__________________________________________________________________________________________________________

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

_________________

 

FORM 10-Q

_________________

 

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2017

  OR



Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from              to               

 

Commission File Number:  1-6028

 

_________________

 

LINCOLN NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

_________________

 



 



 

                  Indiana                 

35-1140070

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)



 

150 N. Radnor Chester Road, Suite A305, Radnor, Pennsylvania

19087

(Address of principal executive offices)

(Zip Code)

 

(484) 583-1400

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

_________________

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No 



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes     No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer , a non-accelerated filer, smaller reporting company , or an emerging growth company .  See the definitions of large accelerated filer,   accelerated filer ,”   smaller reporting company ,”   and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):



Large accelerated filer   Accelerated filer   Non-accelerated filer  (Do not check if a smaller reporting company)

Smaller reporting company    Emerging growth company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No 

 

As of May 1, 2017, there were 224,278,433 shares of the registrant’s common stock outstanding.

 



_________________________________________________________________________________________________________

 


 

Lincoln National Corporation

 

Table of Contents





 

 

 

 

 

Item

 

 

 

 

Page

PART I

 

1.

Financial Statements



 

 

2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

43 

 

 

Forward-Looking Statements – Cautionary Language

43 

 

 

Introduction

44 

 

 

     Executive Summary

44 



 

     Critical Accounting Policies and Estimates

45 

 

 

Results of Consolidated Operations

46 

 

 

Results of Annuities

47 



 

Results of Retirement Plan Services

53 

 

 

Results of Life Insurance

58 

 

 

Results of Group Protection

63 



 

Results of Other Operations  

65 



 

Realized Gain (Loss) and Benefit Ratio Unlocking

68 



 

Consolidated Investments  

70 

 

 

Review of Consolidated Financial Condition

82 

 

 

   Liquidity and Capital Resources

82 



 

3.

Quantitative and Qualitative Disclosures About Market Risk

86 



 

 

4.

Controls and Procedures

88 



 

 

PART II

 



 

 

1.

Legal Proceedings

89 



 

 

1 A .

Risk Factors

89 



 

 

2.

Unregistered Sales of Equity Securities and Use of Proceeds

90 



 

 

6.

Exhibits

90 



 

 



Signatures

91 



 

 

 

Exhibit Index for the Report on Form 10-Q

E-1



 

 

 

 

 





 

 


 



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

LINCOLN NATIONAL CORPORATION

CO NSOLIDATED BALANCE SHEETS

(in millions, except share data)



 

 

 

 

 

 

 

 



 

As of

 

 

As of

 

 

March 31,

December 31,



 

2017

 

 

2016

 



(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value:

 

 

 

 

 

 

 

 

Fixed maturity securities (amortized cost:  2017 – $85,834; 2016 – $84,287)

 

$

91,102 

 

 

$

89,013 

 

Variable interest entities’ fixed maturity securities (amortized cost:  2017 – $0; 2016 – $200)

 

 

 -

 

 

 

200 

 

Equity securities (cost:  2017 – $263; 2016 – $260)

 

 

276 

 

 

 

275 

 

Trading securities

 

 

1,703 

 

 

 

1,712 

 

Mortgage loans on real estate

 

 

10,001 

 

 

 

9,889 

 

Real estate

 

 

24 

 

 

 

24 

 

Policy loans

 

 

2,432 

 

 

 

2,451 

 

Derivative investments

 

 

991 

 

 

 

927 

 

Other investments

 

 

2,104 

 

 

 

2,230 

 

Total investments

 

 

108,633 

 

 

 

106,721 

 

Cash and invested cash

 

 

1,923 

 

 

 

2,722 

 

Deferred acquisition costs and value of business acquired

 

 

9,030 

 

 

 

9,134 

 

Premiums and fees receivable

 

 

465 

 

 

 

430 

 

Accrued investment income

 

 

1,124 

 

 

 

1,062 

 

Reinsurance recoverables

 

 

5,333 

 

 

 

5,265 

 

Funds withheld reinsurance assets

 

 

610 

 

 

 

617 

 

Goodwill

 

 

2,273 

 

 

 

