Notes to the Condensed Consolidated Financial Statements
March 31, 2023
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1. Business and Basis of Presentation |
OneMain Holdings, Inc. (“OMH”), and its wholly owned direct subsidiary, OneMain Finance Corporation (“OMFC”) are financial services holding companies whose subsidiaries engage in the consumer finance and insurance businesses.
The results of OMFC are consolidated into the results of OMH. Due to the nominal differences between OMFC and OMH, content throughout this filing relates to both OMH and OMFC, except where otherwise indicated. OMH and OMFC are referred to in this report, collectively with their subsidiaries, whether directly or indirectly owned, as “the Company,” “OneMain,” “we,” “us,” or “our.”
BASIS OF PRESENTATION
We prepared our condensed consolidated financial statements using generally accepted accounting principles in the United States of America (“GAAP”). These statements are unaudited. The year-end condensed balance sheet data was derived from our audited financial statements but does not include all disclosures required by GAAP. The statements include the accounts of OMH, its subsidiaries (all of which are wholly owned), and variable interest entities (“VIEs”) in which we hold a controlling financial interest and for which we are considered to be the primary beneficiary as of the financial statement date.
We eliminated all material intercompany accounts and transactions. We made judgments, estimates, and assumptions that affect amounts reported in our condensed consolidated financial statements and disclosures of contingent assets and liabilities. In management’s opinion, the condensed consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of results. Actual results could differ from our estimates. We evaluated the effects of and the need to disclose events that occurred subsequent to the balance sheet date.
The condensed consolidated financial statements in this report should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report. We follow the same significant accounting policies for our interim reporting except for the new accounting pronouncements subsequently adopted and disclosed in Note 2. To conform to the 2023 presentation, we reclassified certain items in prior periods of our condensed consolidated financial statements.
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2. Recent Accounting Pronouncements |
ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED
Insurance
In August of 2018, the FASB issued ASU 2018-12, Financial Services - Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts, which provides targeted improvements to Topic 944 for the assumptions used to measure the liability for future policy benefits for nonparticipating traditional and limited-payment contracts; measurement of market risk benefits; amortization of deferred acquisition costs; and enhanced disclosures. The ASU requires the assumptions used to measure the liability for future policy benefits to be updated at least annually. The guidance prescribes the discount rate used to measure the liability to be an upper-medium grade fixed-income instrument yield and updated at each reporting date with changes in the liability due to the discount rate recognized in other comprehensive income.
The amendments in this ASU became effective for the Company beginning January 1, 2023 and we adopted using the modified retrospective transition method. This ASU required a transition date of January 1, 2021 and resulted in recasting prior periods.
The effects of the adoption of ASU 2018-12 to our condensed consolidated balance sheets were as follows: | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | As Reported | | ASU 2018-12 Adjustment | | As Recast |
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December 31, 2022 | | | | | | |
Other assets (OMH only) | | $ | 1,150 | | | $ | 4 | | | $ | 1,154 | |
Other assets (OMFC only) | | 1,148 | | | 4 | | | 1,152 | |
Insurance claims and policyholder liabilities | | 602 | | | 18 | | | 620 | |
Accumulated other comprehensive loss | | (119) | | | (8) | | | (127) | |
Retained earnings (OMH only) | | 2,125 | | | (6) | | | 2,119 | |
Retained earnings (OMFC only) | | 1,199 | | | (6) | | | 1,193 | |
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March 31, 2022 | | | | | | |
Other assets (OMH only) | | $ | 981 | | | $ | 8 | | | $ | 989 | |
Other assets (OMFC only) | | 980 | | | 8 | | | 988 | |
Insurance claims and policyholder liabilities | | 621 | | | 37 | | | 658 | |
Accumulated other comprehensive loss | | (11) | | | (31) | | | (42) | |
Retained earnings (OMH only) | | 1,905 | | | 2 | | | 1,907 | |
Retained earnings (OMFC only) | | 1,156 | | | 2 | | | 1,158 | |
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December 31, 2021 | | | | | | |
Other assets (OMH only) | | $ | 1,003 | | | $ | 16 | | | $ | 1,019 | |
Other assets (OMFC only) | | 1,001 | | | 16 | | | 1,017 | |
Insurance claims and policyholder liabilities | | 621 | | | 72 | | | 693 | |
Accumulated other comprehensive income | | 61 | | | (56) | | | 5 | |
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January 1, 2021 | | | | | | |
Other assets (OMH and OMFC) | | $ | 1,054 | | | $ | 21 | | | $ | 1,075 | |
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Insurance claims and policyholder liabilities | | 621 | | | 97 | | | 718 | |
Accumulated other comprehensive income | | 94 | | | (76) | | | 18 | |
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The effects of the adoption of ASU 2018-12 to our condensed consolidated statements of operations were as follows:
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(dollars in millions, except per share amounts) | | As Reported | | ASU 2018-12 Adjustment | | As Recast |
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Three Months Ended March 31, 2022 | | | | | | |
Insurance policy benefits and claims | | $ | 45 | | | $ | (3) | | | $ | 42 | |
Income before income taxes | | 396 | | | 3 | | | 399 | |
Income taxes | | 95 | | | 1 | | | 96 | |
Net income | | 301 | | | 2 | | | 303 | |
Basic EPS (OMH only) | | 2.37 | | | 0.01 | | | 2.38 | |
Diluted EPS (OMH only) | | 2.36 | | | 0.02 | | | 2.38 | |
The effects of the adoption of ASU 2018-12 to our condensed consolidated statements of comprehensive income were as follows:
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(dollars in millions) | | As Reported | | ASU 2018-12 Adjustment | | As Recast |
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Three Months Ended March 31, 2022 | | | | | | |
Comprehensive income | | $ | 229 | | | $ | 27 | | | $ | 256 | |
The effects of the adoption of ASU 2018-12 to our condensed consolidated statements of cash flows were as follows:
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(dollars in millions) | | As Reported | | ASU 2018-12 Adjustment | | As Recast |
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Three Months Ended March 31, 2022 | | | | | | |
Net income | | $ | 301 | | | $ | 2 | | | $ | 303 | |
Deferred income tax charge | | 21 | | | 1 | | | 22 | |
Cash flows due to changes in other assets and other liabilities (OMH only) | | (62) | | | (3) | | | (65) | |
Cash flows due to changes in other assets and other liabilities (OMFC only) | | (61) | | | (3) | | | (64) | |
As a result of the adoption of ASU 2018-12, our significant accounting policy related to long-duration insurance contracts for policy and claim reserves has changed to reflect the requirements of the new standard. See below for the updated significant accounting policy as of the transition date of January 1, 2021.
Policy and Claim Reserves
Policy reserves are established for our long-duration contracts. The liability for future policy benefits is the present value of estimated future policy benefits to be paid to or on behalf of policyholders less the present value of estimated future net premiums to be collected from policyholders. To estimate the liability, we make assumptions for mortality, morbidity, lapses, and the discount rate.
At least annually, we update our estimate of the liability with actual experience and review our cash flow assumptions. The updated liability is discounted at the original discount rate at contract inception, and the change in the balance is recognized as a remeasurement gain or loss and included in Insurance policy benefits and claims in our consolidated statements of operations.
The discount rate assumption is the equivalent of an upper-medium grade fixed-income instrument yield. To determine the original discount rate at contract inception, we use a weighted average rate based on a forward yield curve over the contract issue year. At each reporting period, the liability is remeasured using the current discount rate and the change in the liability due to the discount rate is recognized in Accumulated other comprehensive income (loss) in our consolidated balance sheets.
Financial Instruments
In March of 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses: Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting for troubled debt restructurings by creditors while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendment also requires disclosure of gross charge-offs by year of origination for finance receivables.
We adopted the amendments in this ASU as of January 1, 2023 using the modified retrospective transition method.
Upon adoption, we recorded a decrease to the allowance for finance receivable losses of $16 million, a decrease to deferred tax assets of $4 million and a one-time corresponding cumulative increase to retained earnings, net of tax, of $12 million in our consolidated balance sheets as of January 1, 2023.
As a result of the adoption of ASU 2022-02, several of our significant accounting policies have changed to reflect the requirements of the new standard. See below for the updated significant accounting policies as of January 1, 2023.
