Item 8. Financial Statements and Supplementary Data
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting for Lincoln National Corporation to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with United States of America generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States of America generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of internal control over financial reporting effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Management assessed our internal control over financial reporting as of December 31, 2019, the end of our fiscal year. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
Based on the assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with United States of America generally accepted accounting principles.
The effectiveness of our internal control over financial reporting as of December 31, 2019, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included on the following page.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Lincoln National Corporation
Opinion on Internal Control over Financial Reporting
We have audited Lincoln National Corporation’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Lincoln National Corporation (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) and our report dated February 20, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 20, 2020
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Lincoln National Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lincoln National Corporation (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 20, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
|
|
|
|
|
|
Deferred Acquisition Costs Asset and Future Contract Benefits Liability
|
|
|
|
|
Description of the Matter
|
|
At December 31, 2019, deferred acquisition costs totaled $7.4 billion and future contract benefits liabilities totaled $36.4 billion, a portion of which related to universal life-type contracts with secondary guarantees and variable annuity contracts with guaranteed benefit riders.
The carrying amount of the deferred acquisition costs related to these products is the total of costs deferred less amortization, which is calculated in relation to the present value of estimated gross profits of the underlying contracts. As described in Notes 1 (see section on DAC, VOBA, DSI and DFEL) and 8 to the consolidated financial statements, there is a significant amount of uncertainty inherent in calculating estimated gross profits as the calculation includes significant management judgment in developing certain assumptions, such as expected future mortality experience, investment margins, capital market performance, retention and rider utilization. Management’s assumptions are adjusted, also known as unlocked, for emerging experience and expected changes in trends. The unlocking results in deferred acquisition cost amortization being recalculated, using the new assumptions for estimated gross profits, that results either in additional or less cumulative amortization expense.
The future contract benefits liability related to these product guarantees is based on estimates of how much the Company will need to pay for future benefits and the amount of fees to be collected from policyholders for these policy features. As described in Note 1 to the consolidated financial statements (see section on Future Contract Benefits and Other Contract Holder Funds), there is significant uncertainty inherent in estimating this liability because there is a significant amount of management judgment involved in developing certain assumptions that impact the liability balance, which are consistent with the assumptions used to amortize the related deferred acquisition cost asset as noted above and which include expected mortality experience, investment margins, capital market performance, retention and rider utilization.
Auditing the valuation of deferred acquisition costs and future contract benefits liabilities related to these products was complex and required the involvement of our actuarial specialists due to the high degree of judgment used by management in setting the assumptions used in the estimate of both the amortization of deferred acquisition costs and the future contract benefits liability related to these products.
|
|
How We Addressed the Matter in Our Audit
|
|
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the deferred acquisition costs and future contract benefits liability estimation processes, including, among others, controls related to the review and approval processes that management has in place for the assumptions used in estimating the estimated gross profits related to deferred acquisition costs and the future contract benefits liability. This included testing controls related to management’s evaluation of the need to update assumptions based on the comparison of actual Company experience to previous assumptions and updating investment margins for current and expected future market conditions.
We involved actuarial specialists to assist with our audit procedures which included, among others, an evaluation of the methodology applied by management with those methods used in prior periods. To assess the significant assumptions used by management, we compared the significant assumptions noted above to historical experience, observable market data or management’s estimates of prospective changes in these assumptions. In addition, we performed an independent recalculation of estimated gross profits related to deferred policy acquisition costs and the future policy benefit reserves for a sample of cohorts or contracts which we compared to the actuarial model used by management.
|
|
|
|
Variable Annuity Guaranteed Living Benefit Riders Embedded Derivatives
|
|
|
|
|
Description of the Matter
|
|
The Company’s variable annuity guaranteed living benefit riders include an embedded derivative, represented by an asset totaling $450 million as of December 31, 2019, related to the non-life contingent feature of the product which is accounted for at fair value, with changes in fair value recognized in income. As described in Notes 1 (see section on Separate Account Assets and Liabilities), 6 and 20 to the consolidated financial statements, there is a significant amount of estimation uncertainty inherent in measuring the fair value of the embedded derivative because of the sensitivity of certain assumptions underlying the estimate, including stock market performance, policy lapse experience and rider utilization. Management’s assumptions are adjusted over time for emerging experience and expected changes in trends, resulting in changes to the estimated fair value of the embedded derivative.
Auditing the valuation of the embedded derivative related to variable annuity guaranteed living benefit riders was complex and required the involvement of our actuarial specialists due to the high degree of judgment used by management in setting the assumptions used in the estimate of the value of the embedded derivative.
|
|
|
|
|
How We Addressed the Matter in Our Audit
|
|
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the embedded derivative estimation process, including, among others, controls related to the review and approval processes that management has in place to develop the assumptions used in measuring the fair value of the embedded derivative. This included testing controls related to management’s evaluation of current and future market conditions and the need to update policy lapse and rider utilization assumptions.
