
| States, Municipalities and Territories | | Corporate Securities | | | | Residential Mortgage Backed Securities | | | | Total |
| (Dollars in thousands) |
Beginning balance | $ | — | | | $ | 3,214 | | | | | $ | 133 | | | | | $ | 3,347 | |
Additions for credit losses not previously recorded | — | | | — | | | | | — | | | | | — | |
Change in allowance on securities with previous allowance | — | | | (1,300) | | | | | — | | | | | (1,300) | |
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Ending balance | $ | — | | | $ | 1,914 | | | | | $ | 133 | | | | | $ | 2,047 | |
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| Three Months Ended March 31, 2022 |
| States, Municipalities and Territories | | Corporate Securities | | | | Residential Mortgage Backed Securities | | | | Total |
| (Dollars in thousands) |
Beginning balance | $ | 2,776 | | | $ | — | | | | | $ | 70 | | | | | $ | 2,846 | |
Additions for credit losses not previously recorded | — | | | 3,825 | | | | | 336 | | | | | 4,161 | |
Change in allowance on securities with previous allowance | (767) | | | — | | | | | 337 | | | | | (430) | |
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Ending balance | $ | 2,009 | | | $ | 3,825 | | | | | $ | 743 | | | | | $ | 6,577 | |
4. Mortgage Loans on Real Estate
Our financing receivables consist of the following three portfolio segments: commercial mortgage loans, agricultural mortgage loans and residential mortgage loans. Our mortgage loan portfolios are summarized in the following table. There were commitments outstanding of $442.6 million at March 31, 2023.
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| March 31, 2023 | | December 31, 2022 |
| (Dollars in thousands) |
Commercial mortgage loans: | | | |
Principal outstanding | $ | 3,570,314 | | | $ | 3,560,903 | |
Deferred fees and costs, net | (6,407) | | | (6,345) | |
Amortized cost | 3,563,907 | | | 3,554,558 | |
Valuation allowance | (25,082) | | | (22,428) | |
Commercial mortgage loans, carrying value | 3,538,825 | | | 3,532,130 | |
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Agricultural mortgage loans: | | | |
Principal outstanding | 609,026 | | | 567,630 | |
Deferred fees and costs, net | (1,759) | | | (1,667) | |
Amortized cost | 607,267 | | | 565,963 | |
Valuation allowance | (1,356) | | | (1,021) | |
Agricultural mortgage loans, carrying value | 605,911 | | | 564,942 | |
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Residential mortgage loans: | | | |
Principal outstanding | 3,011,666 | | | 2,807,652 | |
Deferred fees and costs, net | 1,326 | | | 1,909 | |
Unamortized discounts and premiums, net | 60,685 | | | 55,917 | |
Amortized cost | 3,073,677 | | | 2,865,478 | |
Valuation allowance | (19,188) | | | (13,523) | |
Residential mortgage loans, carrying value | 3,054,489 | | | 2,851,955 | |
Mortgage loans, carrying value | $ | 7,199,225 | | | $ | 6,949,027 | |
Our commercial mortgage loan portfolio consists of loans collateralized by the related properties and diversified as to property type, location and loan size. Our lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce the risk of default. The commercial mortgage loan portfolio is summarized by geographic region and property type as follows:
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| March 31, 2023 | | December 31, 2022 |
| Principal | | Percent | | Principal | | Percent |
| (Dollars in thousands) |
Geographic distribution | | | | | | | |
East | $ | 491,711 | | | 13.8 | % | | $ | 502,659 | | | 14.1 | % |
Middle Atlantic | 279,732 | | | 7.8 | % | | 280,993 | | | 7.9 | % |
Mountain | 413,867 | | | 11.6 | % | | 416,307 | | | 11.7 | % |
New England | 75,432 | | | 2.1 | % | | 73,631 | | | 2.1 | % |
Pacific | 854,742 | | | 23.9 | % | | 858,812 | | | 24.1 | % |
South Atlantic | 949,734 | | | 26.6 | % | | 934,007 | | | 26.2 | % |
West North Central | 199,149 | | | 5.6 | % | | 205,568 | | | 5.8 | % |
West South Central | 305,947 | | | 8.6 | % | | 288,926 | | | 8.1 | % |
| $ | 3,570,314 | | | 100.0 | % | | $ | 3,560,903 | | | 100.0 | % |
Property type distribution | | | | | | | |
Office | $ | 369,223 | | | 10.3 | % | | $ | 388,978 | | | 10.9 | % |
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Retail | 858,628 | | | 24.0 | % | | 896,351 | | | 25.2 | % |
Industrial/Warehouse | 909,077 | | | 25.5 | % | | 866,623 | | | 24.3 | % |
Apartment | 1,029,694 | | | 28.8 | % | | 912,984 | | | 25.6 | % |
Hotel | 324,271 | | | 9.1 | % | | 285,271 | | | 8.0 | % |
Mixed Use/Other | 79,421 | | | 2.3 | % | | 210,696 | | | 6.0 | % |
| $ | 3,570,314 | | | 100.0 | % | | $ | 3,560,903 | | | 100.0 | % |
Our agricultural mortgage loan portfolio consists of loans with an outstanding principal balance of $609.0 million and $567.6 million as of March 31, 2023 and December 31, 2022, respectively. These loans are collateralized by agricultural land and are diversified as to location within the United States. Our residential mortgage loan portfolio consists of loans with an outstanding principal balance of $3.0 billion and $2.8 billion as of March 31, 2023 and December 31, 2022, respectively. These loans are collateralized by the related properties and diversified as to location within the United States.
Mortgage loans on real estate are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan's contractual interest rate. Interest income is included in Net investment income on our Consolidated Statements of Operations. Accrued interest receivable, which was $57.4 million and $58.2 million as of March 31, 2023 and December 31, 2022, respectively, is included in Accrued investment income on our Consolidated Balance Sheets.
Loan Valuation Allowance
We establish a valuation allowance to provide for the risk of credit losses inherent in our mortgage loan portfolios. The valuation allowance is maintained at a level believed adequate by management to absorb estimated expected credit losses. The valuation allowance is based on amortized cost, which excludes accrued interest receivable. We do not measure a credit loss allowance on accrued interest receivable as we write off any uncollectible accrued interest receivable balances to net investment income in a timely manner. We did not charge off any uncollectible accrued interest receivable on our commercial, agricultural or residential mortgage loan portfolios for the three month periods ended March 31, 2023 or 2022, respectively.
The valuation allowances for each of our mortgage loan portfolios are estimated by deriving probability of default and recovery rate assumptions based on the characteristics of the loans in each portfolio, historical economic data and loss information, and current and forecasted economic conditions. Key loan characteristics impacting the estimate for our commercial mortgage loan portfolio include the current state of the borrower’s credit quality, which considers factors such as loan-to-value (“LTV”) and debt service coverage (“DSC”) ratios, loan performance, underlying collateral type, delinquency status, time to maturity, and original credit scores. Key loan characteristics impacting the estimate for our agricultural and residential mortgage loan portfolios include the current state of the borrowers' credit quality, delinquency status, time to maturity and original credit scores.
The following table represents a rollforward of the valuation allowance on our mortgage loan portfolios:
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| Three Months Ended March 31, 2023 |
| Commercial | | Agricultural | | Residential | | Total |
| (Dollars in thousands) |
Beginning allowance balance | $ | (22,428) | | | $ | (1,021) | | | $ | (13,523) | | | $ | (36,972) | |
Charge-offs | — | | | — | | | — | | | — | |
Recoveries | — | | | — | | | — | | | — | |
Change in provision for credit losses | (2,654) | | | (335) | | | (5,665) | | | (8,654) | |
Ending allowance balance | $ | (25,082) | | | $ | (1,356) | | | $ | (19,188) | | | $ | (45,626) | |
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| Three Months Ended March 31, 2022 |
| Commercial | | Agricultural | | Residential | | Total |
| (Dollars in thousands) |
Beginning allowance balance | $ | (17,926) | | | $ | (519) | | | $ | (5,579) | | | $ | (24,024) | |
Charge-offs | — | | | — | | | — | | | — | |
Recoveries | — | | | — | | | — | | | — | |
Change in provision for credit losses | (6,661) | | | (39) | | | 1,455 | | | (5,245) | |
Ending allowance balance | $ | (24,587) | | | $ | (558) | | | $ | (4,124) | | | $ | (29,269) | |
Charge-offs include allowances that have been established on loans that were satisfied either by taking ownership of the collateral or by some other means such as discounted pay-off or loan sale. When ownership of the property is taken it is recorded at the lower of the loan's carrying value or the property's fair value (based on appraised values) less estimated costs to sell. The real estate owned is recorded as a component of Real estate investments and the loan is recorded as fully paid, with any allowance for credit loss that has been established charged off. Fair value of the real estate is determined by third party appraisal. There is no real estate in which ownership of the property was taken to satisfy an outstanding loan held in real estate investments as of March 31, 2023 or December 31, 2022. Recoveries are situations where we have received a payment from the borrower in an amount greater than the carrying value of the loan (principal outstanding less specific allowance).