Troubled Debt Restructured Finance Receivables
ASU 2022-02 superseded the accounting for troubled debt restructurings by creditors. As a result of the adoption of this ASU, the accounting for TDRs is no longer applicable for periods beginning on or after January 1, 2023.
Modified Finance Receivables to Borrowers Experiencing Financial Difficulty
We make modifications to our finance receivables to assist borrowers who are experiencing financial difficulty, participating in a counseling or settlement arrangement, or are in bankruptcy. When we modify the contractual terms for economic or other reasons related to the borrower’s financial difficulties, we classify that receivable as a modified finance receivable. We restructure finance receivables only if we believe the customer has the ability to pay under the restructured terms for the foreseeable future.
When we modify an account, we primarily use a combination of the following to reduce the borrower’s monthly payment: reduce the interest rate, extend the term, defer or forgive past due interest, or forgive principal. As part of the modification, we may require qualifying payments before the accounts are generally brought current for delinquency reporting. In addition, for principal forgiveness, we may require future payment performance by the borrower under the modified terms before the balances are contractually forgiven. We fully reserve for any potential principal forgiveness in our allowance for finance receivable losses.
Account modifications that are deemed to be a modified finance receivable are measured for impairment in accordance with our policy for allowance for finance receivable losses.
Allowance for Finance Receivable Losses
We establish the allowance for finance receivable losses through the provision for finance receivable losses. We evaluate our finance receivable portfolio by level of contractual delinquency in the portfolio, specifically in the late stage delinquency buckets and inclusive of the migration of the loans through the delinquency buckets. Our finance receivables consist of a large number of relatively small, homogeneous accounts. We evaluate our finance receivables for impairment as pools. None of our accounts are large enough to warrant individual evaluation for impairment.
We estimate the allowance for finance receivable losses primarily on historical loss experience using a cumulative loss model applied to our personal loan portfolios. Our gross credit loss expectation is offset by the estimate of future recoveries using historical recovery curves. Our personal loans are primarily segmented in the loss model by contractual delinquency status.
Other attributes in the model include loan modification status, collateral mix and recent credit score. To estimate the gross credit losses, the model utilizes a roll rate matrix to project the first 12 months of losses and historical cohort performance to project the expected losses over the remaining term. Our methodology relies on historical loss experience to forecast the corresponding future outcomes. These patterns are then applied to the current portfolio to obtain an estimate of future losses. We also consider key economic trends including unemployment rates. Forecasted macroeconomic conditions extend to our reasonable and supportable forecast period and revert to a historical average. No new volume is assumed. Personal loan renewals are a significant piece of our new volume and are considered a terminal event of the previous loan.
For our personal loans, we have elected not to measure an allowance on accrued finance charges as it is our policy to reverse finance charge amounts previously accrued after four contractual payments become past due. For credit cards, we measure an allowance on uncollected finance charges, but do not measure an allowance on the unfunded portion of the credit card lines as the accounts are unconditionally cancellable.
Management exercises its judgment when determining the amount of allowance for finance receivable losses. Our judgment is based on quantitative analyses, qualitative factors (such as recent portfolio, industry, and other economic trends), and experience in the consumer finance industry. We adjust the amounts determined by our model for management’s estimate of the effects of model imprecision which include but are not limited to, any changes to underwriting criteria and portfolio seasoning.
We generally charge off to the allowance for finance receivable losses on personal loans and credit cards that are beyond seven payments (approximately 180 days) past due. Exceptions include accounts in bankruptcy, which are generally charged off at the earlier of notice of discharge or when the customer becomes seven payments past due, and accounts of deceased borrowers, which are generally charged off at the time of notice. Generally, we start repossession of any titled personal property when the customer becomes two payments (approximately 30 days) past due and may charge off prior to the account becoming seven payments (approximately 180 days) past due.
We may renew delinquent secured or unsecured personal loan accounts if the customer meets current underwriting criteria and it does not appear that the cause of past delinquency will affect the customer’s ability to repay the renewed loan. We subject all renewals to the same credit risk underwriting process as we would a new application for credit.
See Notes 3 and 4 for additional information on the adoption of ASU 2022-02.
Our finance receivables consist of personal loans and credit cards. Personal loans are non-revolving, with a fixed rate, have fixed terms generally between three and six years, and are secured by automobiles, other titled collateral, or are unsecured. Credit cards are open-ended, revolving, with a fixed rate, and are unsecured.
Components of our net finance receivables were as follows:
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(dollars in millions) | | Personal Loans | | Credit Cards | | Total |
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March 31, 2023 | | | | | | |
Gross finance receivables * | | $ | 19,444 | | | $ | 121 | | | $ | 19,565 | |
Unearned fees | | (215) | | | — | | | (215) | |
Accrued finance charges and fees | | 276 | | | — | | | 276 | |
Deferred origination costs | | 182 | | | 1 | | | 183 | |
Total | | $ | 19,687 | | | $ | 122 | | | $ | 19,809 | |
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December 31, 2022 | | | | | | |
Gross finance receivables * | | $ | 19,615 | | | $ | 107 | | | $ | 19,722 | |
Unearned fees | | (220) | | | — | | | (220) | |
Accrued finance charges and fees | | 299 | | | — | | | 299 | |
Deferred origination costs | | 185 | | | — | | | 185 | |
Total | | $ | 19,879 | | | $ | 107 | | | $ | 19,986 | |
* Personal loan gross finance receivables equal the unpaid principal balance. For precompute personal loans, unpaid principal balance is the gross contractual payments less the unaccreted balance of unearned finance charges. Credit card gross finance receivables equal the principal balance and billed interest and fees.
WHOLE LOAN SALE TRANSACTIONS
As of March 31, 2023, we have whole loan sale flow agreements with third parties, with remaining terms of less than one year, in which we agreed to sell a combined total of $135 million gross receivables per quarter of newly originated unsecured personal loans along with any associated accrued interest. These unsecured personal loans are derecognized from our balance sheet at the time of sale. We service the personal loans sold and are entitled to a servicing fee and other fees commensurate with the services performed as part of the agreements. The gain on sales and servicing fees are recorded in Other revenues in our condensed consolidated statements of operations. We sold $180 million of gross finance receivables during the three months ended March 31, 2023 and 2022. The gain on the sales were $17 million during the three months ended March 31, 2023 and 2022.
CREDIT QUALITY INDICATOR
We consider the delinquency status of our finance receivables as our key credit quality indicator. We monitor the delinquency of our finance receivable portfolio, including the migration between the delinquency buckets and changes in the delinquency trends to manage our exposure to credit risk in the portfolio.
When personal loans are 60 days contractually past due, we consider these accounts to be at an increased risk for loss and move collection of these accounts to our central collection operations. We consider our personal loans to be nonperforming at 90 days or more contractually past due, at which point we stop accruing finance charges and reverse finance charges previously accrued. For our personal loans, we reversed net accrued finance charges of $37 million and $27 million during the three months ended March 31, 2023 and 2022, respectively.
Finance charges recognized from the contractual interest portion of payments received on nonaccrual personal loans totaled $6 million and $4 million during the three months ended March 31, 2023 and 2022, respectively. All personal loans in nonaccrual status are considered in our estimate of allowance for finance receivable losses.
We accrue finance charges and fees on credit cards until charge-off at approximately 180 days past due, at which point we reverse finance charges and fees previously accrued. For credit cards, net accrued finance charges and fees reversed for the three months ended March 31, 2023 and 2022 were immaterial.