We involved actuarial specialists to assist with our audit procedures which included, among others, an evaluation of the methodology applied by management with those methods used in prior periods. To assess the significant assumptions used by management, we compared the significant assumptions noted above to historical experience, observable market data or management’s estimates of prospective changes in these assumptions. In addition, we performed an independent recalculation of the embedded derivative for a sample of contracts which we compared to the fair value model used by management.
|
|
|
|
Valuation of Goodwill for the Life Insurance Reporting Unit
|
|
|
|
|
Description of the Matter
|
|
At December 31, 2019, the Company’s goodwill was $1.8 billion, of which $634 million related to the Company’s Life Insurance reporting unit. As discussed in Notes 1 (see section on Goodwill) and 10 of the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. Determining the fair value of the Life Insurance reporting unit as part of the goodwill impairment analysis is sensitive to significant assumptions such as the discount rate, which reflects the market expected, weighted-average rate of return adjusted for the risk factors associated with the operations, and other relevant assumptions impacting projected financial information, such as the profitability of new and in-force business, all of which are affected by expectations about future market or economic conditions.
Auditing the fair value of the Company’s Life Insurance reporting unit was complex and required the involvement of our valuation and actuarial specialists due to the high degree of judgment used by management.
|
|
|
|
|
How We Addressed the Matter in Our Audit
|
|
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process. This included, among others, controls related to the review and approval processes that management has in place to develop the assumptions used in the estimation process, including management’s determination of the applicable discount rate, and other assumptions for the Life Insurance reporting unit.
We involved actuarial and valuation specialists to assist with our audit procedures which included, among others, an evaluation of the methodology applied by management with those methods used in prior periods. To assess the significant assumptions used by management, we compared the significant assumptions noted above to current industry and economic trends, recent market transactions and other relevant factors. We reviewed the historical accuracy of management’s estimate and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the Life Insurance reporting unit that would result from changes in the assumptions.
|
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1966.
Philadelphia, Pennsylvania
February 20, 2020
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
Fixed maturity available-for-sale securities, at fair value (amortized cost: 2019 – $94,295; 2018 – $92,429)
|
|
$
|
105,200
|
|
|
$
|
94,024
|
|
|
Trading securities
|
|
|
4,673
|
|
|
|
1,950
|
|
|
Equity securities
|
|
|
103
|
|
|
|
99
|
|
|
Mortgage loans on real estate
|
|
|
16,339
|
|
|
|
13,260
|
|
|
Policy loans
|
|
|
2,477
|
|
|
|
2,509
|
|
|
Derivative investments
|
|
|
1,911
|
|
|
|
1,107
|
|
|
Other investments
|
|
|
2,994
|
|
|
|
2,267
|
|
|
Total investments
|
|
|
133,697
|
|
|
|
115,216
|
|
|
Cash and invested cash
|
|
|
2,563
|
|
|
|
2,345
|
|
|
Deferred acquisition costs and value of business acquired
|
|
|
7,694
|
|
|
|
10,264
|
|
|
Premiums and fees receivable
|
|
|
465
|
|
|
|
570
|
|
|
Accrued investment income
|
|
|
1,148
|
|
|
|
1,119
|
|
|
Reinsurance recoverables
|
|
|
17,144
|
|
|
|
17,748
|
|
|
Funds withheld reinsurance assets
|
|
|
536
|
|
|
|
557
|
|
|
Goodwill
|
|
|
1,778
|
|
|
|
1,782
|
|
|
Other assets
|
|
|
16,170
|
|
|
|
15,713
|
|
|
Separate account assets
|
|
|
153,566
|
|
|
|
132,833
|
|
|
Total assets
|
|
$
|
334,761
|
|
|
$
|
298,147
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Future contract benefits
|
|
$
|
36,420
|
|
|
$
|
34,648
|
|
|
Other contract holder funds
|
|
|
98,018
|
|
|
|
91,233
|
|
|
Short-term debt
|
|
|
300
|
|
|
|
-
|
|
|
Long-term debt
|
|
|
6,067
|
|
|
|
5,839
|
|
|
Reinsurance related embedded derivatives
