Life Policy and Investment Contract Reserves

3 Months Ended

Mar. 31, 2023

Liability for Future Policy Benefit, before Reinsurance [Abstract]

Long-Duration Insurance Contracts Disclosure

Life Policy and Investment Contract Reserves

In the first quarter of 2023, we adopted ASU 2018-12 which resulted in changes to the life policy and investment contract reserves and the expansion of required disclosures. The below disclosures represent application of the updated guidance. See Note 1, Accounting Policies, for further discussion.

We establish the reserves for traditional life policies including term, whole life and other products based on certain cash flow assumptions including expected expenses, mortality, morbidity, withdrawal rates and timing of claim presentation. These assumptions are established based on our current expectations and are reviewed annually to determine any necessary updates. Assumptions are also updated on an interim basis if evidence suggests that they should be revised. We use both our own experience and industry experience, adjusted for historical trends, in arriving at our assumptions for expected mortality, morbidity and withdrawal rates. These reserves also include a discount rate assumption that is based on market value discount rates and is updated quarterly. Changes in the inputs, judgments and assumptions during the period and the related measurement impact on the liability are reflected in the below tables. There were no significant changes in the cash flow assumptions during the period.

We establish reserves for the company's deferred annuity, universal life and structured settlement policies equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life policies contain no-lapse guarantee provisions. For these policies, we establish a reserve in addition to the account balance, based on expected no-lapse guarantee benefits and expected policy assessments.

The following table summarizes our life policy and investment contract reserves and provides a reconciliation of the balances described in the below tables to those in the condensed consolidated balance sheets:

(Dollars in millions)	March 31, 2023		December 31, 2022
Life policy reserves:
Term	$	1,011	$	961
Whole life	427		408
Other	94		94
Subtotal	1,532		1,463
Investment contract reserves:
Deferred annuities	711		734
Universal life	583		578
Structured settlements	128		129
Other	105		111
Subtotal	1,527		1,552
Total life policy and investment contract reserves	$	3,059	$	3,015

The table below shows the ASU 2018-12 adoption impacts to the life policy and investment contract reserves as of January 1, 2021 (transition date), pre-tax:

(Dollars in millions)	Term		Whole life		Deferred annuity		Universal life		Other		Total
At January 1, 2021
Balance, pre-adoption at December 31, 2020	$	901	$	363	$	761	$	567	$	323	$	2,915
Removal of shadow adjustments	—		—		—		—		13		13
Net premiums in excess of gross premiums	14		1		—		—		—		15
Remeasurement at market value discount rates	372		245		—		—		—		617
Balance, post-adoption at January 1, 2021	$	1,287	$	609	$	761	$	567	$	336	$	3,560

The table below shows the ASU 2018-12 adoption impacts to the life reinsurance recoverable asset as of January 1, 2021, pre-tax:

(Dollars in millions)	Term		Whole life		Deferred annuity		Universal life		Other		Total
At January 1, 2021
Balance, pre-adoption at December 31, 2020	$	113	$	26	$	—	$	—	$	78	$	217
Remeasurement at market value discount rates	29		18		—		—		—		47
Other adjustments	20		1		—		2		—		23
Balance, post-adoption at January 1, 2021	$	162	$	45	$	—	$	2	$	78	$	287

Other above includes structured settlements, other life policy reserves and other investment contract reserves. The removal of shadow adjustments above represents an increase to the life policy and investment contract reserve balance as it is no longer required under ASU 2018-12 for liabilities amortized in accordance with deferred acquisition costs. Shadow adjustments were historically included to present the carrying amount of the liability as if unrealized holding gains and losses had been realized. The net premiums in excess of gross premiums adjustment represents an increase to the liability as the remeasured net premiums, calculated as the present value of future benefits and related expenses using updated cash flow assumptions as of the transition date less the carrying amount of the liability prior to transition, exceeded the present value of future gross premiums. For purposes of calculating the updated present value of future benefits and related expenses above, the discount rate assumption that was used prior to adoption of ASU 2018-12 was retained. The remeasurement at market value discount rates adjustment represents the increase to the liability as a result of updating the discount rate assumption for our term and whole life products from the rates used prior to adoption of ASU 2018-12 to market value discount rates that existed at the transition date. As the discount rate assumption decreased significantly from the date the contracts were initially made, this adjustment represents the largest impact on the liability as a result of the initial adoption of ASU 2018-12. The life reinsurance recoverable asset is included in the remeasurement as the assumptions used in estimating the life reinsurance recoverable are consistent with those used in estimating the related liabilities. Other adjustments includes a reclassification from prepaid reinsurance premiums to reinsurance recoverable.