Credit Quality Indicators
We evaluate the credit quality of our commercial and agricultural mortgage loans by analyzing LTV and DSC ratios and loan performance. We evaluate the credit quality of our residential mortgage loans by analyzing loan performance.
LTV and DSC ratios for our commercial mortgage loans are originally calculated at the time of loan origination and are updated annually for each loan using information such as rent rolls, assessment of lease maturity dates and property operating statements, which are reviewed in the context of current leasing and in place rents compared to market leasing and market rents. A DSC ratio of less than 1.0 indicates that a property's operations do not generate sufficient income to cover debt payments. An LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. All of our commercial mortgage loans that have a debt service coverage ratio of less than 1.0 are performing under the original contractual loan terms at March 31, 2023 and December 31, 2022.
The amortized cost of our commercial mortgage loan portfolio by LTV and DSC ratios based on the most recent information collected was as follows at March 31, 2023 and December 31, 2022 (by year of origination):
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| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total |
As of March 31, 2023: | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV |
Debt Service Coverage Ratio: | (Dollars in thousands) |
Greater than or equal to 1.5 | $ | — | | — | % | $ | 279,353 | | 62 | % | $ | 239,049 | | 60 | % | $ | 394,892 | | 56 | % | $ | 434,390 | | 58 | % | $ | 1,126,465 | | 46 | % | $ | 2,474,149 | | 52 | % |
Greater than or equal to 1.2 and less than 1.5 | — | | — | % | 6,487 | | 70 | % | 122,944 | | 55 | % | 46,669 | | 55 | % | 109,230 | | 66 | % | 204,897 | | 62 | % | 490,227 | | 61 | % |
Greater than or equal to 1.0 and less than 1.2 | 7,788 | | 16 | % | 175,669 | | 43 | % | 211,652 | | 43 | % | 38,390 | | 60 | % | 31,739 | | 52 | % | 63,234 | | 50 | % | 528,472 | | 47 | % |
Less than 1.0 | — | | — | % | — | | — | % | 26,945 | | 52 | % | — | | — | % | 6,057 | | 64 | % | 38,057 | | 66 | % | 71,059 | | 61 | % |
Total | $ | 7,788 | | 16 | % | $ | 461,509 | | 55 | % | $ | 600,590 | | 53 | % | $ | 479,951 | | 56 | % | $ | 581,416 | | 60 | % | $ | 1,432,653 | | 49 | % | $ | 3,563,907 | | 53 | % |
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| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total |
As of December 31, 2022: | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV |
Debt Service Coverage Ratio: | | | | | | | | | | | | | | |
Greater than or equal to 1.5 | $ | 249,328 | | 63 | % | $ | 257,746 | | 61 | % | $ | 421,391 | | 57 | % | $ | 429,596 | | 58 | % | $ | 325,117 | | 53 | % | $ | 813,319 | | 44 | % | $ | 2,496,497 | | 53 | % |
Greater than or equal to 1.2 and less than 1.5 | 6,488 | | 70 | % | 123,038 | | 55 | % | 46,804 | | 58 | % | 115,977 | | 66 | % | 67,642 | | 67 | % | 145,703 | | 60 | % | 505,652 | | 62 | % |
Greater than or equal to 1.0 and less than 1.2 | 170,059 | | 52 | % | 211,684 | | 43 | % | 18,144 | | 79 | % | 39,396 | | 73 | % | 10,348 | | 76 | % | 58,021 | | 47 | % | 507,652 | | 51 | % |
Less than 1.0 | — | | — | % | — | | — | % | — | | — | % | 6,107 | | 64 | % | 13,025 | | 70 | % | 25,625 | | 65 | % | 44,757 | | 66 | % |
Total | $ | 425,875 | | 59 | % | $ | 592,468 | | 53 | % | $ | 486,339 | | 58 | % | $ | 591,076 | | 61 | % | $ | 416,132 | | 57 | % | $ | 1,042,668 | | 47 | % | $ | 3,554,558 | | 54 | % |
LTV and DSC ratios for our agricultural mortgage loans are calculated at the time of loan origination and are evaluated annually for each loan using land value averages. A DSC ratio of less than 1.0 indicates that a property's operations do not generate sufficient income to cover debt payments. An LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. All of our agricultural mortgage loans that have a debt service coverage ratio of less than 1.0 are performing under the original contractual loan terms at March 31, 2023 and December 31, 2022.
The amortized cost of our agricultural mortgage loan portfolio by LTV and DSC ratios based on the most recent information collected was as follows at March 31, 2023 and December 31, 2022 (by year of origination):
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| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total |
As of March 31, 2023: | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV |
Debt Service Coverage Ratio: | (Dollars in thousands) |
Greater than or equal to 1.5 | $ | 31,906 | | 60 | % | $ | 86,270 | | 47 | % | $ | 82,509 | | 53 | % | $ | 100,292 | | 44 | % | $ | — | | — | % | $ | — | | — | % | $ | 300,977 | | 49 | % |
Greater than or equal to 1.2 and less than 1.5 | 10,082 | | 58 | % | 105,916 | | 54 | % | 67,170 | | 53 | % | 60,643 | | 45 | % | — | | — | % | — | | — | % | 243,811 | | 52 | % |
Greater than or equal to 1.0 and less than 1.2 | — | | — | % | 3,102 | | 56 | % | 8,687 | | 39 | % | 3,125 | | 29 | % | — | | — | % | — | | — | % | 14,914 | | 41 | % |
Less than 1.0 | — | | — | % | — | | — | % | — | | — | % | 7,976 | | 40 | % | 5,589 | | 24 | % | 34,000 | | 42 | % | 47,565 | | 39 | % |
Total | $ | 41,988 | | 59 | % | $ | 195,288 | | 51 | % | $ | 158,366 | | 52 | % | $ | 172,036 | | 44 | % | $ | 5,589 | | 24 | % | $ | 34,000 | | 42 | % | $ | 607,267 | | 49 | % |
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| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total |
As of December 31, 2022: | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV | Amortized Cost | Average LTV |
Debt Service Coverage Ratio: | | | | | | | | | | | | | | |
Greater than or equal to 1.5 | $ | 85,367 | | 47 | % | $ | 84,186 | | 46 | % | $ | 97,143 | | 41 | % | $ | — | | — | % | $ | — | | — | % | $ | — | | — | % | $ | 266,696 | | 45 | % |
Greater than or equal to 1.2 and less than 1.5 | 107,856 | | 54 | % | 67,630 | | 52 | % | 61,103 | | 32 | % | — | | — | % | — | | — | % | — | | — | % | 236,589 | | 48 | % |
Greater than or equal to 1.0 and less than 1.2 | 3,124 | | 56 | % | 8,825 | | 38 | % | 3,125 | | 25 | % | — | | — | % | — | | — | % | — | | — | % | 15,074 | | 39 | % |
Less than 1.0 | — | | — | % | — | | — | % | 7,975 | | 35 | % | 5,629 | | 41 | % | 34,000 | | 31 | % | — | | — | % | 47,604 | | 33 | % |
Total | $ | 196,347 | | 51 | % | $ | 160,641 | | 48 | % | $ | 169,346 | | 37 | % | $ | 5,629 | | 41 | % | $ | 34,000 | | 31 | % | $ | — | | — | % | $ | 565,963 | | 45 | % |
We closely monitor loan performance for our commercial, agricultural and residential mortgage loan portfolios. Aging of financing receivables is summarized in the following table (by year of origination):
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| 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Total |
As of March 31, 2023: | (Dollars in thousands) |
Commercial mortgage loans | | | | | | | | | | | | | |
Current | $ | 7,788 | | | $ | 461,509 | | | $ | 600,590 | | | $ | 479,951 | | | $ | 581,416 | | | $ | 1,432,653 | | | $ | 3,563,907 | |
30 - 59 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
60 - 89 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Over 90 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial mortgage loans | $ | 7,788 | | | $ | 461,509 | | | $ | 600,590 | | | $ | 479,951 | | | $ | 581,416 | | | $ | 1,432,653 | | | $ | 3,563,907 | |
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Agricultural mortgage loans | | | | | | | | | | | | | |
Current | $ | 41,988 | | | $ | 195,288 | | | $ | 153,023 | | | $ | 172,036 | | | $ | 5,589 | | | $ | 34,000 | | | $ | 601,924 | |
30 - 59 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
60 - 89 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Over 90 days past due | — | | | — | | | 5,343 | | | — | | | — | | | — | | | 5,343 | |
Total agricultural mortgage loans | $ | 41,988 | | | $ | 195,288 | | | $ | 158,366 | | | $ | 172,036 | | | $ | 5,589 | | | $ | 34,000 | | | $ | 607,267 | |