|
|
|
327
|
|
|
|
3
|
|
|
Funds withheld reinsurance liabilities
|
|
|
1,810
|
|
|
|
1,740
|
|
|
Payables for collateral on investments
|
|
|
5,082
|
|
|
|
4,805
|
|
|
Other liabilities
|
|
|
13,482
|
|
|
|
12,696
|
|
|
Separate account liabilities
|
|
|
153,566
|
|
|
|
132,833
|
|
|
Total liabilities
|
|
|
315,072
|
|
|
|
283,797
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies and Commitments (See Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Preferred stock – 10,000,000 shares authorized
|
|
|
-
|
|
|
|
-
|
|
|
Common stock – 800,000,000 shares authorized; 196,668,532 and 205,862,760 shares
|
|
|
|
|
|
|
|
|
|
issued and outstanding as of December 31, 2019, and December 31, 2018, respectively
|
|
|
5,162
|
|
|
|
5,392
|
|
|
Retained earnings
|
|
|
8,854
|
|
|
|
8,551
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
5,673
|
|
|
|
407
|
|
|
Total stockholders’ equity
|
|
|
19,689
|
|
|
|
14,350
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
334,761
|
|
|
$
|
298,147
|
|
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
|
$
|
5,513
|
|
$
|
4,601
|
|
$
|
3,256
|
|
|
Fee income
|
|
6,497
|
|
|
5,986
|
|
|
5,619
|
|
|
Net investment income
|
|
5,223
|
|
|
5,085
|
|
|
4,990
|
|
|
Realized gain (loss):
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses on securities
|
|
(30
|
)
|
|
(7
|
)
|
|
(18
|
)
|
|
Portion of loss recognized in other comprehensive income
|
|
15
|
|
|
-
|
|
|
-
|
|
|
Net other-than-temporary impairment losses on securities recognized in earnings
|
|
(15
|
)
|
|
(7
|
)
|
|
(18
|
)
|
|
Realized gain (loss), excluding other-than-temporary impairment losses on securities
|
|
(595
|
)
|
|
148
|
|
|
(152
|
)
|
|
Total realized gain (loss)
|
|
(610
|
)
|
|
141
|
|
|
(170
|
)
|
|
Amortization of deferred gain on business sold through reinsurance
|
|
31
|
|
|
9
|
|
|
23
|
|
|
Other revenues
|
|
604
|
|
|
602
|
|
|
539
|
|
|
Total revenues
|
|
17,258
|
|
|
16,424
|
|
|
14,257
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Interest credited
|
|
2,780
|
|
|
2,617
|
|
|
2,590
|
|
|
Benefits
|
|
7,880
|
|
|
6,786
|
|
|
5,160
|
|
|
Commissions and other expenses
|
|
5,287
|
|
|
4,763
|
|
|
4,176
|
|
|
Interest and debt expense
|
|
326
|
|
|
297
|
|
|
253
|
|
|
Strategic digitization expense
|
|
66
|
|
|
76
|
|
|
43
|
|
|
Impairment of intangibles
|
|
-
|
|
|
-
|
|
|
905
|
|
|
Total expenses
|
|
16,339
|
|
|
14,539
|
|
|
13,127
|
|
|
Income (loss) before taxes
|
|
919
|
|
|
1,885
|
|
|
1,130
|
|
|
Federal income tax expense (benefit)
|
|
33
|
|
|
244
|
|
|
(949
|
)
|
|
Net income (loss)
|
|
886
|
|
|
1,641
|
|
|
2,079
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Unrealized investment gains (losses)
|
|
5,288
|
|
|
(3,449
|
)
|
|
1,643
|
|
|
Foreign currency translation adjustment
|
|
6
|
|
|
(9
|
)
|
|
13
|
|
|
Funded status of employee benefit plans
|
|
(28
|
)
|
|
(7
|
)
|
|
8
|
|
|
Total other comprehensive income (loss), net of tax
|
|
5,266
|
|
|
(3,465
|
)
|
|
1,664
|
|
|
Comprehensive income (loss)
|
$
|
6,152
|
|
$
|
(1,824
|
)
|
$
|
3,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
4.41
|
|
$
|
7.60
|
|
$
|
9.36
|
|
|
Diluted
|
$
|
4.38
|
|
$
|
7.40
|
|
$
|
9.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Declared Per Common Share
|
$
|
1.51
|
|
$
|
1.36
|
|
$
|
1.20
|
|
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year
|
$
|
5,392
|
|
$
|
5,693
|
|
$
|
5,869
|
|
|
Stock compensation/issued for benefit plans
|
|
42
|
|
|
45
|
|
|
94
|
|
|
Retirement of common stock/cancellation of shares
|
|
(272
|
)
|
|
(346
|
)
|
|
(270
|
)
|
|
Balance as of end-of-year
|
|
5,162
|
|
|
5,392
|
|
|
5,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year
|
|
8,551
|
|
|
8,399
|
|
|
7,043
|
|
|
Cumulative effect from adoption of new accounting standards
|
|
-
|
|
|
(642
|
)
|
|
-
|
|
|
Net income (loss)
|
|
886
|
|
|
1,641
|
|
|
2,079
|
|
|
Retirement of common stock
|
|
(278
|
)
|
|
(554
|
)
|
|
(455
|
)
|
|
Common stock dividends declared
|
|
(305
|
)
|
|
(293
|
)
|
|
(268
|
)
|
|
Balance as of end-of-year
|
|
8,854
|
|
|
8,551
|
|
|
8,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year
|
|
407
|
|
|
3,230
|
|
|
1,566
|
|
|
Cumulative effect from adoption of new accounting standards
|
|
-
|
|
|
642
|
|
|
-
|
|
|