The following tables below are a summary of our personal loans by the year of origination and number of days delinquent:
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(dollars in millions) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Total |
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March 31, 2023 | | | | | | | | | | | | | | |
Performing | | | | | | | | | | | | | | |
Current | | $ | 2,641 | | | $ | 9,224 | | | $ | 4,195 | | | $ | 1,464 | | | $ | 861 | | | $ | 260 | | | $ | 18,645 | |
30-59 days past due | | 3 | | | 137 | | | 98 | | | 31 | | | 19 | | | 9 | | | 297 | |
60-89 days past due | | — | | | 98 | | | 72 | | | 22 | | | 13 | | | 6 | | | 211 | |
Total performing | | 2,644 | | | 9,459 | | | 4,365 | | | 1,517 | | | 893 | | | 275 | | | 19,153 | |
Nonperforming (Nonaccrual) | | | | | | | | | | | | | | |
90+ days past due | | — | | | 217 | | | 206 | | | 61 | | | 35 | | | 15 | | | 534 | |
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Total | | $ | 2,644 | | | $ | 9,676 | | | $ | 4,571 | | | $ | 1,578 | | | $ | 928 | | | $ | 290 | | | $ | 19,687 | |
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Gross charge-offs | | $ | — | | | $ | 139 | | | $ | 199 | | | $ | 59 | | | $ | 34 | | | $ | 14 | | | $ | 445 | |
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(dollars in millions) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
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December 31, 2022 | | | | | | | | | | | | | | |
Performing | | | | | | | | | | | | | | |
Current | | $ | 10,614 | | | $ | 4,927 | | | $ | 1,758 | | | $ | 1,081 | | | $ | 240 | | | $ | 105 | | | $ | 18,725 | |
30-59 days past due | | 136 | | | 136 | | | 43 | | | 28 | | | 9 | | | 5 | | | 357 | |
60-89 days past due | | 92 | | | 101 | | | 32 | | | 19 | | | 6 | | | 3 | | | 253 | |
Total performing | | 10,842 | | | 5,164 | | | 1,833 | | | 1,128 | | | 255 | | | 113 | | | 19,335 | |
Nonperforming (Nonaccrual) | | | | | | | | | | | | | | |
90+ days past due | | 160 | | | 246 | | | 74 | | | 44 | | | 13 | | | 7 | | | 544 | |
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Total | | $ | 11,002 | | | $ | 5,410 | | | $ | 1,907 | | | $ | 1,172 | | | $ | 268 | | | $ | 120 | | | $ | 19,879 | |
The following is a summary of credit cards by number of days delinquent:
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(dollars in millions) | | March 31, 2023 | | December 31, 2022 | | | | |
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Current | | $ | 106 | | | $ | 93 | | | | | |
30-59 days past due | | 4 | | | 3 | | | | | |
60-89 days past due | | 3 | | | 3 | | | | | |
90+ days past due | | 9 | | | 8 | | | | | |
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Total | | $ | 122 | | | $ | 107 | | | | | |
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There were no credit cards that were converted to term loans at March 31, 2023 or December 31, 2022.
MODIFIED FINANCE RECEIVABLES TO BORROWERS EXPERIENCING FINANCIAL DIFFICULTY
Information regarding modified finance receivables to borrowers experiencing financial difficulty on or after January 1, 2023, the effective date of ASU 2022-02, were as follows:
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(dollars in millions) | | Three Months Ended March 31, 2023 | | | | |
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Interest rate reduction and term extension | | $ | 126 | | | | | | |
Interest rate reduction and principal forgiveness | | 96 | | | | | | |
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Payment delays | | — | | | | | | |
Total modifications to borrowers experiencing financial difficulties | | $ | 222 | | | | | | |
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Modifications as a percent of net finance receivables | | 1.13 | % | | | | | | |
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Information regarding the financial effect of modifications to borrowers experiencing financial difficulty on or after January 1, 2023, the effective date of ASU 2022-02, were as follows:
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(dollars in millions) | | Three Months Ended March 31, 2023 | | | | |
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Weighted-average interest rate reduction | | 21.32 | % | | | | | | |
Weighted-average term extension (months) | | 19 | | | | | | |
Principal/interest forgiveness | | $ | 11 | | | | | | |
Information regarding the performance of modified finance receivables to borrowers experiencing financial difficulty on or after January 1, 2023, the effective date of ASU 2022-02, were as follows:
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(dollars in millions) | | March 31, 2023 | | | | | | |
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Current | | $ | 159 | | | | | | | |
30-59 days past due | | 27 | | | | | | | |
60-89 days past due | | 14 | | | | | | | |
90+ days past due | | 22 | | | | | | | |
Total | | $ | 222 | | | | | | | |
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There were no modified finance receivables to borrowers experiencing financial difficulty on or after January 1, 2023, the effective date of ASU 2022-02, and for which there was a default during the period to cause the modified finance receivable to be considered nonperforming (90 days or more past due).
See Notes 2 and 4 for additional information on the adoption of ASU 2022-02.
TROUBLED DEBT RESTRUCTURED FINANCE RECEIVABLES PRIOR TO ADOPTION OF ASU 2022-02
ASU 2022-02 superseded the accounting for troubled debt restructurings by creditors. Due to the adoption of this ASU, the following disclosures related to troubled debt restructuring finance receivables are no longer applicable for reporting periods beginning in 2023.
Information regarding TDR finance receivables were as follows:
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(dollars in millions) | | | | December 31, 2022 |
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TDR gross finance receivables | | | | $ | 898 | |
TDR net finance receivables * | | | | 904 | |
Allowance for TDR finance receivable losses | | | | 369 | |
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* TDR net finance receivables are TDR gross finance receivables net of unearned fees, accrued finance charges, and deferred origination costs.
There were no credit cards classified as TDR finance receivables at December 31, 2022.
Information regarding the new volume of the TDR finance receivables were as follows: | | | | | | | | | | | | | | | | | | |
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(dollars in millions) | | | | | | | | Three Months Ended March 31, 2022 | | | | |
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Pre-modification TDR net finance receivables | | | | | | | | $ | 134 | | | | | |
Post-modification TDR net finance receivables: | | | | | | | | | | | | |
Rate reduction | | | | | | | | 87 | | | | | |
Other * | | | | | | | | 47 | | | | | |
Total post-modification TDR net finance receivables | | | | | | | | $ | 134 | | | | | |
Number of TDR accounts | | | | | | | | 16,165 | | | | | |
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* “Other” modifications primarily consist of loans with both rate reductions and the potential of principal forgiveness contingent on future payment performance by the borrower under the modified terms.
Finance receivables that were modified as TDR finance receivables within the previous 12 months and for which there was a default during the period to cause the TDR finance receivables to be considered nonperforming (90 days or more past due) are reflected in the following table: | | | | | | | | | | | | | | | | | | |
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(dollars in millions) | | | | | | | | Three Months Ended March 31, 2022 | | | | |
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TDR net finance receivables * | | | | | | | | $ | 30 | | | | | |
Number of TDR accounts | | | | | | | | 3,796 | | | | | |
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* Represents the corresponding balance of TDR net finance receivables at the end of the month in which they defaulted.
UNFUNDED LENDING COMMITMENTS
Our unfunded lending commitments consist of the unused credit card lines, which are unconditionally cancellable. We do not anticipate that all of our customers will access their entire available line at any given point in time. The unused credit card lines totaled $99 million at March 31, 2023 and $81 million at December 31, 2022.
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4. Allowance for Finance Receivable Losses |
We establish an allowance for finance receivable losses through the provision for finance receivable losses. We evaluate our finance receivable portfolio by the level of contractual delinquency in the portfolio, specifically in the late stage delinquency buckets and inclusive of the migration of the finance receivables through the delinquency buckets. We estimate and record an allowance for finance receivable losses to cover the expected lifetime credit losses on our finance receivables. Our allowance for finance receivable losses may fluctuate based upon changes in portfolio growth, credit quality, and economic conditions.
Our methodology to estimate expected credit losses uses recent macroeconomic forecasts, which include forecasts for unemployment. We leverage projections from various industry leading providers. We also consider inflationary pressures, consumer confidence levels, and interest rate increases that may continue to impact the economic outlook. At March 31, 2023, our economic forecast used a reasonable and supportable period of 12 months. The decrease in our allowance for finance receivable losses for the three months ended March 31, 2023 was primarily due to the adoption of ASU 2022-02. We may experience further changes to the macroeconomic assumptions within our forecast, as well as changes to our loan loss performance outlook, both of which could lead to further changes in our allowance for finance receivable losses, allowance ratio, and provision for finance receivable losses.