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Residential mortgage loans | | | | | | | | | | | | | |
Current | $ | 224,031 | | | $ | 2,003,711 | | | $ | 562,310 | | | $ | 194,720 | | | $ | 27,631 | | | $ | 1,330 | | | $ | 3,013,733 | |
30 - 59 days past due | — | | | 16,627 | | | 2,516 | | | 4,960 | | | 57 | | | 417 | | | 24,577 | |
60 - 89 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Over 90 days past due | — | | | 7,452 | | | 16,155 | | | 7,385 | | | 1,580 | | | 2,795 | | | 35,367 | |
Total residential mortgage loans | $ | 224,031 | | | $ | 2,027,790 | | | $ | 580,981 | | | $ | 207,065 | | | $ | 29,268 | | | $ | 4,542 | | | $ | 3,073,677 | |
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| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
As of December 31, 2022: | (Dollars in thousands) |
Commercial mortgage loans | | | | | | | | | | | | | |
Current | $ | 425,875 | | | $ | 592,468 | | | $ | 486,339 | | | $ | 591,076 | | | $ | 416,132 | | | $ | 1,042,668 | | | $ | 3,554,558 | |
30 - 59 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
60 - 89 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Over 90 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial mortgage loans | $ | 425,875 | | | $ | 592,468 | | | $ | 486,339 | | | $ | 591,076 | | | $ | 416,132 | | | $ | 1,042,668 | | | $ | 3,554,558 | |
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Agricultural mortgage loans | | | | | | | | | | | | | |
Current | $ | 196,347 | | | $ | 160,641 | | | $ | 166,211 | | | $ | 5,629 | | | $ | 34,000 | | | $ | — | | | $ | 562,828 | |
30 - 59 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
60 - 89 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Over 90 days past due | — | | | — | | | 3,135 | | | — | | | — | | | — | | | 3,135 | |
Total agricultural mortgage loans | $ | 196,347 | | | $ | 160,641 | | | $ | 169,346 | | | $ | 5,629 | | | $ | 34,000 | | | $ | — | | | $ | 565,963 | |
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Residential mortgage loans | | | | | | | | | | | | | |
Current | $ | 1,915,169 | | | $ | 595,363 | | | $ | 211,119 | | | $ | 27,483 | | | $ | 1,710 | | | $ | 417 | | | $ | 2,751,261 | |
30 - 59 days past due | 39,179 | | | 8,238 | | | 13,073 | | | 1,960 | | | — | | | — | | | 62,450 | |
60 - 89 days past due | 6,668 | | | 7,165 | | | 3,034 | | | 57 | | | — | | | — | | | 16,924 | |
Over 90 days past due | 9,702 | | | 14,068 | | | 6,515 | | | 1,762 | | | 2,796 | | | — | | | 34,843 | |
Total residential mortgage loans | $ | 1,970,718 | | | $ | 624,834 | | | $ | 233,741 | | | $ | 31,262 | | | $ | 4,506 | | | $ | 417 | | | $ | 2,865,478 | |
Commercial, agricultural and residential mortgage loans are considered nonperforming when they become 90 days or more past due. When loans become nonperforming, we place them on non-accrual status and discontinue recognizing interest income. If payments are received on a nonperforming loan, interest income is recognized to the extent it would have been recognized if normal principal and interest would have been received timely. If payments are received to bring a nonperforming loan back to less than 90 days past due, we will resume accruing interest income on that loan. There were 31 loans in non-accrual status at March 31, 2023 and 59 loans in non-accrual status at December 31, 2022. During the three months ended March 31, 2023 we recognized $15 thousand in interest income on loans which were in non-accrual status at the respective period end. During the three months ended March 31, 2022, we recognized no interest income on loans which were in non-accrual status at the respective period end.
Loan Modifications
Our commercial, agricultural and residential mortgage loans may be subject to loan modifications. Loan modifications may be granted to borrowers experiencing financial difficulty and could include principal forgiveness, interest rate reduction, an other-than-significant delay or a term extension. We consider the following factors in determining whether or not a borrower is experiencing financial difficulty:
•borrower is in default,
•borrower has declared bankruptcy,
•there is growing concern about the borrower's ability to continue as a going concern,
•borrower has insufficient cash flows to service debt,
•borrower's inability to obtain funds from other sources, and
•there is a breach of financial covenants by the borrower.
A loan modification typically does not result in a change in valuation allowance as it is already incorporated into our allowance methodology. However, if we grant a borrower experiencing financial difficulty principal forgiveness, the amount of principal forgiven would be written off, which would reduce the amortized cost of the loan and result in an adjustment to the valuation allowance.
There were no significant mortgage loan modifications for the three months ended March 31, 2023.
Prior to adoption of authoritative guidance on January 1, 2023, we evaluated whether a TDR had occurred on our commercial, agricultural or residential mortgage loans. We did not have any significant loan modifications that resulted in a TDR for the three months ended March 31, 2022.
5. Variable Interest Entities
We have relationships with various types of entities which may be VIEs. Certain VIEs are consolidated in our financial results.
Consolidated Variable Interest Entities
We are invested in four investment company real estate limited partnerships which own various limited liability companies that invest in residential real estate properties and one real estate limited liability company that invests in a commercial real estate property. These entities are VIE's as the legal entities equity investors have insufficient equity at risk and lack of power to direct the activities that most significantly impact the economic performance. We determined we are the primary beneficiary as a result of our power to control the entities through our significant ownership. Due to the nature of the investment company real estate investments, the investments balance will fluctuate based on changes in the fair value of the properties as well as when purchases and sales of properties are made. The investment balance in the commercial real estate property is held at depreciated cost, and is expected to decrease over time.
We are invested in two investment company limited liability companies that invest in operating entities which hold multifamily real estate properties. The entity is a VIE and we have determined we are the primary beneficiary as a result of our power to control the entity through our significant ownership. The investment balance, which represents an equity interest in the investment company limited liability company, fluctuates based on changes in the fair value of the properties and the performance of the operating entities.
We are invested in two limited partnership feeder funds which each invest in a separate limited partnership fund. One fund holds infrastructure credit assets and the other holds tech-centric middle-market loans. In both cases, the feeder fund limited partnerships are VIEs, and we determined we are the primary beneficiary as a result of our significant ownership of the limited partnerships and our obligation to absorb losses or receive benefits from the VIEs. We have consolidated the assets and liabilities of the limited partnerships, which primarily consist of equity interests in limited partnerships.
We are invested in one investment company limited liability company that invests in core infrastructure assets typically held through an interest in limited liability companies. The entity is a VIE and we have determined we are the primary beneficiary as a result of our power to control the entity through significant ownership and our obligation to absorb losses or receive benefits from the VIE. The VIE meets the definition of an investment company, which requires the investment balance to be held at fair value.