Other comprehensive income (loss), net of tax
|
|
5,266
|
|
|
(3,465
|
)
|
|
1,664
|
|
|
Balance as of end-of-year
|
|
5,673
|
|
|
407
|
|
|
3,230
|
|
|
Total stockholders’ equity as of end-of-year
|
$
|
19,689
|
|
$
|
14,350
|
|
$
|
17,322
|
|
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
2017
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
886
|
|
$
|
1,641
|
|
$
|
2,079
|
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
|
|
|
|
|
|
|
|
|
|
|
activities:
|
|
|
|
|
|
|
|
|
|
|
Trading securities purchases, sales and maturities, net
|
|
(2,510
|
)
|
|
(118
|
)
|
|
121
|
|
|
Change in:
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition costs, value of business acquired, deferred sales inducements
|
|
|
|
|
|
|
|
|
|
|
and deferred front-end loads deferrals and interest, net of amortization
|
|
(409
|
)
|
|
(81
|
)
|
|
16
|
|
|
Premiums and fees receivable
|
|
105
|
|
|
(87
|
)
|
|
34
|
|
|
Accrued investment income
|
|
(29
|
)
|
|
(17
|
)
|
|
(16
|
)
|
|
Future contract benefits and other contract holder funds
|
|
(1,479
|
)
|
|
(105
|
)
|
|
(1,720
|
)
|
|
Reinsurance related assets and liabilities
|
|
(134
|
)
|
|
718
|
|
|
128
|
|
|
Accrued expenses
|
|
107
|
|
|
(101
|
)
|
|
113
|
|
|
Federal income tax accruals
|
|
(227
|
)
|
|
154
|
|
|
(1,119
|
)
|
|
Realized (gain) loss
|
|
610
|
|
|
(141
|
)
|
|
170
|
|
|
Amortization of deferred gain on business sold through reinsurance
|
|
(31
|
)
|
|
(9
|
)
|
|
(23
|
)
|
|
Impairment of intangibles
|
|
-
|
|
|
-
|
|
|
905
|
|
|
Other
|
|
425
|
|
|
89
|
|
|
100
|
|
|
Net cash provided by (used in) operating activities
|
|
(2,686
|
)
|
|
1,943
|
|
|
788
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities and equity securities
|
|
(15,326
|
)
|
|
(12,650
|
)
|
|
(10,148
|
)
|
|
Sales of available-for-sale securities and equity securities
|
|
6,807
|
|
|
3,668
|
|
|
1,612
|
|
|
Maturities of available-for-sale securities
|
|
6,571
|
|
|
6,004
|
|
|
5,886
|
|
|
Purchase of common stock in acquisition, net of cash acquired
|
|
-
|
|
|
(1,410
|
)
|
|
-
|
|
|
Sale of business, net
|
|
-
|
|
|
(12
|
)
|
|
-
|
|
|
Purchases of alternative investments
|
|
(433
|
)
|
|
(314
|
)
|
|
(357
|
)
|
|
Sales and repayments of alternative investments
|
|
131
|
|
|
178
|
|
|
184
|
|
|
Issuance of mortgage loans on real estate
|
|
(4,262
|
)
|
|
(2,927
|
)
|
|
(2,058
|
)
|
|
Repayment and maturities of mortgage loans on real estate
|
|
1,163
|
|
|
1,085
|
|
|
1,184
|
|
|
Issuance and repayment of policy loans, net
|
|
32
|
|
|
21
|
|
|
51
|
|
|
Net change in collateral on investments, derivatives and related settlements
|
|
79
|
|
|
735
|
|
|
(429
|
)
|
|
Other
|
|
(261
|
)
|
|
(193
|
)
|
|
(113
|
)
|
|
Net cash provided by (used in) investing activities
|
|
(5,499
|
)
|
|
(5,815
|
)
|
|
(4,188
|
)
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
Payment of long-term debt, including current maturities
|
|
(308
|
)
|
|
(537
|
)
|
|
-
|
|
|
Issuance of long-term debt, net of issuance costs
|
|
744
|
|
|
1,094
|
|
|
-
|
|
|
Payment related to early extinguishment of debt
|
|
(42
|
)
|
|
(23
|
)
|
|
-
|
|
|
Proceeds from sale-leaseback transactions
|
|
-
|
|
|
88
|
|
|
62
|
|
|
Payment related to sale-leaseback transactions
|
|
(83
|
)
|
|
-
|
|
|
-
|
|
|
Proceeds from certain financing arrangements
|
|
107
|
|
|
-
|
|
|
-
|
|
|
Deposits of fixed account values, including the fixed portion of variable
|
|
16,069
|
|
|
13,638
|
|
|
10,797
|
|
|
Withdrawals of fixed account values, including the fixed portion of variable
|
|
(5,849
|
)
|
|
(6,007
|
)
|
|
(5,825
|
)
|
|
Transfers to and from separate accounts, net
|
|
(1,362
|
)
|
|
(2,469
|
)
|
|
(1,787
|
)
|
|
Common stock issued for benefit plans
|
|
(20
|
)
|
|
(6
|
)
|
|
46
|
|
|
Repurchase of common stock
|
|
(550
|
)
|
|
(900
|
)
|
|
(725
|
)
|
|
Dividends paid to common stockholders
|
|
(303
|
)
|
|
(289
|
)
|
|
(262
|
)
|
|
Net cash provided by (used in) financing activities
|
|
8,403
|
|
|
4,589
|
|
|
2,306
|
|
|
Net increase (decrease) in cash, invested cash and restricted cash
|
|
218
|
|
|
717
|
|
|
(1,094
|
)
|
|
Cash, invested cash and restricted cash as of beginning-of-year
|
|
2,345
|
|
|
1,628
|
|
|
2,722
|
|
|
Cash, invested cash and restricted cash as of end-of-year
|
$
|
2,563
|
|
$
|
2,345
|
|
$
|
1,628
|