2,273 

 

Other assets

 

 

5,119 

 

 

 

5,006 

 

Separate account assets

 

 

132,958 

 

 

 

128,397 

 

Total assets

 

$

267,468 

 

 

$

261,627 

 



 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Future contract benefits

 

$

22,202 

 

 

$

21,576 

 

Other contract holder funds

 

 

79,078 

 

 

 

78,903 

 

Short-term debt

 

 

200 

 

 

 

 -

 

Long-term debt

 

 

5,133 

 

 

 

5,345 

 

Reinsurance related embedded derivatives

 

 

50 

 

 

 

53 

 

Funds withheld reinsurance liabilities

 

 

1,961 

 

 

 

1,976 

 

Deferred gain on business sold through reinsurance

 

 

 

 

 

24 

 

Payables for collateral on investments

 

 

5,086 

 

 

 

4,995 

 

Other liabilities

 

 

5,821 

 

 

 

5,880 

 

Separate account liabilities

 

 

132,958 

 

 

 

128,397 

 

Total liabilities

 

 

252,495 

 

 

 

247,149 

 



 

 

 

 

 

 

 

 

Contingencies and Commitments (See Note 8)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock – 10,000,000 shares authorized

 

 

 -

 

 

 

 -

 

Common stock – 800,000,000 shares authorized; 224,888,259 and 226,335,105 shares

 

 

 

 

 

 

 

 

issued and outstanding as of March 31, 2017, and December 31, 2016, respectively

 

 

5,839 

 

 

 

5,869 

 

Retained earnings

 

 

7,287 

 

 

 

7,043 

 

Accumulated other comprehensive income (loss)

 

 

1,847 

 

 

 

1,566 

 

Total stockholders’ equity

 

 

14,973 

 

 

 

14,478 

 

Total liabilities and stockholders’ equity

 

$

267,468 

 

 

$

261,627 

 



See accompanying Notes to Consolidated Financial Statements

1


 





LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in millions, except per share data)



 

 

 

 

 

 



 

 

 

 

 

 



For the Three

 



Months Ended

 



March 31,

 

 

2017

 

2016

 

Revenues

 

 

 

 

 

 

Insurance premiums

$

807

 

$

816

 

Fee income

 

1,354

 

 

1,235

 

Net investment income

 

1,238

 

 

1,172

 

Realized gain (loss):

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

(4

)

 

(56

)

Portion of loss recognized in other comprehensive income

 

 -

 

 

20

 

Net other-than-temporary impairment losses on securities recognized in earnings

 

(4

)

 

(36

)

Realized gain (loss), excluding other-than-temporary impairment losses on securities

 

(35

)

 

(78

)

Total realized gain (loss)

 

(39

)

 

(114

)

Amortization of deferred gain on business sold through reinsurance

 

18

 

 

18

 

Other revenues

 

122

 

 

116

 

Total revenues

 

3,500

 

 

3,243

 

Expenses

 

 

 

 

 

 

Interest credited

 

647

 

 

633

 

Benefits

 

1,290

 

 

1,331

 

Commissions and other expenses

 

1,015

 

 

976

 

Interest and debt expense

 

64

 

 

68

 

Strategic digitization expense

 

9

 

 

 -

 

Total expenses

 

3,025

 

 

3,008

 

Income (loss) before taxes

 

475

 

 

235

 

Federal income tax expense (benefit)

 

40

 

 

24

 

Net income (loss)

 

435

 

 

211

 

Other comprehensive income (loss), net of tax

 

281

 

 

1,086

 

Comprehensive income (loss)

$

716

 

$

1,297

 



 

 

 

 

 

 

Net Income (Loss) Per Common Share

 

 

 

 

 

 

Basic

$

1.93

 

$

0.87

 

Diluted

 

1.89

 

 

0.83

 



 

 

 

 

 

 

Cash Dividends Declared Per Common Share

$

0.29

 

$

0.25

 









See accompanying Notes to Consolidated Financial Statements

2


 

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in millions, except per share data)







 

 

 

 

 

 



 

 

 

 

 

 



For the Three

 



Months Ended

 



March 31,

 



