INCOME TAXES - SUCCESSOR COMPANY

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES - SUCCESSOR COMPANY

INCOME TAXES - SUCCESSOR COMPANY

Acquisition-Related Tax Elections

In conjunction with the acquisition of FLIAC, FGH and PAI agreed to make a joint election under Section 338(h)(10) of the U.S. Internal Revenue Code and under any similar provisions of state or local law (the “Section 338(h)(10) Election”) with respect to the purchase of the shares of FLIAC. Under this election, the parties agreed to treat the transaction for federal income tax purposes as if it had been structured as an asset sale and purchase. As a result of this election, the tax basis of the Successor Company's assets and liabilities were reset to fair value at the time of the acquisition, which resulted in the elimination of previously established current and deferred income tax balances and the establishment of new balances that reflect the updated tax basis, including tax deductible intangible asset. See Note 1 for further information regarding the acquisition and the associated updated income tax balances.

Tax Law Changes

On November 15, 2021, the U.S. enacted The Infrastructure Investment and Jobs Act to improve infrastructure in the U.S. The tax provisions of the Infrastructure Investment and Jobs Act have not had and are currently not expected to have a material impact on the Company’s U.S. federal tax liabilities.

On August 16, 2022, the U.S. enacted The Inflation Reduction Act of 2022, which provides among other provisions a new corporate alternative minimum tax (“CAMT”). The CAMT is effective for taxable years beginning after December 31, 2022 and generally applies to taxpayers with average annual financial statement income exceeding $1 billion over a three-year period. The Company is still evaluating the implications of this new law for the 2023 tax year, but there are no implications for the year ended December 31, 2022.

Effective Tax Rate

The following schedule discloses significant components of Income tax expense (benefit): 

	Successor Company
	Nine Months Ended December 31
	2022
	(in millions)
Current tax expense:
U.S. federal	$	18
Deferred tax benefit:
U.S. federal	(52)
Income tax benefit	(34)
Income tax expense reported in equity related to:
Other comprehensive income	29
Total income tax benefit	$	(5)

Reconciliation of Expected Tax at Statutory Rates to Reported Income Tax Expense (Benefit)

The difference between income taxes expected at the U.S. federal statutory income tax rate of 21 percent applicable for 2022 and the reported income tax expense (benefit) are summarized as follows:

	Successor Company
	Nine Months Ended December 31
	2022
	(in millions)
Expected federal income tax benefit	$	(67)
Valuation Allowance	37
Non-taxable investment income	(5)
Transaction Costs	1
Reported income tax benefit	$	(34)
Effective tax rate	10.7		%

The Company’s effective tax rate for the nine months ended December 31, 2022 was 10.7%. There are two items that had the most significant impact on the difference between the Company’s statutory U.S. federal income tax rate of 21 percent and the Company’s effective tax rate during the periods presented; a partial valuation allowance established during 2022 and the impact of non-taxable investment income associated with the Dividends Received Deduction under U.S. tax law.

Schedule of Deferred Tax Assets and Deferred Tax Liabilities

	As of December 31,
	2022
	(in millions)
Deferred tax assets:
Intangibles	$	122
Investments	121
Capital loss carryforwards	26
Total deferred tax assets	269
Deferred tax liabilities:
Insurance reserves	(150)
Change in insurance liabilities - OCR component	(29)
Other	(3)
Total deferred tax liabilities	(182)
Net deferred tax asset before valuation allowance	87
Valuation allowance	(37)
Net deferred tax asset	$	50

Valuation Allowance on Deferred Tax Assets

The evaluation of the recoverability of our deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.

In evaluating the need for a valuation allowance, the Company considers many factors, including:

(1) the nature of the deferred tax assets and liabilities;

(2) whether they are ordinary or capital;

(3) the timing of their reversal;

(4) taxable income in prior carryback years;

(5) projected taxable earnings exclusive of reversing temporary differences and carryforwards;

(6) the length of time that carryovers can be utilized;

(7) any unique tax rules that would impact the utilization of the deferred tax assets; and

(8) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused.

Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowances, will be realized.

During 2022, the Company established a valuation allowance of $37 million with respect to realized and unrealized capital losses on our fixed maturity securities portfolio. A portion of the deferred tax asset relates to unrealized capital losses for which the carryforward period has not yet begun, and as such, when assessing its recoverability, we consider our ability and intent to hold the underlying securities to recovery, otherwise a valuation allowance is established.

Capital Loss Carryforward

During 2022, the company generated a capital loss carryforward of $122 million, which represents a $26 million deferred tax asset. This capital loss will be carried forward for five years and utilized against any future capital gains generated during that period.