|
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
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 21 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, retirement income and group protection products and solutions. These products primarily 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 consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles (“GAAP”). Certain GAAP policies, which significantly affect the determination of financial condition, results of operations and cash flows, are summarized below.
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of LNC and all other entities in which we have a controlling financial interest and any variable interest entities (“VIEs”) in which we are the primary beneficiary. As discussed in Note 3, on May 1, 2018, LNC and The Lincoln National Life Insurance Company (“LNL”) completed the acquisition of Liberty Life Assurance Company of Boston (“Liberty Life”), which effective September 1, 2019, was renamed Lincoln Life Assurance Company of Boston (“LLACB”). We use the equity method of accounting to recognize all of our investments in limited liability partnerships. All material inter-company accounts and transactions have been eliminated in consolidation.
Our involvement with VIEs is primarily to invest in assets that allow us to gain exposure to a broadly diversified portfolio of asset classes. A VIE is an entity that does not have sufficient equity to finance its own activities without additional financial support or where investors lack certain characteristics of a controlling financial interest. We assess our contractual, ownership or other interests in a VIE to determine if our interest participates in the variability the VIE was designed to absorb and pass onto variable interest holders. We perform an ongoing qualitative assessment of our variable interests in VIEs to determine whether we have a controlling financial interest and would therefore be considered the primary beneficiary of the VIE. If we determine we are the primary beneficiary of a VIE, we consolidate the assets and liabilities of the VIE in our consolidated financial statements.
Accounting Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain investments and derivatives, other-than-temporary impairment (“OTTI”) and asset valuation allowances, deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”), goodwill, future contract benefits, other contract holder funds including deferred front-end loads (“DFEL”), pension plans, stock-based incentive compensation, income taxes and the potential effects of resolving litigated matters.
Business Combinations
We use the acquisition method of accounting for all business combination transactions, and accordingly, recognize the fair values of assets acquired, liabilities assumed and any noncontrolling interests in our consolidated financial statements. The allocation of fair values may be subject to adjustment after the initial allocation for up to a one-year period as more information becomes available relative to the fair values as of the acquisition date. The consolidated financial statements include the results of operations of any acquired company since the acquisition date.
Fair Value Measurement
Our measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or non-performance risk (“NPR”), which would include our own credit risk. Our estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability (“entry price”). Pursuant to the Fair Value
Measurements and Disclosures Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”), we categorize our financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows:
Level 1 – inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date, except for large holdings subject to “blockage discounts” that are excluded;
Level 2 – inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value can be determined through the use of models or other valuation methodologies; and
Level 3 – inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability, and we make estimates and assumptions related to the pricing of the asset or liability, including assumptions regarding risk.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are components that are actively quoted or can be validated to market-based sources.