Changes in the allowance for finance receivable losses were as follows:
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(dollars in millions) | | Personal Loans | | Credit Cards | | Total |
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Three Months Ended March 31, 2023 | | | | | | |
Balance at beginning of period | | $ | 2,290 | | | $ | 21 | | | $ | 2,311 | |
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Impact of adoption of ASU 2022-02 * | | (16) | | | — | | | (16) | |
Provision for finance receivable losses | | 377 | | | 8 | | | 385 | |
Charge-offs | | (445) | | | (6) | | | (451) | |
Recoveries | | 69 | | | — | | | 69 | |
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Balance at end of period | | $ | 2,275 | | | $ | 23 | | | $ | 2,298 | |
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Three Months Ended March 31, 2022 | | | | | | |
Balance at beginning of period | | $ | 2,090 | | | $ | 5 | | | $ | 2,095 | |
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Provision for finance receivable losses | | 233 | | | 5 | | | 238 | |
Charge-offs | | (329) | | | — | | | (329) | |
Recoveries | | 67 | | | — | | | 67 | |
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Balance at end of period | | $ | 2,061 | | | $ | 10 | | | $ | 2,071 | |
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* As a result of the adoption of ASU 2022-02, we recorded a one-time adjustment to the allowance for finance receivable losses. See Notes 2 and 3 for additional information on the adoption of ASU 2022-02.
AVAILABLE-FOR-SALE SECURITIES
Cost/amortized cost, allowance for credit losses, unrealized gains and losses, and fair value of fixed maturity available-for-sale securities by type were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Cost/ Amortized Cost | | | | Unrealized Gains | | Unrealized Losses | | Fair Value |
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March 31, 2023* | | | | | | | | | | |
Fixed maturity available-for-sale securities: | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 17 | | | | | $ | — | | | $ | (1) | | | $ | 16 | |
Obligations of states, municipalities, and political subdivisions | | 73 | | | | | — | | | (6) | | | 67 | |
Commercial paper | | 55 | | | | | — | | | — | | | 55 | |
Non-U.S. government and government sponsored entities | | 151 | | | | | — | | | (7) | | | 144 | |
Corporate debt | | 1,219 | | | | | 3 | | | (99) | | | 1,123 | |
Mortgage-backed, asset-backed, and collateralized: | | | | | | | | | | |
RMBS | | 213 | | | | | — | | | (23) | | | 190 | |
CMBS | | 38 | | | | | — | | | (3) | | | 35 | |
CDO/ABS | | 93 | | | | | — | | | (7) | | | 86 | |
Total | | $ | 1,859 | | | | | $ | 3 | | | $ | (146) | | | $ | 1,716 | |
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December 31, 2022* | | | | | | | | | | |
Fixed maturity available-for-sale securities: | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 17 | | | | | $ | — | | | $ | (1) | | | $ | 16 | |
Obligations of states, municipalities, and political subdivisions | | 74 | | | | | — | | | (8) | | | 66 | |
Commercial paper | | 55 | | | | | — | | | — | | | 55 | |
Non-U.S. government and government sponsored entities | | 150 | | | | | — | | | (8) | | | 142 | |
Corporate debt | | 1,251 | | | | | 1 | | | (115) | | | 1,137 | |
Mortgage-backed, asset-backed, and collateralized: | | | | | | | | | | |
RMBS | | 217 | | | | | — | | | (25) | | | 192 | |
CMBS | | 38 | | | | | — | | | (3) | | | 35 | |
CDO/ABS | | 95 | | | | | — | | | (9) | | | 86 | |
Total | | $ | 1,897 | | | | | $ | 1 | | | $ | (169) | | | $ | 1,729 | |
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* The allowance for credit losses related to our investment securities as of March 31, 2023 and December 31, 2022 were immaterial.
Interest receivables reported in Other assets in our condensed consolidated balance sheets totaled $14 million as of March 31, 2023 and December 31, 2022. There were no material amounts reversed from investment revenue for available-for-sale securities for the three months ended March 31, 2023 and 2022.
Fair value and unrealized losses on available-for-sale securities by type and length of time in a continuous unrealized loss position without an allowance for credit losses were as follows:
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| | Less Than 12 Months | | 12 Months or Longer | | Total |
(dollars in millions) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
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March 31, 2023 | | | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 10 | | | $ | — | | | $ | 6 | | | $ | (1) | | | $ | 16 | | | $ | (1) | |
Obligations of states, municipalities, and political subdivisions | | 12 | | | — | | | 50 | | | (6) | | | 62 | | | (6) | |
Commercial paper | | 51 | | | — | | | — | | | — | | | 51 | | | — | |
Non-U.S. government and government sponsored entities | | 30 | | | — | | | 93 | | | (7) | | | 123 | | | (7) | |
Corporate debt | | 311 | | | (8) | | | 712 | | | (91) | | | 1,023 | | | (99) | |
Mortgage-backed, asset-backed, and collateralized: | | | | | | | | | | | | |
RMBS | | 48 | | | (2) | | | 125 | | | (21) | | | 173 | | | (23) | |
CMBS | | 9 | | | — | | | 26 | | | (3) | | | 35 | | | (3) | |
CDO/ABS | | 18 | | | — | | | 58 | | | (7) | | | 76 | | | (7) | |
Total | | $ | 489 | | | $ | (10) | | | $ | 1,070 | | | $ | (136) | | | $ | 1,559 | | | $ | (146) | |
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December 31, 2022 | | | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 10 | | | $ | — | | | $ | 6 | | | $ | (1) | | | $ | 16 | | | $ | (1) | |
Obligations of states, municipalities, and political subdivisions | | 48 | | | (5) | | | 15 | | | (3) | | | 63 | | | (8) | |
Commercial paper | | 51 | | | — | | | — | | | — | | | 51 | | | — | |
Non-U.S. government and government sponsored entities | | 104 | | | (3) | | | 32 | | | (5) | | | 136 | | | (8) | |
Corporate debt | | 779 | | | (54) | | | 299 | | | (61) | | | 1,078 | | | (115) | |
Mortgage-backed, asset-backed, and collateralized: | | | | | | | | | | | | |
RMBS | | 106 | | | (9) | | | 68 | | | (16) | | | 174 | | | (25) | |
CMBS | | 21 | | | (2) | | | 13 | | | (1) | | | 34 | | | (3) | |
CDO/ABS | | 45 | | | (3) | | | 35 | | | (6) | | | 80 | | | (9) | |
Total | | $ | 1,164 | | | $ | (76) | | | $ | 468 | | | $ | (93) | | | $ | 1,632 | | | $ | (169) | |
On a lot basis, we had 2,176 and 2,280 investment securities in an unrealized loss position at March 31, 2023 and December 31, 2022, respectively. We do not consider the unrealized losses to be credit-related, as these unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase. Additionally, as of March 31, 2023, there were no credit impairments on investment securities that we intend to sell. We do not have plans to sell any of the remaining investment securities with unrealized losses as of March 31, 2023, and we believe it is more likely than not that we would not be required to sell such investment securities before recovery of their amortized cost.
We continue to monitor unrealized loss positions for potential credit impairments. During the three months ended March 31, 2023 and 2022, there were no material credit impairments related to our investment securities. Therefore, there were no material additions or reductions in the allowance for credit losses (impairments recognized or reversed in earnings) on credit impaired available-for-sale securities for the three months ended March 31, 2023 and 2022.
The proceeds of available-for-sale securities sold or redeemed during the three months ended March 31, 2023 and 2022 totaled $26 million and $163 million, respectively. The net realized gains and losses were immaterial during the three months ended March 31, 2023 and 2022.
Contractual maturities of fixed-maturity available-for-sale securities at March 31, 2023 were as follows: | | | | | | | | | | | | | | |
(dollars in millions) | | Fair Value | | Amortized Cost |
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Fixed maturities, excluding mortgage-backed, asset-backed, and collateralized securities: | | | | |
Due in 1 year or less | | $ | 192 | | | $ | 194 | |
Due after 1 year through 5 years | | 544 | | | 571 | |
Due after 5 years through 10 years | | 532 | | | 592 | |
Due after 10 years | | 137 | | | 158 | |
Mortgage-backed, asset-backed, and collateralized securities | | 311 | | | 344 | |
Total | | $ | 1,716 | | | $ | 1,859 | |
Actual maturities may differ from contractual maturities since issuers and borrowers may have the right to call or prepay obligations. We may sell investment securities before maturity for general corporate and working capital purposes and to achieve certain investment strategies.
The fair value of securities on deposit with third parties totaled $535 million and $532 million at March 31, 2023 and December 31, 2022, respectively.