Tax Audits and Unrecognized Tax Benefits

The Company has not yet filed any tax returns for the period subsequent to the acquisition. Pursuant to the acquisition agreement, any tax examinations and resulting tax liability for the Predecessor Company will be the sole responsibility of PAI. We periodically evaluate uncertain tax positions to determine whether the tax positions are more likely than not to be realized as a tax benefit or expense in the current year. We also recognize interest and penalties related to uncertain tax benefits in U.S. Federal income tax expense. As of December 31, 2022, there were no uncertain tax positions and no accrual for interest and penalties. The Company does not anticipate any significant changes within the next twelve months to its total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

INCOME TAXES - PREDECESSOR COMPANY

The following schedule discloses significant components of income tax expense (benefit) for each period presented: 

	Year Ended December 31
	2021		2020
	(in millions)
Current tax expense (benefit):
U.S. federal	$	241	$	92
State and local	3		—
Total	244		92
Deferred tax expense (benefit):
U.S. federal	1,050		(958)
Total	1,050		(958)
Income tax expense (benefit)	1,294		(866)
Income tax expense (benefit) reported in equity related to:
Other comprehensive income (loss)	(362)		294
Total income tax expense (benefit)	$	932	$	(572)

With respect to the three months ended March 31, 2022, the Company uses a full year projected effective tax rate approach to calculate year-to-date taxes. In addition, certain items impacting total income tax expense are recorded in the periods in which they occur. The projected effective tax rate is the ratio of projected “Income tax expense (benefit)” divided by projected “Income (loss) from operations before income taxes”. The interim period tax expense (or benefit) is the difference between the year-to-date income tax provision and the amounts reported for the previous interim periods of the fiscal year. Accordingly comparable information, as presented for the the full year December 31, 2021 and 2020, is not presented above or in the following chart.

Reconciliation of Expected Tax at Statutory Rates to Reported Income Tax Expense (Benefit)

The differences between income taxes expected at the U.S. federal statutory income tax rate of 21 percent and the reported income tax expense (benefit) are summarized as follows:

	Year Ended December 31
	2021			2020
	(in millions)
Expected federal income tax expense (benefit)	$	1,314		$	(847)
Non-taxable investment income	(12)			(11)
Tax credits	(10)			(8)
Other	2			—
Reported income tax expense (benefit)	$	1,294		$	(866)
Effective tax rate	20.7		%	21.5		%

The effective tax rate is the ratio of Total income tax expense (benefit) divided by Income (loss) from operations before income taxes. The Company’s effective tax rate for the the years ended December 31, 2021 and 2020 was 20.7% and 21.5%, respectively. The following is a description of items that had the most significant impact on the difference between the Company’s statutory U.S. federal income tax rate of 21 percent applicable for the years ended December 31, 2021 and 2020 and the Company’s effective tax rate during the periods presented:

Non-Taxable Investment Income. The U.S. Dividends Received Deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and accounts for most of the non-taxable investment income shown in the table above. More specifically, the U.S. DRD constitutes $11 million of the total $12 million of 2021 non-taxable investment income and $10 million of the total $11 million of 2020 non-taxable investment income. The DRD for 2021 was estimated using information from 2020, current year investment results, and current year’s equity market performance. The actual 2021 DRD can vary based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of

distributions received from fund investments, changes in the account balances of variable life and annuity contracts, and the Predecessor Company’s taxable income before the DRD.

Tax credits. These amounts primarily represent tax credits relating to foreign taxes withheld on the Predecessor Company’s separate account investments.

Other. This line item represents insignificant reconciling items that are individually less than 5 percent of the computed expected federal income tax expense (benefit) and have therefore been aggregated for purposes of this reconciliation in accordance with relevant disclosure guidance.

Schedule of Deferred Tax Assets and Deferred Tax Liabilities

	December 31, 2021
	(in millions)
Deferred tax assets:
Insurance reserves	$	242
Investments	830
Other	1
Deferred tax assets	1,073
Deferred tax liabilities:
VOBA and deferred policy acquisition cost	110
Deferred sales inducements	62
Net unrealized gain on securities	56
Deferred tax liabilities	228
Net deferred tax asset (liability)	$	845

Valuation Allowance on Deferred Tax Assets

The application of U.S. GAAP requires the Company to evaluate the recoverability of deferred tax assets and establish a valuation allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not expected to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, the Company considers many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (5) the length of time that carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowances, will be realized.

The Predecessor Company had no valuation allowance as of December 31, 2021.

The Predecessor Company’s Income (loss) from operations before income taxes includes income (loss) from domestic operations of $6,259 million and $(4,035) million for the twelve months ended December 31, 2021 and 2020 respectively.

Tax Audit and Unrecognized Tax Benefits

The Predecessor Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still subject to review by the IRS or other taxing authorities. The completion of review or the expiration of the Federal statute of limitations for a given audit period could result in an adjustment to the liability for income taxes.

The Predecessor Company had no unrecognized tax benefits as of December 31, 2021 and 2020.

The Predecessor Company classified all interest and penalties related to tax uncertainties as income tax expense (benefit). The Predecessor Company did not recognize tax related interest and penalties.

The Company participated in the IRS’s Compliance Assurance Program. Under this program, the IRS assigns an examination team to review completed transactions as they occur in order to reach agreement with the Company on how they should be reported in the relevant tax returns. If disagreements arise, accelerated resolution programs are available to resolve the disagreements in a timely manner.