Fixed Maturity Available-For-Sale Securities – Fair Valuation Methodologies and Associated Inputs
Securities classified as available-for-sale (“AFS”) consist of fixed maturity securities and are stated at fair value with unrealized gains and losses included within accumulated other comprehensive income (loss) (“AOCI”), net of associated DAC, VOBA, DSI, future contract benefits, other contract holder funds and deferred income taxes.
We measure the fair value of our securities classified as fixed maturity AFS based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity security, and we consistently apply the valuation methodology to measure the security’s fair value. Our fair value measurement is based on a market approach that utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach primarily include third-party pricing services, independent broker quotations or pricing matrices. We do not adjust prices received from third parties; however, we do analyze the third-party pricing services’ valuation methodologies and related inputs and perform additional evaluation to determine the appropriate level within the fair value hierarchy.
The observable and unobservable inputs to our valuation methodologies are based on a set of standard inputs that we generally use to evaluate all of our fixed maturity AFS securities. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators, industry and economic events are monitored, and further market data is acquired if certain triggers are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For private placement securities, we use pricing matrices that utilize observable pricing inputs of similar public securities and Treasury yields as inputs to the fair value measurement. Depending on the type of security or the daily market activity, standard inputs may be prioritized differently or may not be available for all fixed maturity AFS securities on any given day. For broker-quoted only securities, non-binding quotes from market makers or broker-dealers are obtained from sources recognized as market participants. For securities trading in less liquid or illiquid markets with limited or no pricing information, we use unobservable inputs to measure fair value.
The following summarizes our fair valuation methodologies and associated inputs, which are particular to the specified security type and are in addition to the defined standard inputs to our valuation methodologies for all of our fixed maturity AFS securities discussed above:
Corporate bonds and U.S. government bonds – We also use Trade Reporting and Compliance EngineTM reported tables for our corporate bonds and vendor trading platform data for our U.S. government bonds.
Mortgage- and asset-backed securities (“ABS”) – We also utilize additional inputs, which include new issues data, monthly payment information and monthly collateral performance, including prepayments, severity, delinquencies, step-down features and over collateralization features for each of our mortgage-backed securities (“MBS”), which include collateralized mortgage obligations and mortgage pass through securities backed by residential mortgages (“RMBS”), commercial mortgage-backed securities (“CMBS”), collateralized loan obligations (“CLOs”) and collateralized debt obligations (“CDOs”).
State and municipal bonds – We also use additional inputs that include information from the Municipal Securities Rule Making Board, as well as material event notices, new issue data, issuer financial statements and Municipal Market Data benchmark yields for our state and municipal bonds.
Hybrid and redeemable preferred securities – We also utilize additional inputs of exchange prices (underlying and common stock of the same issuer) for our hybrid and redeemable preferred securities.
In order to validate the pricing information and broker-dealer quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales and observations of general market movements for those security classes. We have policies and procedures in place to review the process that is utilized by our third-party pricing service and the output that is provided to us by the pricing service. On a periodic basis, we test the pricing for a sample of securities to evaluate the inputs and assumptions used by the pricing service, and we perform a comparison of the pricing service output to an alternative pricing source. We also evaluate prices provided by our primary pricing service to ensure that they are not stale or unreasonable by reviewing the prices for unusual changes from period to period based on certain parameters or for lack of change from one period to the next.
Fixed Maturity AFS Securities – Evaluation for Recovery of Amortized Cost
We regularly review our fixed maturity AFS securities (also referred to as “debt securities”) for declines in fair value that we determine to be other-than-temporary.
For our debt securities, we generally consider the following to determine whether our debt securities with unrealized losses are other-than-temporarily impaired:
The estimated range and average period until recovery;
The estimated range and average holding period to maturity;
Remaining payment terms of the security;
Current delinquencies and nonperforming assets of underlying collateral;
Expected future default rates;
Collateral value by vintage, geographic region, industry concentration or property type;
Subordination levels or other credit enhancements as of the balance sheet date as compared to origination; and
Contractual and regulatory cash obligations.
For a debt security, if we intend to sell a security, or it is more likely than not we will be required to sell a debt security before recovery of its amortized cost basis and the fair value of the debt security is below amortized cost, we conclude that an OTTI has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). If we do not intend to sell a debt security, or it is not more likely than not we will be required to sell a debt security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected is less than the amortized cost of the debt security (referred to as the credit loss), we conclude that an OTTI has occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge to realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss), as this amount is deemed the credit portion of the OTTI. The remainder of the decline to fair value is recorded in other comprehensive income (“OCI”) to unrealized OTTI on fixed maturity AFS securities on our Consolidated Statements of Stockholders’ Equity, as this amount is considered a noncredit (i.e., recoverable) impairment.