OTHER SECURITIES
The fair value of other securities by type was as follows: | | | | | | | | | | | | | | |
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(dollars in millions) | | March 31, 2023 | | December 31, 2022 |
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Fixed maturity other securities: | | | | |
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Bonds | | $ | 21 | | | $ | 23 | |
Preferred stock * | | 16 | | | 15 | |
Common stock * | | 33 | | | 33 | |
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Total | | $ | 70 | | | $ | 71 | |
* We employ an income equity strategy targeting investments in stocks with strong current dividend yields. Stocks included have a history of stable or increasing dividend payments.
Net unrealized losses on other securities held were immaterial for the three months ended March 31, 2023 and 2022. Net realized gains and losses on other securities sold or redeemed were immaterial for the three months ended March 31, 2023 and 2022.
Other securities primarily consist of equity securities and those securities for which the fair value option was elected. We report net unrealized and realized gains and losses on other securities held, sold, or redeemed in investment revenue.
Principal maturities of long-term debt by type of debt at March 31, 2023 were as follows:
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| | Senior Debt | | | | |
(dollars in millions) | | Securitizations | | Private Secured Term Funding | | Revolving Conduit Facilities | | | | Unsecured Notes (a) | | Junior Subordinated Debt (a) | | Total |
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Interest rates (b) | | 0.87%-7.07% | | 5.77% | | 5.55% | | | | 3.50%-8.25% | | 6.58 | % | | |
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Remainder of 2023 | | $ | — | | | $ | — | | | $ | — | | | | | $ | 226 | | | $ | — | | | $ | 226 | |
2024 | | — | | | — | | | — | | | | | 1,270 | | | — | | | 1,270 | |
2025 | | — | | | — | | | — | | | | | 1,249 | | | — | | | 1,249 | |
2026 | | — | | | — | | | — | | | | | 1,600 | | | — | | | 1,600 | |
2027 | | — | | | — | | | — | | | | | 750 | | | — | | | 750 | |
2028-2067 | | — | | | — | | | — | | | | | 2,932 | | | 350 | | | 3,282 | |
Secured (c) | | 9,654 | | | 350 | | | 100 | | | | | — | | | — | | | 10,104 | |
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Total principal maturities | | $ | 9,654 | | | $ | 350 | | | $ | 100 | | | | | $ | 8,027 | | | $ | 350 | | | $ | 18,481 | |
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Total carrying amount | | $ | 9,611 | | | $ | 349 | | | $ | 100 | | | | | $ | 7,974 | | | $ | 172 | | | $ | 18,206 | |
Debt issuance costs (d) | | (40) | | | (1) | | | — | | | | | (57) | | | — | | | (98) | |
(a) Pursuant to the Base Indenture, the Supplemental Indentures, and the Guaranty Agreements, OMH agreed to fully and unconditionally guarantee, on a senior unsecured basis, payments of principal, premium and interest on the Unsecured Notes and Junior Subordinated Debenture. The OMH guarantees of OMFC’s long-term debt are subject to customary release provisions.
(b) The interest rates shown are the range of contractual rates in effect at March 31, 2023.
(c) Securitizations, private secured term funding, and borrowings under the revolving conduit facilities are not included in the above maturities by period due to their variable monthly repayments, which may result in pay-off prior to the stated maturity date. See Note 7 for further information on our long-term debt associated with securitizations, private secured term funding, and revolving conduit facilities.
(d) Debt issuance costs are reported as a direct deduction from long-term debt, with the exception of debt issuance costs associated with our revolving conduit facilities and unsecured corporate revolver, which totaled $31 million at March 31, 2023 and are reported in Other assets in our condensed consolidated balance sheets.
UNSECURED CORPORATE REVOLVER
At March 31, 2023, the total maximum borrowing capacity of our unsecured corporate revolver was $1.25 billion. The corporate revolver has a five-year term beginning October 25, 2021, during which draws and repayments may occur. Any outstanding principal balance is due and payable on October 25, 2026. At March 31, 2023, no amounts were drawn under this facility.
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7. Variable Interest Entities |
CONSOLIDATED VIES
We have transferred finance receivables to VIEs for asset-backed financing transactions and include the assets and liabilities in our condensed consolidated financial statements because we are the primary beneficiary of each VIE. We account for these asset-backed debt obligations as securitized borrowings.
See Note 2 and Note 9 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in our Annual Report for more detail regarding VIEs.
We parenthetically disclose on our consolidated balance sheets the VIE’s assets that can only be used to settle the VIE’s obligations and liabilities when its creditors have no recourse against the primary beneficiary’s general credit. The carrying amounts of consolidated VIE assets and liabilities associated with our securitization trusts, private secured term funding, and revolving conduit facilities were as follows: | | | | | | | | | | | | | | |
(dollars in millions) | | March 31, 2023 | | December 31, 2022 |
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Assets | | | | |
Cash and cash equivalents | | $ | 2 | | | $ | 2 | |
Net finance receivables | | 11,108 | | | 10,432 | |
Allowance for finance receivable losses | | 1,206 | | | 1,126 | |
Restricted cash and restricted cash equivalents | | 513 | | | 442 | |
Other assets | | 29 | | | 28 | |
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Liabilities | | | | |
Long-term debt | | $ | 10,060 | | | $ | 9,361 | |
Other liabilities | | 20 | | | 20 | |
Other than the retained subordinate and residual interests in our consolidated VIEs, we are under no further obligation than is otherwise noted herein, either contractually or implicitly, to provide financial support to these entities. Consolidated interest expense related to our VIEs totaled $101 million and $65 million during the three months ended March 31, 2023 and 2022, respectively.
SECURITIZED BORROWINGS
Each of our outstanding securitizations contain a revolving period ranging from two to seven years during which no principal payments are required to be made on the related asset-backed notes. The indentures governing our securitized borrowings contain early amortization events and events of default, that, if triggered, may result in the acceleration of the obligation to pay principal and interest on the related asset-backed notes.
PRIVATE SECURED TERM FUNDING
At March 31, 2023, an aggregate amount of $350 million was outstanding under the private secured term funding collateralized by our personal loans. No principal payments are required to be made until after April 25, 2025, followed by a subsequent one-year amortization period, at the expiration of which the outstanding principal amount is due and payable.
REVOLVING CONDUIT FACILITIES
We had access to 15 revolving conduit facilities with a total maximum borrowing capacity of $6.2 billion as of March 31, 2023. Our conduit facilities contain revolving periods during which time no principal payments are required, but may be made without penalty, followed by a subsequent amortization period. Principal balances of outstanding loans, if any, are due and payable in full over periods ranging up to ten years as of March 31, 2023. Amounts drawn on these facilities are collateralized by our personal loans.
At March 31, 2023, an aggregate amount of $100 million was drawn under these facilities and the remaining borrowing capacity was $6.1 billion.
Changes in the reserve for unpaid claims and loss adjustment expenses (net of reinsurance recoverables) on our short-duration insurance contracts: | | | | | | | | | | | | | | |
| | At or for the Three Months Ended March 31, |
(dollars in millions) | | 2023 | | 2022 (a) |
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Balance at beginning of period | | $ | 93 | | | $ | 102 | |
Less reinsurance recoverables | | (3) | | | (3) | |
Net balance at beginning of period | | 90 | | | 99 | |
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Additions for losses and loss adjustment expenses incurred to: | | | | |
Current year | | 42 | | | 46 | |
Prior years (b) | | (1) | | | (6) | |
Total | | 41 | | | 40 | |
Reductions for losses and loss adjustment expenses paid related to: | | | | |
Current year | | (12) | | | (13) | |
Prior years | | (27) | | | (27) | |
Total | | (39) | | | (40) | |
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Net balance at end of period | | 92 | | | 99 | |
Plus reinsurance recoverables | | 3 | | | 3 | |
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Balance at end of period | | $ | 95 | | | $ | 102 | |
(a) As a result of the modified retrospective adoption of ASU 2018-12, we have recorded a $16 million reduction to the 2022 beginning balance, and the previously reported balances were recast to exclude reserves for unpaid claims on our long-duration contracts. These reserves have been included in our estimate of the liability for future policy benefits as of the transition date of January 1, 2021. See Note 2 for additional information on the adoption of ASU 2018-12.