The shadow removal and remeasurement at market value discount rates adjustments were recorded as an increase to the life policy and investment contract reserves liability and a decrease to opening AOCI as of the transition date. The net premiums in excess of gross premiums adjustment was recorded as an increase to the life policy and investment contract reserves liability and a decrease to the opening balance of retained earnings as of the transition date.

The following table shows the balances and changes in the term and whole life policy reserves included in life policy and investment contract reserves:

(Dollars in millions)	Three months ended March 31,
	2023				2022
	Term		Whole life		Term		Whole life
Present value of expected net premiums:
Balance, beginning of period	$	1,643	$	208	$	1,801	$	241
Beginning balance at original discount rate	1,708		217		1,503		201
Effect of changes in cash flow assumptions	—		—		(4)		—
Effect of actual variances from expected experience	(3)		1		11		—
Adjusted beginning of period balance	1,705		218		1,510		201
Issuances	38		7		59		11
Interest accrual	18		2		15		2
Net premiums collected	(46)		(7)		(42)		(7)
Ending balance at original discount rate	1,715		220		1,542		207
Effect of changes in discount rate assumptions	(16)		(3)		144		19
Balance, end of period	1,699		217		1,686		226
Present value of expected future policy benefits:
Balance, beginning of period	2,584		614		2,993		826
Beginning balance at original discount rate	2,692		607		2,425		577
Effect of changes in cash flow assumptions	—		—		(4)		—
Effect of actual variances from expected experience	(2)		1		18		—
Adjusted beginning of period balance	2,690		608		2,439		577
Issuances	38		6		59		11
Interest accrual	30		8		27		7
Benefits paid	(46)		(8)		(62)		(9)
Ending balance at original discount rate	2,712		614		2,463		586
Effect of changes in discount rate assumptions	(21)		30		282		150
Balance, end of period	2,691		644		2,745		736
Net liability for future policy benefits:
Present value of expected future policy benefits less expected net premiums	992		427		1,059		510
Impact of flooring at cohort level	19		—		20		—
Net life policy reserves	1,011		427		1,079		510
Less reinsurance recoverable at original discount rate	(96)		(25)		(100)		(27)
Less effect of discount rate assumption changes on reinsurance recoverable	(10)		(6)		(14)		(11)
Net life policy reserves, after reinsurance recoverable	$	905	$	396	$	965	$	472
Weighted-average duration of the net life policy reserves	12		16		12		18

The total impact of flooring at cohort level in the above table includes the effect of discount rate assumption changes of $5 million and $6 million for the three months ended March 31, 2023 and 2022, respectively.

The following table shows the amount of undiscounted and discounted expected future benefit payments and expected gross premiums for our term and whole life policies:

(Dollars in millions)	At March 31,
	2023				2022
	Undiscounted		Discounted		Undiscounted		Discounted
Term
Expected future benefit payments	$	4,696	$	2,691	$	4,128	$	2,745
Expected future gross premiums	4,470		2,674		4,000		2,754
Whole life
Expected future benefit payments	$	1,586	$	644	$	1,511	$	736
Expected future gross premiums	618		384		580		400

The following table shows the amount of revenue and interest recognized in the condensed consolidated statements of income related to our term and whole life policies:

(Dollars in millions)	Three months ended March 31,
	2023		2022
Gross premiums
Term	$	73	$	69
Whole life	12		12
Total	$	85	$	81
Interest accretion
Term	$	12	$	12
Whole life	6		5
Total	$	18	$	17

Adverse development that resulted in an immediate charge to income due to net premiums exceeding gross premiums was immaterial for the three months ended March 31, 2023.