When assessing our intent to sell a debt security, or if it is more likely than not we will be required to sell a debt security before recovery of its cost basis, we evaluate facts and circumstances such as, but not limited to, decisions to reposition our security portfolio, sales of securities to meet cash flow needs and sales of securities to capitalize on favorable pricing. Management considers the following as part of the evaluation:
The current economic environment and market conditions;
Our business strategy and current business plans;
The nature and type of security, including expected maturities and exposure to general credit, liquidity, market and interest rate risk;
Our analysis of data from financial models and other internal and industry sources to evaluate the current effectiveness of our hedging and overall risk management strategies;
The current and expected timing of contractual maturities of our assets and liabilities, expectations of prepayments on investments and expectations for surrenders and withdrawals of life insurance policies and annuity contracts;
The capital risk limits approved by management; and
Our current financial condition and liquidity demands.
In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The discount rate is the effective interest rate implicit in the underlying debt security. The effective interest rate is the original yield, or the coupon if the debt security was previously impaired. See the discussion below for additional information on the methodology and significant inputs, by security type, that we use to determine the amount of a credit loss.
To determine the recovery period of a debt security, we consider the facts and circumstances surrounding the underlying issuer including, but not limited to, the following:
Historical and implied volatility of the security;
Length of time and extent to which the fair value has been less than amortized cost;
Adverse conditions specifically related to the security or to specific conditions in an industry or geographic area;
Failure, if any, of the issuer of the security to make scheduled payments; and
Recoveries or additional declines in fair value subsequent to the balance sheet date.
In periods subsequent to the recognition of an OTTI, the fixed maturity AFS security is accounted for as if it had been purchased on the measurement date of the OTTI. Therefore, for the fixed maturity AFS security, the original discount or reduced premium is reflected in net investment income over the contractual term of the investment in a manner that produces a constant effective yield.
To determine recovery value of a corporate bond, CLO or CDO, we perform additional analysis related to the underlying issuer including, but not limited to, the following:
Fundamentals of the issuer to determine what we would recover if they were to file bankruptcy versus the price at which the market is trading;
Fundamentals of the industry in which the issuer operates;
Earnings multiples for the given industry or sector of an industry that the underlying issuer operates within, divided by the outstanding debt to determine an expected recovery value of the security in the case of a liquidation;
Expected cash flows of the issuer (e.g., whether the issuer has cash flows in excess of what is required to fund its operations);
Expectations regarding defaults and recovery rates;
Changes to the rating of the security by a rating agency; and
Additional market information (e.g., if there has been a replacement of the corporate debt security).
Each quarter, we review the cash flows for the MBS to determine whether or not they are sufficient to provide for the recovery of our amortized cost. We revise our cash flow projections only for those securities that are at most risk for impairment based on current credit enhancement and trends in the underlying collateral performance. To determine recovery value of a MBS, we perform additional analysis related to the underlying issuer including, but not limited to, the following:
Discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover;
Level of creditworthiness of the home equity loans or residential mortgages that back an RMBS or commercial mortgages that back a CMBS;
Susceptibility to fair value fluctuations for changes in the interest rate environment;
Susceptibility to reinvestment risks, in cases where market yields are lower than the securities’ book yield earned;
Susceptibility to reinvestment risks, in cases where market yields are higher than the book yields earned on a security;
Expectations of sale of such a security where market yields are higher than the book yields earned on a security; and
Susceptibility to variability of prepayments.
When evaluating MBS and mortgage-related ABS, we consider a number of pool-specific factors as well as market level factors when determining whether or not the impairment on the security is temporary or other-than-temporary. The most important factor is the performance of the underlying collateral in the security and the trends of that performance in the prior periods. We use this information about the collateral to forecast the timing and rate of mortgage loan defaults, including making projections for loans that are already delinquent and for those loans that are currently performing but may become delinquent in the future. Other factors used in this analysis include the credit characteristics of borrowers, geographic distribution of underlying loans and timing of liquidations by state. Once default rates and timing assumptions are determined, we then make assumptions regarding the severity of a default if it were to occur. Factors that impact the severity assumption include expectations for future home price appreciation or depreciation, loan size, first lien versus second lien, existence of loan level private mortgage insurance, type of occupancy and geographic distribution of loans. Once default and severity assumptions are determined for the security in question, cash flows for the underlying collateral are projected including expected defaults and prepayments. These cash flows on the collateral are then translated to cash flows on our tranche based on the cash flow waterfall of the entire capital security structure. If this analysis indicates the entire principal on a particular security will not be returned, the security is reviewed for OTTI by comparing the expected cash flows to amortized cost. To the extent that the security has already been impaired or was purchased at a discount, such that the amortized cost of the security is less than or equal to the present value of cash flows expected to be collected, no impairment is required. Otherwise, if the amortized cost of the security is greater than the present value of the cash flows expected to be collected, and the security was not purchased at a discount greater than the expected principal loss, then impairment is recognized.