The carrying amounts of our consolidated VIE assets, which can only be used to settle obligations of the consolidated VIEs, and liabilities of consolidated VIEs for which creditors do not have recourse were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Total Assets | | Total Liabilities | | Total Assets | | Total Liabilities |
| (Dollars in thousands) |
Real estate investments | $ | 1,221,622 | | | $ | 127,087 | | | $ | 1,095,267 | | | $ | 78,244 | |
Real estate limited liability companies | 65,776 | | | 243 | | | 66,258 | | | 287 | |
Limited partnership funds | 901,367 | | | 189 | | | 620,741 | | | 113 | |
Infrastructure limited liability companies | 100,600 | | | — | | | — | | | — | |
| $ | 2,289,365 | | | $ | 127,519 | | | $ | 1,782,266 | | | $ | 78,644 | |
Unconsolidated Variable Interest Entities
We provided debt funding to various special purpose vehicles, which are used to acquire and hold various types of loans or receivables. These legal entities are deemed VIEs because there is insufficient equity at risk. We have determined we are not the primary beneficiary as we do not control the activities that most significantly impact the economic performance of the VIEs. Our investments in these VIEs are reported in Fixed maturity securities, available for sale in the Consolidated Balance Sheets.
The carrying value and maximum loss exposure for our unconsolidated VIEs were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Asset Carrying Value | | Maximum Exposure to Loss | | Asset Carrying Value | | Maximum Exposure to Loss |
| (Dollars in thousands) |
Fixed maturity securities, available for sale | $ | 1,493,364 | | | $ | 1,493,364 | | | $ | 1,178,110 | | | $ | 1,178,110 | |
| | | | | | | |
6. Derivative Instruments
We use derivative instruments to manage risks. We have derivatives that are designated as hedging instruments and others that are not designated as hedging instruments. Any change in the fair value of the derivatives is recognized immediately in the Consolidated Statements of Operations.
The notional and fair values of our derivative instruments, including derivative instruments embedded in fixed index annuity contracts, presented in the Consolidated Balance Sheets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Notional | | Fair Value | | Notional | | Fair Value |
| (Dollars in thousands) |
Derivatives designated as hedging instruments | | | | | | | |
Assets | | | | | | | |
Derivative instruments | | | | | | | |
Interest rate swaps | $ | 408,369 | | | $ | 19,778 | | | $ | 408,369 | | | $ | 32,769 | |
| | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | |
Assets | | | | | | | |
Derivative instruments | | | | | | | |
Call options | $ | 39,005,998 | | | $ | 664,255 | | | $ | 38,927,534 | | | $ | 397,789 | |
Warrants | — | | | — | | | 2,020 | | | 1,169 | |
| | | | | | | |
| $ | 39,005,998 | | | $ | 664,255 | | | $ | 38,929,554 | | | $ | 398,958 | |
Liabilities | | | | | | | |
Policy benefit reserves - annuity products | | | | | | | |
Fixed index annuities - embedded derivatives, net | | | $ | 4,905,133 | | | | | $ | 4,820,845 | |
Funds withheld for reinsurance liabilities | | | | | | | |
Reinsurance related embedded derivative | | | (377,484) | | | | | (441,864) | |
| | | $ | 4,527,649 | | | | | $ | 4,378,981 | |
Derivatives Designated as Hedging Instruments
We use interest rate swaps that are designated and accounted for as fair value hedges to protect a portfolio of fixed-rate fixed maturity securities against changes in fair value due to changes in interest rates. Our interest rate swap contracts allow us to pay a fixed rate and receive a floating rate utilizing the Secured Overnight Financing Rate at specified intervals based on a notional amount. Interest rate swaps are carried at fair value and presented as Derivative instruments on the Consolidated Balance Sheets.
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the portion of the derivative instrument included in the assessment of hedge effectiveness and the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in the same line item in the Consolidated Statements of Operations. The change in unrealized gain or loss attributable to interest rate changes on the fixed maturity securities that are designated as part of the hedge are reclassified out of Accumulated other comprehensive income (loss) into Change in fair value of derivatives in the Consolidated Statements of Operations. The remaining change in unrealized gain or loss on the hedged item not associated with the risk being hedged is recognized as a component of Other comprehensive income.
The following represents the amortized cost and cumulative fair value hedging adjustments included in the hedged assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Line Item in the Consolidated Balance Sheets in Which Hedged Item is Included | | Amortized Cost of Hedged Item | | Cumulative Amount of Fair Value Basis Adjustment Gain (Loss) |
| | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
| | (Dollars in thousands) |
Fixed maturities, available for sale: | | | | | | | | |
Current hedging relationships | | $ | 389,904 | | | $ | 389,060 | | | $ | (25,011) | | | $ | (39,128) | |
Discontinued hedging relationships | | 1,333,176 | | | 1,594,736 | | | (79,031) | | | (94,681) | |
The following represents a summary of the gains (losses) related to the derivatives and hedged items that qualify for fair value hedge accounting:
| | | | | | | | | | | | | | | | | | | | | | | |
| Derivative | | Hedged Item | | Net | | Amount Excluded: Recognized in Income Immediately |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| (Dollars in thousands) |
For the three months ended March 31, 2023 | | | | | | | |
Interest rate swaps | $ | (12,991) | | | $ | 14,116 | | | $ | 1,125 | | | $ | — | |
| | | | | | | |
For the three months ended March 31, 2022 | | | | | | | |
Interest rate swaps | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Derivatives Not Designated as Hedging Instruments
We have fixed index annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index. When fixed index annuity deposits are received, a portion of the deposit is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to fixed index annuity policyholders. Substantially all such call options are one year options purchased to match the funding requirements of the underlying policies. The call options are marked to fair value with the change in fair value included as a component of revenues. The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term and the changes in fair value for open positions. On the respective anniversary dates of the index policies, the index used to compute the index credit is reset and we purchase new call options to fund the next index credit. We manage the cost of these purchases through the terms of our fixed index annuities, which permit us to change caps, participation rates, and/or asset fees, subject to guaranteed minimums on each policy's anniversary date. By adjusting caps, participation rates, or asset fees, we can generally manage option costs except in cases where the contractual features would prevent further modifications.
The changes in fair value of derivatives not designated as hedging instruments included in the Consolidated Statements of Operations are as follows:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| | | | | (Dollars in thousands) |
Change in fair value of derivatives: | | | | | | | |
Call options | | | | | $ | 43,444 | | | $ | (478,448) | |
Warrants | | | | | 1,321 | | | 929 | |
| | | | | | | |
| | | | | $ | 44,765 | | | $ | (477,519) | |
Change in fair value of embedded derivatives: | | | | | | | |
Fixed index annuities - embedded derivatives | | | | | $ | 205,469 | | | $ | (1,308,123) | |
Other changes in difference between policy benefit reserves computed using derivative accounting (ASC 815) vs. insurance contracts accounting (ASC 944) | | | | | 134,591 | | | 116,918 | |
Reinsurance related embedded derivative | | | | | 64,380 | | | (202,444) | |
| | | | | $ | 404,440 | | | $ | (1,393,649) | |
The amounts presented as "Other changes in difference between policy benefit reserves computed using derivative accounting (ASC 815) vs. insurance contract accounting (ASC 944)" represents the total change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the insurance contracts accounting standard at each balance sheet date, less the change in fair value of our fixed index annuities embedded derivatives that is presented as Level 3 liabilities in Note 2 - Fair Values of Financial Instruments.
Derivative Exposure
We attempt to mitigate potential risk of loss due to the nonperformance of the counterparties through a regular monitoring process which evaluates the program's effectiveness. We do not purchase derivative instruments that would require payment or collateral to another institution and our derivative instruments do not contain counterparty credit-risk-related contingent features. We are exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, we purchase our derivative instruments from multiple counterparties and evaluate the creditworthiness of all counterparties prior to purchase of the contracts. All non-exchange traded derivative instruments have been purchased from nationally recognized financial institutions with a Standard and Poor's credit rating of A- or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. Both our call options and interest rate swaps fall under the same credit support agreements with each counterparty that allow us to request the counterparty to provide collateral to us when the fair value of our exposure to the counterparty exceeds specified amounts.