2017

 

2016

 



 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Balance as of beginning-of-year

$

5,869

 

$

6,298

 

Stock compensation/issued for benefit plans

 

44

 

 

3

 

Retirement of common stock/cancellation of shares

 

(74

)

 

(142

)

Balance as of end-of-period

 

5,839

 

 

6,159

 



 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

Balance as of beginning-of-year

 

7,043

 

 

6,474

 

Net income (loss)

 

435

 

 

211

 

Retirement of common stock

 

(126

)

 

(58

)

Common stock dividends declared

 

(65

)

 

(59

)

Balance as of end-of-period

 

7,287

 

 

6,568

 



 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

Balance as of beginning-of-year

 

1,566

 

 

845

 

Other comprehensive income (loss), net of tax

 

281

 

 

1,086

 

Balance as of end-of-period

 

1,847

 

 

1,931

 

Total stockholders’ equity as of end-of-period

$

14,973

 

$

14,658

 











See accompanying Notes to Consolidated Financial Statements

3


 

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)







 

 

 

 

 

 



For the Three

 



Months Ended

 



March 31,

 



2017

 

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

$

435

 

$

211

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Deferred acquisition costs, value of business acquired, deferred sales inducements

 

 

 

 

 

 

and deferred front-end loads deferrals and interest, net of amortization

 

15

 

 

5

 

Trading securities purchases, sales and maturities, net

 

23

 

 

28

 

Change in premiums and fees receivable

 

(35

)

 

(25

)

Change in accrued investment income

 

(62

)

 

(38

)

Change in future contract benefits and other contract holder funds

 

(281

)

 

262

 

Change in reinsurance related assets and liabilities

 

(13

)

 

(286

)

Change in federal income tax accruals

 

40

 

 

(38

)

Realized (gain) loss

 

39

 

 

114

 

Amortization of deferred gain on business sold through reinsurance

 

(18

)

 

(18

)

Other

 

(34

)

 

83

 

Net cash provided by (used in) operating activities

 

109

 

 

298

 



 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of available-for-sale securities

 

(3,158

)

 

(3,291

)

Sales of available-for-sale securities

 

503

 

 

1,502

 

Maturities of available-for-sale securities

 

1,298

 

 

1,269

 

Purchases of alternative investments

 

(53

)

 

(71

)

Sales and repayments of alternative investments

 

53

 

 

32

 

Issuance of mortgage loans on real estate

 

(341

)

 

(421

)

Repayment and maturities of mortgage loans on real estate

 

229

 

 

182

 

Issuance and repayment of policy loans, net

 

18

 

 

11

 

Net change in collateral on investments and derivatives

 

(32

)

 

106

 

Other

 

(16

)

 

(26

)

Net cash provided by (used in) investing activities

 

(1,499

)

 

(707

)



 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Deposits of fixed account values, including the fixed portion of variable

 

2,713

 

 

2,672

 

Withdrawals of fixed account values, including the fixed portion of variable

 

(1,530

)

 

(1,413

)

Transfers to and from separate accounts, net

 

(356

)

 

(549

)

Common stock issued for benefit plans

 

29

 

 

(10

)

Repurchase of common stock

 

(200

)

 

(200

)

Dividends paid to common stockholders

 

(65

)

 

(60

)

Net cash provided by (used in) financing activities

 

591

 

 

440

 



 

 

 

 

 

 

Net increase (decrease) in cash and invested cash

 

(799

)

 

31

 

Cash and invested cash as of beginning-of-year

 

2,722

 

 

3,146

 

Cash and invested cash as of end-of-period

$

1,923

 

$

3,177

 



 

See accompanying Notes to Consolidated Financial Statements

4


 

 

LINCOLN NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  Nature of Operations and Basis of Presentation



Nature of Operations  



Lincoln National Corporation and its majority-owned subsidiaries ( LNC or the Company, which also may be referred to as we,   our   or us ) operate multiple insurance businesses through four business segments.  See Note 13 for additional details.  The collective group of businesses uses Lincoln Financial Group as its marketing identity.  Through our business segments, we sell a wide range of wealth protection, accumulation and retirement income products and solutions.  These products include fixed and indexed annuities, variable annuities, universal life insurance ( UL ), variable universal life insurance ( VUL ), linked-benefit UL, indexed universal life insurance ( IUL ), term life insurance, employer-sponsored retirement plans and services, and group life, disability and dental.