(b) At March 31, 2023, $1 million reflected a redundancy in the prior years’ net reserves, primarily due to favorable development of credit disability claims during the period. At March 31, 2022, $6 million reflected a redundancy in the prior years’ net reserves, primarily due to favorable development of credit life claims during the period.
LIABILITY FOR FUTURE POLICY BENEFITS
The present value of expected net premiums on long-duration insurance contracts were as follows:
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| | At or for the Three Months Ended March 31, |
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| | 2023 | | 2022 | | | |
(dollars in millions) | | Term and Whole Life | | Accidental Death and Disability Protection | | Term and Whole Life | | Accidental Death and Disability Protection | | | |
Balance at beginning of period | | $ | 252 | | | $ | 48 | | | $ | 313 | | | $ | 69 | | | | |
Effect of cumulative changes in discount rate assumptions (beginning of period) | | (8) | | | — | | | (53) | | | (10) | | | | |
Beginning balance at original discount rate | | 244 | | | 48 | | | 260 | | | 59 | | | | |
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Effect of actual variances from expected experience | | (2) | | | — | | | 1 | | | — | | | | |
Adjusted balance at beginning of period | | 242 | | | 48 | | | 261 | | | 59 | | | | |
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Interest accretion | | 6 | | | — | | | 27 | | | (1) | | | | |
Net premiums collected | | (7) | | | (2) | | | (10) | | | (2) | | | | |
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Ending balance at original discount rate | | 241 | | | 46 | | | 278 | | | 56 | | | | |
Effect of changes in discount rate assumptions | | 5 | | | — | | | 35 | | | 6 | | | | |
Balance at ending of period | | $ | 246 | | | $ | 46 | | | $ | 313 | | | $ | 62 | | | | |
The present value of expected future policy benefits on long-duration insurance contracts were as follows:
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| | At or for the Three Months Ended March 31, |
| | | | | | | | |
| | 2023 | | 2022 | | | |
(dollars in millions) | | Term and Whole Life | | Accidental Death and Disability Protection | | Term and Whole Life | | Accidental Death and Disability Protection | | | |
Balance at beginning of period | | $ | 483 | | | $ | 126 | | | $ | 601 | | | $ | 165 | | | | |
Effect of cumulative changes in discount rate assumptions (beginning of period) | | (17) | | (1) | | (109) | | (27) | | | |
Beginning balance at original discount rate | | 466 | | 125 | | 492 | | 138 | | | |
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Effect of actual variances from expected experience | | 1 | | (1) | | 2 | | (1) | | | |
Adjusted balance at beginning of period | | 467 | | 124 | | 494 | | 137 | | | |
Net issuances | | 1 | | — | | 1 | | — | | | |
Interest accretion | | 9 | | 3 | | 27 | | 1 | | | |
Benefit payments | | (16) | | (4) | | (17) | | (4) | | | |
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Ending balance at original discount rate | | 461 | | 123 | | 505 | | 134 | | | |
Effect of changes in discount rate assumptions | | 12 | | — | | 66 | | 14 | | | |
Balance at ending of period | | $ | 473 | | | $ | 123 | | | $ | 571 | | | $ | 148 | | | | |
The net liability for future policy benefits on long-duration insurance contracts were as follows:
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| | At or for the Three Months Ended March 31, |
| | 2023 | | 2022 | | | |
| | | | | | | | |
(dollars in millions) | | Term and Whole Life | | Accidental Death and Disability Protection | | Term and Whole Life | | Accidental Death and Disability Protection | | | |
Net liability for future policy benefits | | $ | 227 | | | $ | 77 | | | $ | 258 | | | $ | 86 | | | | |
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Deferred profit liability | | 15 | | 54 | | 16 | | 61 | | | |
Total net liability for future policy benefits | | $ | 242 | | | $ | 131 | | | $ | 274 | | | $ | 147 | | | | |
The weighted-average duration of the liability for future policy benefits was 8 years at March 31, 2023 and 2022.
The following table reconciles the net liability for future policy benefits to Insurance claims and policyholder liabilities in the condensed consolidated balance sheets:
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| | At or for the Three Months Ended March 31, | | |
(dollars in millions) | | 2023 | | 2022 | | | | | | | |
Term and whole life | | $ | 242 | | | $ | 274 | | | | | | | | | | |
Accidental death and disability protection | | 131 | | | 147 | | | | | | | | | | |
Other* | | 242 | | | 237 | | | | | | | | | | |
Total | | $ | 615 | | | $ | 658 | | | | | | | | | | |
* Other primarily includes reserves for short-duration contracts that are payable to third-party beneficiaries.
The undiscounted and discounted expected gross premiums and expected future benefits and expenses for our long-duration insurance contracts were as follows:
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| | At or for the Three Months Ended March 31, |
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| | 2023 | | 2022 | | | |
(dollars in millions) | | Term and Whole Life | | Accidental Death and Disability Protection | | Term and Whole Life | | Accidental Death and Disability Protection | | | |
Expected future gross premiums: | | | | | | | | | | | |
Undiscounted | | $ | 466 | | | $ | 159 | | | $ | 586 | | | $ | 181 | | | | |
Discounted | | 326 | | | 114 | | | 442 | | | 142 | | | | |
Expected future benefit payments: | | | | | | | | | | | |
Undiscounted | | 670 | | | 181 | | | 741 | | | 198 | | | | |
Discounted | | 473 | | | 123 | | | 571 | | | 148 | | | | |
The revenue and interest related to our long-duration insurance contracts recognized in the condensed consolidated statements of operations were as follows:
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| | At or for the Three Months Ended March 31, |
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| | 2023 | | 2022 | | | |
(dollars in millions) | | Term and Whole Life | | Accidental Death and Disability Protection | | Term and Whole Life | | Accidental Death and Disability Protection | | | |
Gross premiums or assessments | | $ | 11 | | | $ | 5 | | | $ | 17 | | | $ | 5 | | | | |
Interest accretion | | 3 | | | 3 | | | — | | | 1 | | | | |
Total | | $ | 14 | | | $ | 8 | | | $ | 17 | | | $ | 6 | | | | |
The expected and actual experience for mortality, morbidity, and lapses of the liability for future policy benefits were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At or for the Three Months Ended March 31, |
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| | 2023 | | 2022 | | | |
| | Term and Whole Life | | Accidental Death and Disability Protection | | Term and Whole Life | | Accidental Death and Disability Protection | | | |
Mortality/Morbidity: | | | | | | | | | | | |
Expected | | 0.39 | % | | 0.01 | % | | 0.40 | % | | 0.01 | % | | | |
Actual | | 0.31 | % | | 0.01 | % | | 0.43 | % | | 0.01 | % | | | |
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Lapses: | | | | | | | | | | | |
Expected | | 3.18 | % | | 2.24 | % | | 2.70 | % | | 2.27 | % | | | |
Actual | | 1.67 | % | | 0.34 | % | | 0.96 | % | | 0.33 | % | | | |
The weighted-average interest rates for the liability of future policy benefits for our long-duration insurance contracts were as follows:
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| | At or for the Three Months Ended March 31, |
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| | 2023 | | 2022 | | | |
| | Term and Whole Life | | Accidental Death and Disability Protection | | Term and Whole Life | | Accidental Death and Disability Protection | | | |
Interest accretion rate | | 5.26 | % | | 4.86 | % | | 5.26 | % | | 4.85 | % | | | |
Current discount rate | | 5.07 | % | | 5.06 | % | | 3.68 | % | | 3.61 | % | | | |
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9. Capital Stock and Earnings Per Share (OMH Only) |
CAPITAL STOCK
OMH has two classes of authorized capital stock: preferred stock and common stock. OMFC has two classes of authorized capital stock: special stock and common stock. OMH and OMFC may issue preferred stock and special stock, respectively, in one or more series. The OMH Board of Directors and the OMFC Board of Directors determine the dividend, liquidation, redemption, conversion, voting, and other rights prior to issuance.