The notional amount and fair value of our call options and interest rate swaps by counterparty and each counterparty's current credit rating are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | March 31, 2023 | | December 31, 2022 |
Counterparty | | Credit Rating (S&P) | | Credit Rating (Moody's) | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | | | | | (Dollars in thousands) |
Bank of America | | A+ | | Aa2 | | $ | 3,913,403 | | | $ | 45,365 | | | $ | 3,574,125 | | | $ | 26,080 | |
Barclays | | A | | A1 | | 2,910,246 | | | 60,478 | | | 3,686,896 | | | 39,657 | |
Canadian Imperial Bank of Commerce | | A+ | | Aa2 | | 2,442,141 | | | 54,020 | | | 2,707,734 | | | 34,218 | |
Citibank, N.A. | | A+ | | Aa3 | | 4,132,309 | | | 49,853 | | | 3,748,162 | | | 29,873 | |
Credit Suisse | | A- | | A3 | | 2,074,458 | | | 36,903 | | | 2,086,470 | | | 20,691 | |
J.P. Morgan | | A+ | | Aa2 | | 6,153,747 | | | 78,007 | | | 6,501,103 | | | 69,006 | |
Mizuho | | A | | A1 | | 691,141 | | | 19,273 | | | — | | | — | |
Morgan Stanley | | A+ | | Aa3 | | 2,569,596 | | | 36,543 | | | 2,957,389 | | | 38,470 | |
Royal Bank of Canada | | AA- | | A1 | | 4,595,241 | | | 102,189 | | | 4,378,132 | | | 58,026 | |
Societe Generale | | A | | A1 | | 2,460,528 | | | 36,410 | | | 2,099,081 | | | 17,157 | |
Truist | | A | | A2 | | 2,142,918 | | | 49,287 | | | 1,960,787 | | | 32,885 | |
Wells Fargo | | A+ | | Aa2 | | 5,200,545 | | | 113,323 | | | 5,436,824 | | | 61,840 | |
Exchange traded | | | | | | 128,094 | | | 2,382 | | | 199,200 | | | 2,655 | |
| | | | | | $ | 39,414,367 | | | $ | 684,033 | | | $ | 39,335,903 | | | $ | 430,558 | |
As of March 31, 2023 and December 31, 2022, we held $0.6 billion and $0.4 billion, respectively, of cash and cash equivalents and other investments from counterparties for derivative collateral, which is included in Other liabilities on our Consolidated Balance Sheets. This derivative collateral limits the maximum amount of economic loss due to credit risk that we would incur if the counterparties failed completely to perform according to the terms of the contracts to $65.7 million and $3.3 million at March 31, 2023 and December 31, 2022, respectively.
The future index credits on our fixed index annuities are treated as a "series of embedded derivatives" over the expected life of the applicable contract. We do not purchase call options to fund the index liabilities which may arise after the next policy anniversary date. We must value both the call options and the related forward embedded options in the policies at fair value.
We cede certain fixed index annuity product liabilities to third party reinsurers on a modified coinsurance basis which results in an embedded derivative. The obligation to pay the total return on the assets supporting liabilities associated with this reinsurance agreement represents a total return swap. The fair value of the total return swap is based on the unrealized gains and losses of the underlying assets held in the modified coinsurance portfolio. The reinsurance related embedded derivative is reported in Funds withheld for reinsurance liabilities on the Consolidated Balance Sheets and the change in the fair value of the embedded derivative is reported in Change in fair value of embedded derivatives on the Consolidated Statements of Operations.
7. Deferred Policy Acquisition Costs and Deferred Sales Inducements
Deferred Policy Acquisition Costs
The following tables present the balances and changes in deferred policy acquisition costs:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Fixed Index Annuities | | Fixed Rate Annuities | | Single Premium Immediate Annuities |
| (Dollars in thousands) |
Balance, beginning of year | $ | 2,649,322 | | | $ | 120,105 | | | $ | 4,216 | |
| | | | | |
Capitalizations | 54,803 | | | 11,949 | | | 16 | |
Amortization expense | (60,801) | | | (7,247) | | | (188) | |
Balance, end of period | $ | 2,643,324 | | | $ | 124,807 | | | $ | 4,044 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Fixed Index Annuities | | Fixed Rate Annuities | | Single Premium Immediate Annuities |
| (Dollars in thousands) |
Balance, beginning of year | $ | 2,906,684 | | | $ | 151,322 | | | $ | 4,198 | |
Write-off related to in-force ceded reinsurance | (196,417) | | | (7,209) | | | — | |
Capitalizations | 193,988 | | | 4,424 | | | 663 | |
Amortization expense | (254,933) | | | (28,432) | | | (645) | |
Balance, end of period | $ | 2,649,322 | | | $ | 120,105 | | | $ | 4,216 | |
The reconciliation of the deferred policy acquisition costs to the deferred policy acquisition costs in the consolidated balance sheets is as follows:
| | | | | | | | | | | |
| Deferred Policy Acquisitions Costs |
| March 31, 2023 | | December 31, 2022 |
| (Dollars in thousands) |
Fixed Index Annuities | $ | 2,643,324 | | | $ | 2,649,322 | |
Fixed Rate Annuities | 124,807 | | | 120,105 | |
Single Premium Immediate Annuities | 4,044 | | | 4,216 | |
Total | $ | 2,772,175 | | | $ | 2,773,643 | |
Deferred Sales Inducements
The following tables present the balances and changes in deferred sales inducements:
| | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Fixed Index Annuities | | Fixed Rate Annuities |
| (Dollars in thousands) |
Balance, beginning of year | $ | 2,017,960 | | | $ | 27,723 | |
Capitalizations | 45,266 | | | — | |
Amortization expense | (45,786) | | | (814) | |
Balance, end of period | $ | 2,017,440 | | | $ | 26,909 | |
| | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Fixed Index Annuities | | Fixed Rate Annuities |
| (Dollars in thousands) |
Balance, beginning of year | $ | 2,088,591 | | | $ | 31,370 | |
Capitalizations | 107,683 | | | 8 | |
Amortization expense | (178,314) | | | (3,655) | |
Balance, end of period | $ | 2,017,960 | | | $ | 27,723 | |
The reconciliation of the deferred sales inducements to the deferred sales inducements in the consolidated balance sheets is as follows:
| | | | | | | | | | | |
| Deferred Sales Inducements |
| March 31, 2023 | | December 31, 2022 |
| (Dollars in thousands) |
Fixed Index Annuities | $ | 2,017,440 | | | $ | 2,017,960 | |
Fixed Rate Annuities | 26,909 | | | 27,723 | |
Total | $ | 2,044,349 | | | $ | 2,045,683 | |
8. Policyholder Liabilities
Liability for Future Policy Benefits
The liability for future policy benefits consists only of the liability associated with single premium immediate annuities (SPIA) with life contingencies. As this business has no future expected premiums, the rollforward presented below is the present value of expected future benefits. The balances of and changes in the liability for future policy benefits for the three months ended March 31, 2023 and year ended December 31, 2022 is as follows:
| | | | | | | | | | | |
| Present Value of Expected Future Policy Benefits |
| Three Months Ended March 31, 2023 | | Year Ended December 31, 2022 |
| (Dollars in thousands) |
Balance, beginning of year | $ | 317,418 | | | $ | 401,022 | |
Beginning balance at original discount rate | 341,071 | | | 351,575 | |
Effect of changes in cash flow assumptions | — | | | 1,280 | |
Effect of actual variances from expected experience | (354) | | | (1,958) | |
Adjusted beginning of year balance | 340,717 | | | 350,897 | |
| | | |
Issuances | 2,874 | | | 15,766 | |
Interest accrual | 3,548 | | | 14,613 | |
Benefit payments | — | | | — | |
| | | |
Derecognition (lapses) | (9,818) | | | (40,205) | |
Ending balance at original discount rate | 337,321 | | | 341,071 | |
Effect of changes in discount rate assumptions | (18,859) | | | (23,653) | |
Balance, end of period | $ | 318,462 | | | $ | 317,418 | |
The reconciliation of the net liability for future policy benefits to the liability for future policy benefits included in policy benefit reserves in the consolidated balance sheets is as follows:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (Dollars in thousands) |
Liability for future policy benefits | $ | 319,895 | | | $ | 318,677 | |
Deferred profit liability | 19,341 | | | 19,084 | |
| 339,236 | | | 337,761 | |
Less: Reinsurance recoverable | (1,433) | | | (1,259) | |
Net liability for future policy benefits, after reinsurance recoverable | $ | 337,803 | | | $ | 336,502 | |
The weighted-average liability duration of the liability for future policy benefits is as follows:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
SPIA With Life Contingency: | | | |
Weighted-average liability duration of the liability for future policy benefits (years) | 7.58 | | 6.78 |
| | | |
| | | |