Basis of Presentation



The accompanying unaudited consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles ( GAAP ) for interim financial information and with the instructions for the Securities and Exchange Commission ( SEC ) Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  Therefore, the information contained in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 ( 2016 Form 10-K ), should be read in connection with the reading of these interim unaudited consolidated financial statements.



Certain GAAP policies, which significantly affect the determination of financial condition, results of operations and cash flows, are summarized in our 2016 Form 10-K.



Certain amounts reported in prior year's consolidated financial statements have been reclassified to conform to the presentation adopted in the current year.  Specifically, we reclassified cash flows from certain investing activities into their own respective line items within the Consolidated Statements of Cash Flows.  Previously, these amounts were reported within purchases of other investments or sales or maturities of other investments line items, as applicable, within cash flows from investing activities.  These reclassifications had no effect on net income (loss), net cash provided by (used in) investing activities, or stockholders’ equity for the prior year.



In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results.  Operating results for the three month period ended March 31, 2017, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017.  All material inter-company accounts and transactions have been eliminated in consolidation.





5


 

 

2.  New Accounting Standards



Adoption of New Accounting Standards



The following table provides a description of our adoption of new Accounting Standard Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”) and the impact of the adoption on our financial statements:







 

 

 

Standard

Description

Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships 

The amendments clarify that a change in the counterparty to a derivative instrument identified in a hedging relationship in and of itself does not require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met.  We adopted the guidance in this ASU prospectively. 

January 1, 2017

The adoption of this ASU did not have an effect on our consolidated financial condition or results of operations.

ASU 2016-06, Contingent Put and Call Options in Debt Instruments

The amendments clarify the requirements for assessing whether contingent call and put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts.  Upon adoption of this ASU, entities will be required to assess embedded call and put options solely in accordance with the four-step decision sequence that was developed by the FASB Derivatives Implementation Group.  We adopted this ASU using a modified retrospective basis applied to existing debt instruments. 

January 1, 2017

The adoption of this ASU did not have an effect on our consolidated financial condition or results of operations.



Future Adoption of New Accounting Standards



The following table provides a description of future adoptions of new accounting standards that may have an impact on our financial statements when adopted:







 

 

 

Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2014-09, Revenue from Contracts with Customers & ASU 2015-14, Revenue from Contracts with Customers; Deferral of the Effective Date

This standard establishes the core principle of recognizing revenue to depict the transfer of promised goods and services.  The amendments define a five-step process that systematically identifies the various components of the revenue recognition process, culminating with the recognition of revenue upon satisfaction of an entity’s performance obligation.  Retrospective application is required.  After performing extensive outreach, the FASB decided to delay the effective date of ASU 2014-09 for one year.  Early application is permitted but only for annual reporting periods beginning after December 15, 2016. 

January 1, 2018

Our primary revenue sources will continue to be recognized in accordance with ASC Topic 944, Financial Services – Insurance .  Our analysis indicates that approximately $1 billion of our revenue reported in fee income and other revenue in our Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2016, is within the scope of this ASU.  We continue to evaluate the impact of adopting this ASU on our consolidated financial condition and results of operations.  

6


 

 

Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities

These amendments require, among other things, the fair value measurement of investments in equity securities and certain other ownership interests that do not result in consolidation and are not accounted for under the equity method of accounting.  The change in fair value of the impacted investments in equity securities must be recognized in net income.  In addition, the amendments include certain enhancements to the presentation and disclosure requirements for financial assets and financial liabilities.  Early adoption of the ASU is generally not permitted, except as defined in the ASU.  The amendments should be adopted in the financial statements through a cumulative-effect adjustment to the beginning balance of retained earnings.

January 1, 2018

We hold equity securities classified as available-for-sale (“AFS”) securities that are currently measured at fair value with changes in fair value recognized through other comprehensive income (loss) (“OCI”).  Upon adoption of this ASU, we will be required to recognize changes in fair value of our equity securities through net income.  See Note 4 for details regarding our equity securities currently classified as AFS securities. 