The following table shows the weighted-average interest rate for our term and whole life products:

	At March 31,
	2023		2022
Term
Interest accretion rate	5.32	%	5.37	%
Current discount rate	4.81		3.40
Whole life
Interest accretion rate	5.94	%	5.98	%
Current discount rate	5.06		3.77

The discount rate assumption was developed by calculating forward rates from market yield curves of upper-medium grade fixed-income instruments.

The following table shows the balances and changes in policyholders' account balances included in investment contract reserves:

(Dollars in millions)	Three months ended March 31,
	2023						2022
	Deferred annuity			Universal life			Deferred annuity			Universal life
Balance, beginning of period	$	734		$	457		$	763		$	454
Premiums received	10			11			6			11
Policy charges	—			(10)			—			(10)
Surrenders and withdrawals	(36)			(3)			(12)			(3)
Benefit payments	(3)			(2)			(6)			(1)
Interest credited	6			5			5			5
Balance, end of period	$	711		$	458		$	756		$	456
Weighted average crediting rate	3.36		%	4.26		%	2.95		%	4.25		%
Net amount at risk	$	—		$	4,064		$	—		$	4,172
Cash surrender value	706			424			752			421

The net amount at risk above represents the guaranteed benefit amount in excess of the current account balances.

The following table shows the balance of account values by range of guaranteed minimum crediting rates, in basis points, and the related range of the difference between rates being credited to policyholders and the respective guaranteed minimums for our deferred annuity and universal life contracts:

(Dollars in millions)	At guaranteed minimum		1 to 50 basis points above		51-150 basis points above		Greater than 150 basis points		Total
At March 31, 2023
Deferred annuity
1.00-3.00%	$	9	$	423	$	17	$	212	661
3.01-4.00%	50		—		—		—		50
Total	$	59	$	423	$	17	$	212	$	711
Universal life
1.00-3.00%	$	60	$	47	$	9	$	2	$	118
3.01-4.00%	53		—		—		—		53
Greater than 4.00%	287		—		—		—		287
Total	$	400	$	47	$	9	$	2	$	458
At March 31, 2022
Deferred annuity
1.00-3.00%	$	479	$	—	$	177	$	50	$	706
3.01-4.00%	50		—		—		—		50
Total	$	529	$	—	$	177	$	50	$	756
Universal life
1.00-3.00%	$	61	$	44	$	7	$	1	$	113
3.01-4.00%	51		—		—		—		51
Greater than 4.00%	292		—		—		—		292
Total	$	404	$	44	$	7	$	1	$	456

The following table shows the balances and changes in the other additional liability related to the no-lapse guarantees contained within our universal life contracts:

(Dollars in millions)	Three months ended March 31,
	2023		2022
Balance, beginning of period	$	121	$	133
Balance, beginning of period before shadow reserve adjustments	123		131
Effect of changes in cash flow assumptions	—		—
Effect of actual variances from expected experience	(1)		3
Adjusted beginning of period balance	122		134
Interest accrual	1		1
Excess death benefits	—		(8)
Attributed assessments	3		3
Effect of changes in interest rate assumptions	1		(3)
Balance, end of period before shadow reserve adjustments	127		127
Shadow reserve adjustments	(2)		—
Balance, end of period	125		127
Less reinsurance recoverable, end of period	6		5
Net other additional liability, after reinsurance recoverable	$	131	$	132
Weighted-average duration of the other additional liability	34		35

The following table shows balances and changes in separate account balances during the period:

(Dollars in millions)	Three months ended March 31,
	2023		2022
Balance, beginning of period	$	892	$	959
Interest credited before policy charges	10		10
Change in unrealized gains and losses impacting separate account liabilities	—		(52)
Benefit payments	(2)		(10)
Other	(1)		(4)
Balance, end of period	$	899	$	903
Cash surrender value	$	896	$	869