The following table presents the amount of undiscounted expected future benefit payments and expected gross premiums:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (Dollars in thousands) |
SPIA With Life Contingency: | | | |
Expected future benefit payments | $ | 462,201 | | | $ | 467,627 | |
Expected future gross premiums | — | | | — | |
| | | |
| | | |
| | | |
| | | |
The amount of revenue and interest recognized in the statement of operations for the three months ended March 31, 2023 and year ended December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Year Ended December 31, 2022 |
| Gross Premiums or Assessments | | Interest Expense | | Gross Premiums or Assessments | | Interest Expense |
| (Dollars in thousands) |
Liability for future policy benefits | $ | 3,391 | | | $ | 3,548 | | | $ | 16,994 | | | $ | 14,613 | |
| | | | | | | |
Total | $ | 3,391 | | | $ | 3,548 | | | $ | 16,994 | | | $ | 14,613 | |
The weighted-average interest rate is as follows:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (Dollars in thousands) |
Interest accretion rate | 4.26 | % | | 4.25 | % |
Current discount rate | 4.95 | % | | 5.37 | % |
Market Risk Benefits
The balances of and changes in the liability for market risk benefits (MRB) for the three months ended March 31, 2023 and year ended December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Year Ended December 31, 2022 |
| Fixed Rate Annuities | | Fixed Index Annuities | | Fixed Rate Annuities | | Fixed Index Annuities |
| (Dollars in thousands) |
MRB Liability | | | | | | | |
Balance, beginning of year | $ | 37,863 | | | $ | 2,187,758 | | | $ | 78,411 | | | $ | 2,557,379 | |
Balance, beginning of year, before effect of changes in the instrument-specific credit risk | 44,355 | | | 2,453,169 | | | 77,732 | | | 2,310,436 | |
Issuances | — | | | 44,841 | | | 376 | | | 59,452 | |
Interest accrual | 607 | | | 36,217 | | | 1,349 | | | 72,551 | |
Attributed fees collected | 302 | | | 30,041 | | | 1,270 | | | 125,168 | |
Benefits payments | — | | | — | | | — | | | — | |
Effect of changes in interest rates | 2,973 | | | 172,165 | | | (19,421) | | | (952,265) | |
Effect of changes in equity markets | — | | | (16,573) | | | — | | | 186,618 | |
Effect of changes in equity index volatility | — | | | (7,760) | | | — | | | 241,563 | |
Actual policyholder behavior different from expected behavior | — | | | — | | | — | | | — | |
Effect of changes in future expected policyholder behavior | 714 | | | 3,738 | | | 602 | | | 46,567 | |
Effect of changes in other future expected assumptions | — | | | — | | | (17,553) | | | 363,079 | |
Balance, end of year, before effect of changes in the instrument-specific credit | 48,951 | | | 2,715,838 | | | 44,355 | | | 2,453,169 | |
Effect of changes in the instrument-specific credit risk | (7,795) | | | (334,113) | | | (6,492) | | | (265,411) | |
Balance, end of year | 41,156 | | | 2,381,725 | | | 37,863 | | | 2,187,758 | |
Reinsured MRB, end of period | 11,463 | | | 674,239 | | | 10,656 | | | 593,959 | |
Balance, end of period, net of reinsurance | $ | 29,693 | | | $ | 1,707,486 | | | $ | 27,207 | | | $ | 1,593,799 | |
| | | | | | | |
Net amount at risk (a) | $ | 262,643 | | | $ | 11,120,564 | | | $ | 258,826 | | | $ | 10,987,198 | |
Weighted average attained age of contract holders (years) | 69 | | 71 | | 69 | | 71 |
(a)Net amount at risk is defined as the current guarantee amount in excess of the current account balance.
The following is a reconciliation of market risk benefits by amounts in an asset position and in a liability position to market risk benefit amounts included in other assets and market risk benefit reserves, respectively, in the Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Asset | | Liability | | Net Liability |
| (Dollars in thousands) |
Fixed Index Annuities | $ | 226,747 | | | $ | 2,608,472 | | | $ | 2,381,725 | |
Fixed Rate Annuities | 3,557 | | | 44,713 | | | 41,156 | |
| | | | | |
Total | $ | 230,304 | | | $ | 2,653,185 | | | $ | 2,422,881 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Asset | | Liability | | Net Liability |
| (Dollars in thousands) |
Fixed Index Annuities | $ | 226,294 | | | $ | 2,414,052 | | | $ | 2,187,758 | |
Fixed Rate Annuities | 3,577 | | | 41,440 | | | 37,863 | |
| | | | | |
Total | $ | 229,871 | | | $ | 2,455,492 | | | $ | 2,225,621 | |
Reinsured Market Risk Benefits
The following table presents the balances and changes in reinsured market risk benefits associated with fixed index annuities for the three months ended March 31, 2023 and year ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Year Ended December 31, 2022 |
| Fixed Rate Annuities | | Fixed Index Annuities | | Fixed Rate Annuities | | Fixed Index Annuities |
Ceded MRB | (Dollars in thousands) |
Balance, beginning of year | $ | 10,656 | | | $ | 593,959 | | | $ | — | | | $ | 156,931 | |
Write-off related to in-force ceded reinsurance | — | | | — | | | 10,091 | | | 334,835 | |
Issuances | — | | | 32,744 | | | — | | | 36,036 | |
Interest accrual | 128 | | | 7,136 | | | 104 | | | 7,598 | |
Attributed fees collected | 7 | | | 6,106 | | | 28 | | | 23,745 | |
Benefits payments | — | | | — | | | — | | | — | |
Effect of changes in interest rates | 603 | | | 40,846 | | | 135 | | | (171,948) | |
Effect of changes in equity markets | — | | | (7,043) | | | 118 | | | 43,799 | |
Effect of changes in equity index volatility | — | | | (2,021) | | | — | | | 34,278 | |
Actual policyholder behavior different from expected behavior | — | | | — | | | — | | | — | |
Effect of changes in future expected policyholder behavior | 69 | | | 2,512 | | | 180 | | | 12,598 | |
Effect of changes in other future expected assumptions | — | | | — | | | — | | | 116,087 | |
Balance, end of year | $ | 11,463 | | | $ | 674,239 | | | $ | 10,656 | | | $ | 593,959 | |
| | | | | | | |
Net amount at risk (a) | $ | 73,259 | | | $ | 2,419,275 | | | $ | 72,350 | | | $ | 2,402,964 | |
Weighted average attained age of contract holders (years) | 70 | | 71 | | 70 | | 71 |
(a)Net amount at risk is defined as the current guarantee amount in excess of the current account balance.
The following is a reconciliation of reinsurance market risk benefits by amounts in an asset position and in liability position to market risk benefit amounts included in coinsurance deposits and other liabilities, respectively, in the consolidated balance sheets:
| | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Asset | | Liability | | Net Asset |
| (Dollars in thousands) |
Fixed Index Annuities | $ | 712,734 | | | $ | 38,495 | | | $ | 674,239 | |
Fixed Rate Annuities | 11,884 | | | 421 | | | 11,463 | |
| | | | | |
Total | $ | 724,618 | | | $ | 38,916 | | | $ | 685,702 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Asset | | Liability | | Net Asset |
| (Dollars in thousands) |
Fixed Index Annuities | $ | 629,611 | | | $ | 35,652 | | | $ | 593,959 | |
Fixed Rate Annuities | 11,070 | | | 414 | | | 10,656 | |
| | | | | |
Total | $ | 640,681 | | | $ | 36,066 | | | $ | 604,615 | |
Significant Inputs for Fair Value Measurement - Market Risk Benefits
The following tables provides a summary of the significant inputs and assumptions used in the fair value measurements of market risk benefits:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Fair Value | | Valuation Technique | | Significant Inputs and Assumptions | | Range | | Weighted Average |
| (in thousands) | | | | | | | | |
Market risk benefits | $ | 2,422,881 | | | Discounted cash flow | | Utilization (a) | | 0.04% - 78.75% | | 4.18% |
Ceded market risk benefits | 685,702 | | | | | Option budget (b) | | 1.65% - 2.50% | | 2.31% |
| | | | | Risk-free interest rate (c) | | 2.35% - 4.72% | | 3.01% |
| | | | | Nonperformance risk (d) | | 0.55% - 3.49% | | 2.71% |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Fair Value | | Valuation Technique | | Significant Inputs and Assumptions | | Range | | Weighted Average |
| (in thousands) | | | | | | | | |
Market risk benefits | $ | 2,225,621 | | | Discounted cash flow | | Utilization (a) | | 0.04% - 78.75% | | 4.24% |
Ceded market risk benefits | 604,615 | | | | | Option budget (b) | | 1.65% - 2.50% | | 2.31% |
| | | | | Risk-free interest rate (c) | | 2.51% - 4.90% | | 3.31% |
| | | | | Nonperformance risk (d) | | 0.06% - 3.27% | | 2.59% |
| | | | | | | | | |
(a)The utilization assumption represents the percentage of policyholders who will elect to receive lifetime income benefit payments in a given year. A decrease (increase) in the utilization assumption used in the fair value of market risk benefits could lead to favorable (unfavorable) changes in the market risk benefits.