ASU 2016-02, Leases

This standard establishes a new accounting model for leases.  Lessees will recognize most leases on the balance sheet as a right-of-use asset and a related lease liability.  The lease liability is measured as the present value of the lease payments over the lease term with the right-of-use asset measured at the lease liability amount and including adjustments for certain lease incentives and initial direct costs.  Lease expense recognition will continue to differentiate between finance leases and operating leases resulting in a similar pattern of lease expense recognition as under current GAAP.  This ASU permits a modified retrospective adoption approach that includes a number of optional practical expedients that entities may elect upon adoption.  Early adoption is permitted.

January 1, 2019

We are currently identifying all of our leases that will be within the scope of this standard; as such, we continue to evaluate the quantitative impact of adopting this ASU on our Consolidated Balance Sheets. Based on our initial assessment, we do not expect there to be a significant difference in our pattern of lease expense recognition under this ASU.

ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

These amendments clarify the implementation guidance on principal versus agent considerations in ASU 2014-09, including how an entity should identify the unit of accounting for the principal versus agent evaluation.  In addition, the amendments clarify how to apply the control principle to certain types of arrangements, such as service transactions, by explaining what a principal controls before the good or service is transferred to the customer.  Transition requirements are consistent with ASU 2014-09.  

January 1, 2018

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.  See comments under ASU 2014-09 for more information.

ASU 2016-10, Identifying Performance Obligations and Licensing

These amendments clarify, among other things, the accounting guidance in ASU 2014-09 regarding how an entity will determine whether promised goods or services are separately identifiable, which is an important consideration in determining whether to account for goods or services as a separate performance obligation.   Transition requirements are consistent with ASU 2014-09.

January 1, 2018

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.  See comments under ASU 2014-09 for more information.

7


 

 

Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2016-12, Narrow Scope Improvements and Practical Expedients

The standard update amends the revenue recognition guidance in ASU 2014-09 related to transition, collectability, noncash consideration and the presentation of sales and other similar taxes. The amendments clarify that, for a contract to be considered completed at transition, substantially all of the revenue must have been recognized under current GAAP.  The amendments also clarify how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s   contract criteria.  Transition requirements are consistent with ASU 2014-09.

January 1, 2018

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.  See comments under ASU 2014-09 for more information.

ASU 2016-13, Measurement of Credit Losses on Financial Instruments

These amendments adopt a new model to measure and recognize credit losses for most financial assets.  The method used to measure estimated credit losses for AFS debt securities will be unchanged from current GAAP; however, the amendments require credit losses to be recognized through an allowance rather than as a reduction to the amortized cost of those debt securities.  The amendments will permit entities to recognize improvements in credit loss estimates on AFS debt securities by reducing the allowance account immediately through earnings.  The amendments will be adopted through a cumulative effect adjustment to the beginning balance of retained earnings as of the first reporting period in which the amendments are effective.  Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein.        

January 1, 2020

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations, with a primary focus on our fixed maturity securities (see Note 4).  We currently reduce the amortized cost of the individual security when recognizing other-than-temporary impairment (“OTTI”) on these securities.  Upon adoption of ASU 2016-13, we will no longer reduce the amortized cost of each individual security; rather we will establish a valuation allowance, and any declines or improvements in credit quality will be recognized through the valuation allowance. 

ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments

These amendments clarify the classification of eight specific cash flow issues in an entity’s statement of cash flows where it was determined by the FASB that there is diversity in practice.  Early adoption of the amendments is permitted, and retrospective transition is required for each period presented in the statement of cash flows. 

January 1, 2018

We are currently evaluating these disclosure requirements and will amend classifications in our Consolidated Statements of Cash Flows upon adoption as applicable.

ASU 2016-16, Intra-Entity Asset Transfers Other Than Inventory

This amendment requires an entity to recognize current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs, thereby eliminating the current GAAP exception that prohibits the recognition of income taxes until the asset has been sold to an outside party.  Early adoption is permitted as of the beginning of the annual reporting period for which financial statements have not been issued.   