Changes in OMH shares of common stock issued and outstanding were as follows:
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| | Three Months Ended March 31, | | | | |
| | 2023 | | 2022 | | | | | | |
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Balance at beginning of period | | 121,042,125 | | | 127,809,640 | | | | | | | |
Common stock issued | | 207,403 | | | 252,277 | | | | | | | |
Common stock repurchased | | (683,384) | | | (2,282,552) | | | | | | | |
Treasury stock issued | | 21,070 | | | 14,471 | | | | | | | |
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Balance at end of period | | 120,587,214 | | | 125,793,836 | | | | | | | |
EARNINGS PER SHARE (OMH ONLY)
The computation of earnings per share was as follows: | | | | | | | | | | | | | | | | | | | | |
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| | Three Months Ended March 31, | | | | |
(dollars in millions, except per share data) | | 2023 | | 2022 | | | | | | |
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Numerator (basic and diluted): | | | | | | | | | | |
Net income | | $ | 179 | | | $ | 303 | | | | | | | |
Denominator: | | | | | | | | | | |
Weighted average number of shares outstanding (basic) | | 120,765,661 | | | 127,075,714 | | | | | | | |
Effect of dilutive securities * | | 204,230 | | | 387,313 | | | | | | | |
Weighted average number of shares outstanding (diluted) | | 120,969,891 | | | 127,463,027 | | | | | | | |
Earnings per share: | | | | | | | | | | |
Basic | | $ | 1.48 | | | $ | 2.38 | | | | | | | |
Diluted | | $ | 1.48 | | | $ | 2.38 | | | | | | | |
* We have excluded weighted-average unvested restricted stock units totaling 1,543,976 and 1,172,754 for the three months ended March 31, 2023 and 2022, respectively, from the fully-diluted earnings per share calculations as these shares would be anti-dilutive, which could impact the earnings per share calculation in the future.
Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during each period. Diluted earnings per share is computed based on the weighted-average number of shares outstanding plus the effect of potentially dilutive shares outstanding during the period using the treasury stock method. The potentially dilutive shares represent outstanding unvested restricted stock units.
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10. Accumulated Other Comprehensive Income (Loss) |
Changes, net of tax, in accumulated other comprehensive income (loss) were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Unrealized Gains (Losses) Available-for-Sale Securities (a) | | Retirement Plan Liabilities Adjustments | | Foreign Currency Translation Adjustments | | Changes in discount rate for insurance claims and policyholder liabilities | | Other (b) | | Total Accumulated Other Comprehensive Income (Loss) |
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Three Months Ended March 31, 2023 | | | | | | | | | | | | |
Balance at beginning of period | | $ | (131) | | | $ | (8) | | | $ | (5) | | | $ | (8) | | | $ | 25 | | | $ | (127) | |
Other comprehensive income (loss) before reclassifications | | 19 | | | — | | | — | | | 3 | | | (3) | | | 19 | |
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Balance at end of period | | $ | (112) | | | $ | (8) | | | $ | (5) | | | $ | (5) | | | $ | 22 | | | $ | (108) | |
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Three Months Ended March 31, 2022 | | | | | | | | | | | | |
Balance at beginning of period | | $ | 49 | | | $ | 1 | | | $ | 3 | | | $ | (56) | | | $ | 8 | | | $ | 5 | |
Other comprehensive income (loss) before reclassifications | | (81) | | | — | | | 1 | | | 25 | | | 10 | | | (45) | |
Reclassification adjustments from accumulated other comprehensive income (loss) | | (2) | | | — | | | — | | | — | | | — | | | (2) | |
Balance at end of period | | $ | (34) | | | $ | 1 | | | $ | 4 | | | $ | (31) | | | $ | 18 | | | $ | (42) | |
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(a) There were no material amounts related to available-for-sale debt securities for which an allowance for credit losses was recorded during the three months ended March 31, 2023 and 2022.
(b) Other primarily includes changes in the fair value of our mark-to-market derivative instruments that have been designated as cash flow hedges.
Reclassification adjustments from accumulated other comprehensive income (loss) to the applicable line item on our condensed consolidated statements of operations were immaterial for the three months ended March 31, 2023 and 2022.
We had a net deferred tax asset of $438 million and $456 million at March 31, 2023 and December 31, 2022, respectively.
We follow the guidance of ASC 740, Income Taxes, for interim reporting of income taxes under which we calculate an estimated annual effective tax rate (“AETR”) and apply the AETR to our year-to-date income (loss) before income taxes. In addition, we recognize any discrete items as they occur.
The effective tax rate for the three months ended March 31, 2023 was 24.0%, compared to 24.1% for the same period in 2022. The effective tax rate for the three months ended March 31, 2023 and 2022 differed from the federal statutory rate of 21% primarily due to the effect of state income taxes.
We are under examination by various states for the years 2017 to 2021. Management believes it has adequately provided for taxes for such years.
Our gross unrecognized tax benefits, including related interest and penalties, totaled $6 million at March 31, 2023 and December 31, 2022. We accrue interest related to uncertain tax positions in income tax expense. The amount of any change in the balance of uncertain tax liabilities over the next 12 months is not expected to be material to our condensed consolidated financial statements.
LEGAL CONTINGENCIES
In the normal course of business, we have been named, from time to time, as defendants in various legal actions, including arbitrations, class actions, and other litigation arising in connection with our activities. Some of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Additionally, we are, from time to time, in the normal course of business, subject to inquiries and investigations by federal, state and local governmental authorities regarding our products and our operations. These inquiries and investigations may result in fines, restitution or other penalties, including injunctive relief that may result in restrictions on our business. While we will continue to evaluate legal actions to determine whether a loss is reasonably possible or probable and is reasonably estimable, there can be no assurance that material losses will not be incurred from pending, threatened or future litigation, investigations, examinations, or other claims.
We contest liability and/or the amount of damages, as appropriate, in each pending matter. Where available information indicates that it is probable that a liability had been incurred at the date of the condensed consolidated financial statements and we can reasonably estimate the amount of that loss, we accrue the estimated loss by a charge to income. In many actions, however, it is inherently difficult to determine whether any loss is probable or even reasonably possible, or to estimate the amount of any loss. In addition, even where loss is reasonably possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.
For certain legal actions, we cannot reasonably estimate such losses, particularly for actions that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the actions in question, before a loss or additional loss or range of loss or range of additional loss can be reasonably estimated for any given action.
For certain other legal actions, we can estimate reasonably possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but do not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on our condensed consolidated financial statements as a whole.
In March 2022, the staff of the United States Consumer Financial Protection Bureau (“CFPB”) notified us that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, it is considering recommending that the CFPB take legal action against the Company in connection with alleged violations of the Consumer Financial Protection Act, 12 U.S.C. §§ 5531, 5536. The staff’s investigation is focused on certain refunding practices for optional insurance and membership plan products that were subsequently canceled by the consumer after purchase. We are cooperating with the CFPB in this matter and expect ongoing interactions. Although the Company believes it has not violated the Consumer Financial Protection Act, we are unable to estimate how long this investigation will continue, whether and in what manner the CFPB may commence legal action, or what the ultimate outcome of this matter will be. Should the CFPB opt to commence legal proceedings, it may seek civil monetary penalties, restitution, injunctive relief, or other damages. The Company does not currently believe that the outcome of this matter will have a material adverse effect on our business, financial condition, or results of operations.
At March 31, 2023, Consumer and Insurance (“C&I”) is our only reportable segment. The remaining components (which we refer to as “Other”) consist of our liquidating SpringCastle Portfolio servicing activity and our non-originating legacy operations, which primarily include our liquidating real estate loans.
The accounting policies of the C&I segment are the same as those disclosed in Note 2 and Note 17 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in our Annual Report.
The following tables present information about C&I and Other, as well as reconciliations to the condensed consolidated financial statement amounts.