(b)The option budget assumption represents the expected cost of annual call options we will purchases in the future. An increase (decrease) in the option budget assumption used in the fair value of market risk benefits could lead to favorable (unfavorable) changes in the market risk benefits.
(c)The risk-free interest rate assumption impacts the discount rate used in the discounted future cash flow valuation. An increase (decrease) in the risk-free interest rate assumption used in the fair value of market risk benefits could lead to favorable (unfavorable) changes in the market risk benefits.
(d)The nonperformance risk assumption impacts the discount rate used in the discounted future cash flow valuation and includes our own credit risk based on the current market credit spreads for debt-like instruments we have issued and are available in the market. Additionally, the nonperformance risk assumption includes the counterparty credit risk used in the fair value measurement of ceded market risk benefits which is determined using the current market credit spreads based on the counterparty credit rating. An increase (decrease) in the nonperformance risk assumption for own credit risk used in the fair value of market risk benefits could lead to favorable (unfavorable) changes in the market risk benefits. An decrease (increase) in the nonperformance risk assumption for counterparty credit risk used in the fair value of ceded market risk benefits could lead to favorable (unfavorable) changes in the ceded market risk benefits.
There were no notable changes to significant inputs and assumptions used in the fair value measurement of market risk benefits during the three months ended March 31, 2023. During the year ended December 31, 2022, the Company made the following notable changes to significant inputs and assumptions resulting in changes in the fair value measurement of market risk benefits:
•Utilization assumptions were increased resulting in an increase to the market risk benefits liability and a decrease to net income.
•Option budget assumptions were increased resulting in a decrease to the market risk benefits liability and an increase to net income.
Policyholder Account Balances
The following table presents the balances and changes in policyholders’ account balances:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Year Ended December 31, 2022 |
| Fixed Rate Annuities | | Fixed Index Annuities | | Fixed Rate Annuities | | Fixed Index Annuities |
| (Dollars in thousands) |
Balance, beginning of year | $ | 6,589,577 | | | $ | 53,808,184 | | | $ | 6,860,060 | | | $ | 55,001,391 | |
Issuances | 407,249 | | | 926,058 | | | 159,570 | | | 2,986,223 | |
Premiums received | 526 | | | 35,046 | | | 4,811 | | | 170,493 | |
Policy charges | (2,100) | | | (75,223) | | | (6,587) | | | (272,604) | |
Surrenders and withdrawals | (180,822) | | | (1,213,070) | | | (574,590) | | | (3,945,504) | |
Benefit payments | (3,290) | | | (203,524) | | | (11,328) | | | (727,847) | |
Interest credited | 38,884 | | | 83,963 | | | 151,762 | | | 598,639 | |
Other | (482) | | | (313) | | | 5,879 | | | (2,607) | |
Balance, end of period | $ | 6,849,542 | | | $ | 53,361,121 | | | $ | 6,589,577 | | | $ | 53,808,184 | |
| | | | | | | |
Weighted-average crediting rate | 2.32 | % | | 0.63 | % | | 2.28 | % | | 1.11 | % |
Net amount at risk (a) | $ | 262,643 | | | $ | 11,120,564 | | | $ | 258,826 | | | $ | 10,987,198 | |
Cash surrender value | $ | 6,456,292 | | | $ | 49,205,688 | | | $ | 6,208,597 | | | $ | 49,551,657 | |
(a)Net amount at risk is defined as the current guarantee amount in excess of the current account balance.
The following table presents the reconciliation of policyholders’ account balances to policy benefit reserves in the consolidated balance sheets:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (Dollars in thousands) |
Fixed index annuities policyholder account balances | $ | 53,361,121 | | | $ | 53,808,184 | |
Fixed rate annuities policyholder account balances | 6,849,542 | | | 6,589,577 | |
Embedded derivative adjustment (b) | (1,576,129) | | | (1,996,640) | |
Liability for future policy benefits | 319,895 | | | 318,677 | |
Deferred profit liability | 19,341 | | | 19,084 | |
Other | 45,419 | | | 42,954 | |
Total | $ | 59,019,189 | | | $ | 58,781,836 | |
(b)The embedded derivative adjustment reconciles the account balance to the gross GAAP liability and represents the combination of the host contract and the fair value of the embedded derivatives.
The following table presents the balance of account values by range of guaranteed minimum crediting rates and the related range of the difference, in basis points, between rates being credited to policyholders and the respective guaranteed minimums:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Range of guaranteed minimum crediting rate | | At guaranteed minimum | | 1 to 50 | | 51 to 150 | | Greater than 150 basis points above | | Total |
| | | (Dollars in thousands) |
Fixed Index Annuities | 0.00% - 0.50% | | $ | — | | | $ | 545,301 | | | $ | 443,724 | | | $ | 406,824 | | | $ | 1,395,849 | |
| 0.50% - 1.00% | | 2,449,974 | | | 1,104,836 | | | 2,251,001 | | | 89,954 | | | 5,895,765 | |
| 1.00% - 1.50% | | 50,601 | | | 9,347 | | | — | | | — | | | 59,948 | |
| 1.50% - 2.00% | | 57 | | | — | | | — | | | — | | | 57 | |
| 2.00% - 2.50% | | 132,027 | | | 91,276 | | | 8 | | | — | | | 223,311 | |
| 2.50% - 3.00% | | 905,663 | | | — | | | — | | | — | | | 905,663 | |
| Greater than 3.00% | | — | | | — | | | — | | | — | | | — | |
| Allocated to index strategies | | — | | | — | | | — | | | — | | | 44,880,528 | |
Total | | | $ | 3,538,322 | | | $ | 1,750,760 | | | $ | 2,694,733 | | | $ | 496,778 | | | $ | 53,361,121 | |
| | | | | | | | | | | |
Fixed Rate Annuities | 0.00% - 0.50% | | $ | — | | | $ | — | | | $ | — | | | $ | 101 | | | $ | 101 | |
| 0.50% - 1.00% | | 55,547 | | | 201,007 | | | 3,995,398 | | | 1,014,260 | | | 5,266,212 | |
| 1.00% - 1.50% | | 453,063 | | | 232 | | | — | | | — | | | 453,295 | |
| 1.50% - 2.00% | | 278,374 | | | 93,402 | | | 271,181 | | | 190 | | | 643,147 | |
| 2.00% - 2.50% | | 18,985 | | | 23 | | | — | | | — | | | 19,008 | |
| 2.50% - 3.00% | | 406,972 | | | 7,304 | | | — | | | — | | | 414,276 | |
| Greater than 3.00% | | 53,503 | | | — | | | — | | | — | | | 53,503 | |
Total | | | $ | 1,266,444 | | | $ | 301,968 | | | $ | 4,266,579 | | | $ | 1,014,551 | | | $ | 6,849,542 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Range of guaranteed minimum crediting rate | | At guaranteed minimum | | 1 to 50 | | 51 to 150 | | Greater than 150 basis points above | | Total |
| | | (Dollars in thousands) |
Fixed Index Annuities | 0.00% - 0.50% | | $ | — | | | $ | 462,356 | | | $ | 407,031 | | | $ | 315,324 | | | $ | 1,184,711 | |
| 0.50% - 1.00% | | 2,421,244 | | | 1,098,332 | | | 2,258,992 | | | 77,901 | | | 5,856,469 | |
| 1.00% - 1.50% | | 51,586 | | | 9,391 | | | — | | | — | | | 60,977 | |
| 1.50% - 2.00% | | 57 | | | — | | | — | | | — | | | 57 | |
| 2.00% - 2.50% | | 133,059 | | | 100,205 | | | 8 | | | — | | | 233,272 | |
| 2.50% - 3.00% | | 939,684 | | | — | | | — | | | — | | | 939,684 | |
| Greater than 3.00% | | — | | | — | | | — | | | — | | | — | |
| Allocated to index strategies | | | | | | | | | | 45,533,014 | |
Total | | | $ | 3,545,630 | | | $ | 1,670,284 | | | $ | 2,666,031 | | | $ | 393,225 | | | $ | 53,808,184 | |
| | | | | | | | | | | |
Fixed Rate Annuities | 0.00% - 0.50% | | $ | — | | | $ | — | | | $ | — | | | $ | 61 | | | $ | 61 | |
| 0.50% - 1.00% | | 55,458 | | | 203,523 | | | 4,000,203 | | | 701,836 | | | 4,961,020 | |
| 1.00% - 1.50% | | 454,728 | | | 231 | | | — | | | — | | | 454,959 | |
| 1.50% - 2.00% | | 281,694 | | | 96,767 | | | 277,053 | | | 189 | | | 655,703 | |
| 2.00% - 2.50% | | 21,887 | | | 22 | | | — | | | — | | | 21,909 | |
| 2.50% - 3.00% | | 434,042 | | | 7,417 | | | — | | | — | | | 441,459 | |
| Greater than 3.00% | | 54,466 | | | — | | | — | | | — | | | 54,466 | |
Total | | | $ | 1,302,275 | | | $ | 307,960 | | | $ | 4,277,256 | | | $ | 702,086 | | | $ | 6,589,577 | |
9. Notes and Loan Payable
Notes and loan payable includes the following:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (Dollars in thousands) |
Senior notes due 2027 | | | |
Principal | $ | 500,000 | | | $ | 500,000 | |
Unamortized debt issue costs | (2,811) | | | (2,960) | |
Unamortized discount | (169) | | | (178) | |
Term loan due 2027 | | | |
Principal | 300,000 | | | 300,000 | |
Principal paydown | (5,625) | | | (3,750) | |
Unamortized debt issue costs | (982) | | | (1,039) | |
| $ | 790,413 | | | $ | 792,073 | |
On June 16, 2017, we issued $500 million aggregate principal amount of senior unsecured notes due 2027 which bear interest at 5.0% per year and will mature on June 15, 2027 (the "2027 Notes"). The 2027 Notes were issued at a $0.3 million discount, which is being amortized over the term of the 2027 Notes using the effective interest method. Contractual interest is payable semi-annually in arrears each June 15th and December 15th. The initial transaction fees and costs totaling $5.8 million were capitalized as deferred financing costs and are being amortized over the term of the 2027 Notes using the effective interest method.