January 1, 2018

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.

8


 

 

Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2016-18, Restricted Cash

This amendment requires that amounts generally described as restricted cash and restricted cash equivalents should be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  Early adoption is permitted using a retrospective transition method applied to each period presented.

January 1, 2018

We will provide these additional disclosures in our Consolidated Statements of Cash Flows upon the adoption date as applicable.

ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers

These amendments clarify 13 issues related to the adoption of ASU 2014-09.  The most significant issue of these amendments for us is the clarification that all contracts within the scope of Topic 944 are excluded from the scope of ASU 2014-09, rather than just insurance contracts as described in ASU 2014-09.  Transition requirements are consistent with ASU 2014-09.

January 1, 2018

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.  See comments under ASU 2014-09 for more information.

ASU 2017-04, Simplifying the Test for Goodwill Impairment

These amendments eliminate the requirement in current GAAP to perform Step 2 of the goodwill impairment test in favor of only applying Step 1.  Under Step 1, the fair value of the reporting unit is compared with its carrying value, and an impairment charge is recognized when the carrying value exceeds the reporting unit’s fair value.  An entity still has the option to first perform a qualitative assessment of an individual reporting unit to determine if the quantitative assessment in Step 1 is necessary.  ASU 2017-04 should be adopted prospectively, and early adoption is permitted on impairment testing dates after January 1, 2017.      

Impairment tests performed after January 1, 2020

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. 

ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

These amendments require that an entity report the service cost component of employee pension and postretirement benefit plans in the same line item as other compensation costs from services rendered by the applicable employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations.  ASU 2017-07 requires retrospective adoption related to the presentation of net periodic pension costs and postretirement benefit cost.

January 1, 2018

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. 

ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities

These amendments require an entity to shorten the amortization period for certain callable debt securities held at a premium so that the premium is amortized to the earliest call date.  Early adoption is permitted, and the ASU requires adoption under a modified retrospective basis through a cumulative-effect adjustment to the beginning balance of retained earnings. 

January 1, 2019

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. 



  



9


 

 

3.  Variable Interest Entities (“VIEs”)



Consolidated VIEs



See Note 4 in our 201 6 Form 10-K for a detailed discussion of our consolidated VIEs, which information is incorporated herein by reference .



As of March 2017 and December 2016 , our $ 200 million and $400 million credit-linked notes (“CLNs”) matured, respectively, and we no longer reflect the assets and liabilities associated with these VIEs on our Consolidated Balance Sheets or recognize the results of operations of these VIEs on our Consolidated Statements of Co mprehensive Income (Loss).  We no longer have any exposure related to these VIEs.



Asset and liability information (dollars in millions) for the consolidated VIEs included on our Consolidated Balance Sheets was as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of March 31, 2017

 

 

As of December 31, 2016

 



 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 



 

of

 

 

Notional

 

Carrying

 

 

of

 

 

Notional

 

Carrying

 



Instruments

 

Amounts

 

Value

 

Instruments

 

Amounts

 

Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed credit card loans (1)

 

 

N/A

 

 

$

 -

 

$

 -

 

 

 

N/A

 

 

$

 -

 

$

200 

 

Total return swap

 

 

 

 

 

527 

 

 

 -

 

 

 

 

 

 

533 

 

 

 -

 

Credit default swaps

 

 

 -

 

 

 

 -

 

 

 -

 

 

 

 

 

 

200 

 

 

 -

 

Total assets

 

 

 

 

$

527 

 

$

 -

 

 

 

 

 

$

733 

 

$

200 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



(1)

Reported in variable interest entities’ fixed maturity securities on our Consolidated Balance Sheets.



As of March 31, 2017, and December 31, 2016, we did not recognize any liabilities from consolidated VIEs on our Consolidated Balance Sheets.  We did hold one contingent forward instrument as of December 31, 2016; however, the instrument had a zero notional and carrying value.



For details related to the fixed maturity AFS securities underlying these VIEs, see Note 4.