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(dollars in millions) | | Consumer and Insurance | | Other | | Segment to GAAP Adjustment | | Consolidated Total |
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Three Months Ended March 31, 2023 | | | | | | | | |
Interest income | | $ | 1,092 | | | $ | 1 | | | $ | 1 | | | $ | 1,094 | |
Interest expense | | 238 | | | — | | | 1 | | | 239 | |
Provision for finance receivable losses | | 385 | | | — | | | — | | | 385 | |
Net interest income after provision for finance receivable losses | | 469 | | | 1 | | | — | | | 470 | |
Other revenues | | 176 | | | 1 | | | — | | | 177 | |
Other expenses | | 409 | | | 3 | | | — | | | 412 | |
Income (loss) before income tax expense (benefit) | | $ | 236 | | | $ | (1) | | | $ | — | | | $ | 235 | |
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Assets | | $ | 21,199 | | | $ | 30 | | | $ | 1,214 | | | $ | 22,443 | |
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Three Months Ended March 31, 2022 | | | | | | | | |
Interest income | | $ | 1,087 | | | $ | 1 | | | $ | 1 | | | $ | 1,089 | |
Interest expense | | 217 | | | 1 | | | 1 | | | 219 | |
Provision for finance receivable losses | | 237 | | | — | | | 1 | | | 238 | |
Net interest income after provision for finance receivable losses | | 633 | | | — | | | (1) | | | 632 | |
Other revenues | | 158 | | | 4 | | | — | | | 162 | |
Other expenses | | 392 | | | 4 | | | (1) | | | 395 | |
Income before income tax expense | | $ | 399 | | | $ | — | | | $ | — | | | $ | 399 | |
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Assets | | $ | 19,756 | | | $ | 40 | | | $ | 2,020 | | | $ | 21,816 | |
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14. Fair Value Measurements |
The accounting policies of our fair value measurements are the same as those disclosed in Note 2 and Note 18 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in our Annual Report.
The following table presents the carrying amounts and estimated fair values of our financial instruments and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:
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| | Fair Value Measurements Using | | Total Fair Value | | Total Carrying Value |
(dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | |
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March 31, 2023 | | | | | | | | | | |
Assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 538 | | | $ | 6 | | | $ | — | | | $ | 544 | | | $ | 544 | |
Investment securities | | 52 | | | 1,729 | | | 5 | | | 1,786 | | | 1,786 | |
Net finance receivables, less allowance for finance receivable losses | | — | | | — | | | 19,150 | | | 19,150 | | | 17,511 | |
Restricted cash and restricted cash equivalents | | 531 | | | — | | | — | | | 531 | | | 531 | |
Other assets * | | — | | | — | | | 41 | | | 41 | | | 31 | |
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Liabilities | | | | | | | | | | |
Long-term debt | | $ | — | | | $ | 17,057 | | | $ | — | | | $ | 17,057 | | | $ | 18,206 | |
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December 31, 2022 | | | | | | | | | | |
Assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 481 | | | $ | 17 | | | $ | — | | | $ | 498 | | | $ | 498 | |
Investment securities | | 51 | | | 1,744 | | | 5 | | | 1,800 | | | 1,800 | |
Net finance receivables, less allowance for finance receivable losses | | — | | | — | | | 19,272 | | | 19,272 | | | 17,675 | |
Restricted cash and restricted cash equivalents | | 450 | | | 11 | | | — | | | 461 | | | 461 | |
Other assets * | | — | | | — | | | 43 | | | 43 | | | 35 | |
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Liabilities | | | | | | | | | | |
Long-term debt | | $ | — | | | $ | 16,969 | | | $ | — | | | $ | 16,969 | | | $ | 18,281 | |
*Other assets at March 31, 2023 and December 31, 2022 primarily consists of finance receivables held for sale.
FAIR VALUE MEASUREMENTS — RECURRING BASIS
The following tables present information about our assets measured at fair value on a recurring basis and indicates the fair value hierarchy based on the levels of inputs we utilized to determine such fair value:
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| | Fair Value Measurements Using | | Total Carried At Fair Value |
(dollars in millions) | | Level 1 | | Level 2 | | Level 3 | |
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March 31, 2023 | | | | | | | | |
Assets | | | | | | | | |
Cash equivalents in mutual funds | | $ | 109 | | | $ | — | | | $ | — | | | $ | 109 | |
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Cash equivalents in securities | | — | | | 6 | | | — | | | 6 | |
Investment securities: | | | | | | | | |
Available-for-sale securities | | | | | | | | |
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U.S. government and government sponsored entities | | — | | | 16 | | | — | | | 16 | |
Obligations of states, municipalities, and political subdivisions | | — | | | 67 | | | — | | | 67 | |
Commercial paper | | — | | | 55 | | | — | | | 55 | |
Non-U.S. government and government sponsored entities | | — | | | 144 | | | — | | | 144 | |
Corporate debt | | 5 | | | 1,115 | | | 3 | | | 1,123 | |
RMBS | | — | | | 190 | | | — | | | 190 | |
CMBS | | — | | | 35 | | | — | | | 35 | |
CDO/ABS | | — | | | 86 | | | — | | | 86 | |
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Total available-for-sale securities | | 5 | | | 1,708 | | | 3 | | | 1,716 | |
Other securities | | | | | | | | |
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Bonds: | | | | | | | | |
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Corporate debt | | — | | | 5 | | | — | | | 5 | |
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CDO/ABS | | — | | | 16 | | | — | | | 16 | |
Total bonds | | — | | | 21 | | | — | | | 21 | |
Preferred stock | | 16 | | | — | | | — | | | 16 | |
Common stock | | 31 | | | — | | | 2 | | | 33 | |
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Total other securities | | 47 | | | 21 | | | 2 | | | 70 | |
Total investment securities | | 52 | | | 1,729 | | | 5 | | | 1,786 | |
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Restricted cash equivalents in mutual funds | | 517 | | | — | | | — | | | 517 | |
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Total | | $ | 678 | | | $ | 1,735 | | | $ | 5 | | | $ | 2,418 | |
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| | Fair Value Measurements Using | | Total Carried At Fair Value |
(dollars in millions) | | Level 1 | | Level 2 | | Level 3 | |
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December 31, 2022 | | | | | | | | |
Assets | | | | | | | | |
Cash equivalents in mutual funds | | $ | 77 | | | $ | — | | | $ | — | | | $ | 77 | |
Cash equivalents in securities | | — | | | 17 | | | — | | | 17 | |
Investment securities: | | | | | | | | |
Available-for-sale securities | | | | | | | | |
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U.S. government and government sponsored entities | | — | | | 16 | | | — | | | 16 | |
Obligations of states, municipalities, and political subdivisions | | — | | | 66 | | | — | | | 66 | |
Commercial paper | | — | | | 55 | | | — | | | 55 | |
Non-U.S. government and government sponsored entities | | — | | | 142 | | | — | | | 142 | |
Corporate debt | | 5 | | | 1,129 | | | 3 | | | 1,137 | |
RMBS | | — | | | 192 | | | — | | | 192 | |
CMBS | | — | | | 35 | | | — | | | 35 | |
CDO/ABS | | — | | | 86 | | | — | | | 86 | |
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Total available-for-sale securities | | 5 | | | 1,721 | | | 3 | | | 1,729 | |
Other securities | | | | | | | | |
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Bonds: | | | | | | | | |
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Corporate debt | | — | | | 6 | | | — | | | 6 | |
RMBS | | — | | | 1 | | | — | | | 1 | |
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CDO/ABS | | — | | | 16 | | | — | | | 16 | |
Total bonds | | — | | | 23 | | | — | | | 23 | |
Preferred stock | | 15 | | | — | | | — | | | 15 | |
Common stock | | 31 | | | — | | | 2 | | | 33 | |
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Total other securities | | 46 | | | 23 | | | 2 | | | 71 | |
Total investment securities | | 51 | | | 1,744 | | | 5 | | | 1,800 | |
Restricted cash equivalents in mutual funds | | 445 | | | — | | | — | | | 445 | |
Restricted cash equivalents in securities | | $ | — | | | $ | 11 | | | $ | — | | | 11 | |
Total | | $ | 573 | | | $ | 1,772 | | | $ | 5 | | | $ | 2,350 | |
Due to the insignificant activity within the Level 3 assets during the three months ended March 31, 2023 and 2022, we have omitted the additional disclosures relating to the changes in Level 3 assets measured at fair value on a recurring basis and the quantitative information about Level 3 unobservable inputs.
FAIR VALUE MEASUREMENTS — NON-RECURRING BASIS
We measure the fair value of certain assets on a non-recurring basis when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Net impairment charges recorded on assets measured at fair value on a non-recurring basis were immaterial during the three months ended March 31, 2023 and 2022.
FAIR VALUE MEASUREMENTS — VALUATION METHODOLOGIES AND ASSUMPTIONS
See Note 18 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in our Annual Report for information regarding our methods and assumptions used to estimate fair value.