On February 15, 2022, we entered into a five-year, $300 million unsecured delayed draw term loan credit agreement. On July 6, 2022, we borrowed $300 million under this agreement. We will pay a floating rate of interest on the term loan utilizing SOFR adjusted for a credit spread. The term loan matures on February 15, 2027 and is amortizing at 2.5% annually for the first three years and 5.0% for the last two years.
10. Commitments and Contingencies
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state and federal regulatory bodies, such as state insurance departments, the Securities and Exchange Commission ("SEC") and the Department of Labor, regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws and the Employee Retirement Income Security Act of 1974, as amended.
In accordance with applicable accounting guidelines, we establish an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. As a litigation or regulatory matter is developing we, in conjunction with outside counsel, evaluate on an ongoing basis whether the matter presents a loss contingency that meets conditions indicating the need for accrual and/or disclosure, and if not, the matter will continue to be monitored for further developments. If and when the loss contingency related to litigation or regulatory matters is deemed to be both probable and estimable, we will establish an accrued liability with respect to that matter and will continue to monitor the matter for further developments that may affect the amount of the accrued liability.
There can be no assurance that any pending or future litigation will not have a material adverse effect on our business, financial condition, or results of operations.
In addition to our commitments to fund mortgage loans, we have unfunded commitments at March 31, 2023 to limited partnerships of $0.8 billion and to fixed maturity securities of $1.1 billion.
Through our FHLB membership, we have issued funding agreements to the FHLB in exchange for cash advances. As of March 31, 2023, we had $100.0 million of FHLB funding agreements outstanding. We are required to provide collateral in excess of the funding agreement amounts outstanding. The fixed maturity security investments pledged for collateral had a fair value of $1.5 billion at March 31, 2023.
11. Earnings (Loss) Per Common Share and Stockholders' Equity
Earnings (Loss) Per Common Share
The following table sets forth the computation of earnings (loss) per common share and earnings (loss) per common share - assuming dilution:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| | | | | (Dollars in thousands, except per share data) |
Numerator: | | | | | | | |
Net income (loss) available to common stockholders - numerator for earnings (loss) per common share | | | | | $ | (166,913) | | | $ | 668,546 | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted average common shares outstanding | | | | | 83,416,966 | | | 96,866,125 | |
Effect of dilutive securities: | | | | | | | |
Stock options and deferred compensation agreements | | | | | 597,119 | | | 612,265 | |
Restricted stock and restricted stock units | | | | | 737,283 | | | 474,923 | |
Antidilutive impact due to net loss | | | | | (1,334,402) | | | — | |
Denominator for earnings (loss) per common share - assuming dilution | | | | | 83,416,966 | | | 97,953,313 | |
| | | | | | | |
Earnings (loss) per common share | | | | | $ | (2.00) | | | $ | 6.90 | |
Earnings (loss) per common share - assuming dilution | | | | | $ | (2.00) | | | $ | 6.83 | |
There were no options to purchase shares of our common stock outstanding excluded from the computation of diluted earnings (loss) per common share during the three months ended March 31, 2023 and 2022, as the exercise price of all options outstanding was less than the average market price of our common shares for those periods.
Stockholders' Equity
On June 10, 2020, we issued 12,000 shares of 6.625% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series B ("Series B") with a $1.00 par value per share and a liquidation preference of $25,000 per share, for aggregate net proceeds of $290.3 million.
On November 21, 2019 we issued 16,000 shares of 5.95% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series A ("Series A") with a $1.00 par value per share and a liquidation preference of $25,000 per share, for aggregate net proceeds of $388.9 million.
Dividends on the Series A and Series B preferred stock are payable on a non-cumulative basis only when, as and if declared, quarterly in arrears on the first day of March, June, September and December of each year, commencing on March 1, 2020 for Series A and on December 1, 2020 for Series B. For the three months ended March 31, 2023 and 2022, we paid dividends totaling $5.9 million and $5.9 million for Series A preferred stock and $5.0 million and $5.0 million for Series B preferred stock, respectively. The Series A and Series B preferred stock rank senior to our common stock with respect to dividends, to the extent declared, and in liquidation, to the extent of the liquidation preference. The Series A and Series B preferred stock are not subject to any mandatory redemption, sinking fund, retirement fund, purchase fund or similar provisions.
Share Repurchase Program
As part of a share repurchase program, the Company's Board of Directors approved the repurchase of Company common stock of $500 million on November 19, 2021, and an additional $400 million on November 11, 2022. The share repurchase program has offset dilution from the issuance of shares to Brookfield, and its purpose remains to institute a regular cash return program for shareholders.
On March 17, 2023 we entered into an accelerated share repurchase (ASR) agreement with JPMorgan Chase Bank, National Association to repurchase an aggregate of $200 million of our common stock. Under the ASR agreement, we received an initial share delivery of approximately 4.8 million shares representing approximately 80% of the number of shares initially underlying the ASR. The average price paid for the initial share delivery under the ASR was $33.12 per common share. The final settlement is expected in the third quarter of 2023 and will be based on the volume-weighted average stock price during the ASR term, less a discount and subject to potential adjustments under the ASR. The ASR agreement was determined to be an equity contract.
From the 2020 inception of the share repurchase program through March 31, 2023, we have repurchased approximately 31.2 million shares of our common stock at an average price of $34.76 per common share, including 2.4 million shares repurchased in the open market during the three months ended March 31, 2023. As of March 31, 2023, we had $276 million remaining under our share repurchase program.
Treasury Stock
As of March 31, 2023, we held 31,809,876 shares of treasury stock with a carrying value of $1,075.0 million. As of December 31, 2022, we held 24,590,353 shares of treasury stock with a carrying value of $823.1 million.
12. Subsequent Events
Based on events that occurred subsequent to March 31, 2023, we expect to realize losses on a regional bank security held in our fixed maturity securities portfolio in the second quarter of 2023. The fair value of the security in our Consolidated Balance Sheets as of March 31, 2023 was $24 million, accordingly if we were to realize a complete loss on the security, it would result in a net decrease of $16 million to stockholder's equity.