As described more fully in Note 1 of our 2016 Form 10-K, we regularly review our investment holdings for OTTI.  Based upon this review, we believe that the AFS fixed maturity securities were not other-than-temporarily impaired as of March 31, 201 7 .  



The gains (losses) for the consolidated VIEs (in millions) recorded on our Consolidated Statements of Comprehensive Income (Loss) were as follows:





 

 

 

 

 

 



 

 

 

 

 

 



For the Three

 



Months Ended

 



March 31,

 



2017

 

2016

 

Non-Qualifying Hedges

 

 

 

 

 

 

Credit default swaps

$

 -

 

$

 

Contingent forwards

 

 -

 

 

 -

 

Total non-qualifying hedges (1)

$

 -

 

$

 



(1)

Reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss ).



Unconsolidated VIEs



See Note 4 in our 2016 Form 10-K for a detailed discussion of our unconsolidated VIEs, which information is incorporated herein by reference.



Limited Partnerships and Limited Liability Companies



We invest in certain limited partnerships (“LPs”) and limited liability companies (“LLCs”), including qualified affordable housing projects, that we have concluded are VIEs.  We do not hold any substantive kick-out or participation rights in the LPs and LLCs, and we do not receive any performance fees or decision maker fees from the LPs and LLCs.  Based on our analysis of the LPs and LLCs, we are not the primary beneficiary of the VIEs as we do not have the power to direct the most significant activities of the LPs and LLCs. 



10


 

 

The carrying amounts of our investments in the LPs and LLCs are recognized in other investments on our Consolidated Balance Sheets and were $1.3 billion as of March 31, 2017, and December 31, 2016.  Included in these carrying amounts are our investments in qualified affordable housing projects, which were $35 million and $37 million as of March 31, 2017, and December 31, 2016, respectively.  We do not have any contingent commitments to provide additional capital funding to these qualified affordable housing projects.  We receive returns from these qualified affordable housing projects in the form of income tax credits and other tax benefits, which are recognized in federal income tax expense (benefit) on our Consolidated Statements of Comprehensive Income (Loss) and were less than $1 million for the three months ended March 31, 2017 and 2016.



Our exposure to loss is limited to the capital we invest in the LPs and LLCs, and there have been no indicators of impairment that would require us to recognize an impairment loss related to the LPs and LLCs as of March 31, 2017.



4.  Investments



AFS Securities



See Note 1 in our 2016 Form 10-K for information regarding our accounting policy relating to AFS securities, which also includes additional disclosures regarding our fair value measurements.



The amortized cost, gross unrealized gains, losses and OTTI and fair value of AFS securities (in millions) were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of March 31, 2017

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

74,509

 

$

5,036

 

$

771

 

$

(5

)

$

78,779

 

Asset-backed securities (“ABS”)

 

1,017

 

 

40

 

 

12

 

 

(17

)

 

1,062

 

U.S. government bonds

 

540

 

 

38

 

 

2

 

 

 -

 

 

576

 

Foreign government bonds

 

398

 

 

58

 

 

 -

 

 

 -

 

 

456

 

Residential mortgage-backed securities (“RMBS”)

 

3,490

 

 

144

 

 

62

 

 

(9

)

 

3,581

 

Commercial mortgage-backed securities (“CMBS”)

 

423

 

 

7

 

 

4

 

 

(1

)

 

427

 

Collateralized loan obligations (“CLOs”)

 

772

 

 

3

 

 

3

 

 

(4

)

 

776

 

State and municipal bonds

 

4,101

 

 

743

 

 

18

 

 

 -

 

 

4,826

 

Hybrid and redeemable preferred securities

 

584

 

 

75

 

 

40

 

 

 -

 

 

619

 

Total fixed maturity securities

 

85,834

 

 

6,144

 

 

912

 

 

(36

)

 

91,102

 

Equity securities

 

263

 

 

16

 

 

3

 

 

 -

 

 

276

 

Total AFS securities

$

86,097

 

$

6,160

 

$

915

 

$

(36

)

$

91,378

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2016

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

73,275

 

$

4,754

 

$

970

 

$

(5

)

$

77,064

 

ABS

 

1,047

 

 

39

 

 

14

 

 

(13

)

 

1,085

 

U.S. government bonds

 

384

 

 

37

 

 

2

 

 

 -

 

 

419

 

Foreign government bonds

 

449

 

 

58

 

 

1

 

 

 -

 

 

506

 

RMBS

 

3,534

 

 

147

 

 

73

 

 

(6

)

 

3,614

 

CMBS

 

345

 

 

8

 

 

4

 

 

(1

)

 

350

 

CLOs

 

742

 

 

1

 

 

3

 

 

(4

)

 

744

 

State and municipal bonds

 

3,929

 

 

718

 

 

20

 

 

 -

 

 

4,627

 

Hybrid and redeemable preferred securities

 

582

 

 

70

 

 

48

 

 

 -

 

 

604

 

VIEs’ fixed maturity securities

 

200

 

 

 -

 

 

 -

 

 

 -

 

 

200

 

Total fixed maturity securities

 

84,487

 

 

5,832

 

 

1,135

 

 

(29

)

 

89,213

 

Equity securities

 

260

 

 

19

 

 

4

 

 

 -

 

 

275

 

Total AFS securities

$

84,747

 

$

5,851

 

$

1,139

 

$

(29

)

$

89,488

 



(1)

Includes unrealized (gains) and losses on impaired securities related to changes in the fair value of such securities subsequent to the impairment measurement date.









11


 

 

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of March 31, 2017, were as follows:





 

 

 

 

 

 



 

 

 

 

 

 



Amortized

 

Fair

 



Cost

 

Value

 

Due in one year or less

$

3,090 

 

$

3,131 

 

Due after one year through five years

 

18,673 

 

 

19,611 

 

Due after five years through ten years

 

17,275 

 

 

17,719 

 

Due after ten years

 

41,094 

 

 

44,795 

 

Subtotal

 

80,132 

 

 

85,256 

 

Structured securities (ABS, MBS, CLOs)

 

5,702 

 

 

5,846 

 

Total fixed maturity AFS securities

$

85,834 

 

$

91,102 

 



Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.



The fair value and gross unrealized losses, including the p ortion of OTTI recognized in OCI, of AFS securities (dollars in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of March 31, 2017

 

 

Less Than or Equal

 

Greater Than

 

 

 

 

 

 

 

 



to Twelve Months

 

Twelve Months

 

Total

 



 

 

Gross 

 

 

 

Gross 

 

 

 

 

 

Gross 

 

 

 

Unrealized

 

Unrealized

 

 

 

Unrealized



Fair

Losses and

Fair

Losses and

Fair

 

Losses and



Value

 

OTTI

 

Value

 

OTTI

 

Value

 

 

OTTI

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

14,068 

 

$

471 

 

$

2,790 

 

$

302 

 

$

16,858 

 

 

$

773 

 

ABS

 

121 

 

 

 

 

270 

 

 

22 

 

 

391 

 

 

 

26 

 

U.S. government bonds

 

170 

 

 

 

 

 -

 

 

 -

 

 

170 

 

 

 

 

RMBS

 

996 

 

 

52 

 

 

325 

 

 

15 

 

 

1,321 

 

 

 

67 

 

CMBS

 

210 

 

 

 

 

18 

 

 

 

 

228 

 

 

 

 

CLOs

 

277 

 

 

 

 

21 

 

 

 -

 

 

298 

 

 

 

 

State and municipal bonds

 

231 

 

 

12 

 

 

46 

 

 

 

 

277 

 

 

 

18 

 

Hybrid and redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

preferred securities

 

56 

 

 

 

 

141 

 

 

37 

 

 

197 

 

 

 

40 

 

Total fixed maturity securities

 

16,129 

 

 

551 

 

 

3,611 

 

 

384 

 

 

19,740 

 

 

 

935 

 

Equity securities

 

13 

 

 

 

 

40 

 

 

 

 

53 

 

 

 

 

Total AFS securities

$

16,142 

 

$

553 

 

$

3,651 

 

$

385 

 

$

19,793 

 

 

$

938 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total number of AFS securities in an unrealized loss position

 

 

 

 

 

 

 

 

 

 

 

 

1,584 

 



12