We further monitor the cash flows of all of our fixed maturity AFS securities backed by mortgages on an ongoing basis. We also perform detailed analysis on all of our subprime, Alt-A, non-agency residential MBS and on a significant percentage of our fixed maturity AFS securities backed by pools of commercial mortgages. The detailed analysis includes revising projected cash flows by updating the cash flows for actual cash received and applying assumptions with respect to expected defaults, foreclosures and recoveries in the future. These revised projected cash flows are then compared to the amount of credit enhancement (subordination) in the structure to determine whether the amortized cost of the security is recoverable. If it is not recoverable, we record an impairment of the security.
Trading Securities
Trading securities consist of fixed maturity securities in designated portfolios, some of which support modified coinsurance (“Modco”) and coinsurance with funds withheld (“CFW”) reinsurance agreements. Investment results for the portfolios that support Modco and CFW reinsurance agreements, including gains and losses from sales, are passed directly to the reinsurers pursuant to contractual terms of
the reinsurance agreements. Trading securities are carried at fair value, and changes in fair value and changes in the fair value of embedded derivative liabilities associated with the underlying reinsurance agreements are recorded in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss) as they occur.
Equity Securities
Equity securities are carried at fair value, and changes in fair value are recorded in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss) as they occur. Equity securities consist primarily of common stock of publicly-traded companies, privately placed securities and mutual fund shares. We measure the fair value of our equity securities based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the equity security. Fair values of publicly-traded equity securities are determined using quoted prices in active markets for identical or comparable securities. When quoted prices are not available, we use valuation methodologies most appropriate for the specific asset. Fair values for private placement securities are determined using discounted cash flow, earnings multiple and other valuation models. The fair values of mutual fund shares that transact regularly are based on transaction prices of identical fund shares.
Alternative Investments
Alternative investments, which consist primarily of investments in limited partnerships (“LPs”), are included in other investments on our Consolidated Balance Sheets. We account for our investments in LPs using the equity method to determine the carrying value. Recognition of alternative investment income is delayed due to the availability of the related financial statements, which are generally obtained from the partnerships’ general partners. As a result, our private equity investments are generally on a three-month delay and our hedge funds are on a one-month delay. In addition, the impact of audit adjustments related to completion of calendar-year financial statement audits of the investees are typically received during the second quarter of each calendar year. Accordingly, our investment income from alternative investments for any calendar-year period may not include the complete impact of the change in the underlying net assets for the partnership for that calendar-year period.
Payables for Collateral on Investments
When we enter into collateralized financing transactions on our investments, a liability is recorded equal to the cash or non-cash collateral received. This liability is included within payables for collateral on investments on our Consolidated Balance Sheets. Income and expenses associated with these transactions are recorded as investment income and investment expenses within net investment income on our Consolidated Statements of Comprehensive Income (Loss). Changes in payables for collateral on investments are reflected within cash flows from investing activities on our Consolidated Statements of Cash Flows.
Mortgage Loans on Real Estate
Mortgage loans on real estate consist of commercial and residential mortgage loans and are carried at unpaid principal balances adjusted for amortization of premiums and accretion of discounts and are net of valuation allowances. Interest income is accrued on the principal balance of the loan based on the loan’s contractual interest rate. Premiums and discounts are amortized using the effective yield method over the life of the loan. Interest income and amortization of premiums and discounts are reported in net investment income on our Consolidated Statements of Comprehensive Income (Loss) along with mortgage loan fees, which are recorded as they are incurred.
Our policy for commercial mortgage loans is to report loans that are 60 or more days past due, which equates to two or more payments missed, as delinquent. Our policy for residential mortgage loans is to report loans that are 90 or more days past due, which equates to three or more payments missed, as delinquent. We do not accrue interest on loans 90 days past due, and any interest received on these loans is either applied to the principal or recorded in net investment income on our Consolidated Statements of Comprehensive Income (Loss) when received, depending on the assessment of the collectability of the loan. We resume accruing interest once a loan complies with all of its original terms or restructured terms. Mortgage loans deemed uncollectible are charged against the valuation allowance, and subsequent recoveries, if any, are credited to the valuation allowance.
We establish a valuation allowance to provide for the risk of credit losses inherent in our portfolio. The valuation allowance includes specific valuation allowances for loans that are deemed to be impaired as well as general valuation allowances for pools of loans with similar risk characteristics where a property risk or market specific risk has not been identified but for which we anticipate a loss may occur. Loans are considered impaired when it is probable that, based upon current information and events, we will be unable to collect all amounts due under the contractual terms of the loan agreement. When we determine that a loan is impaired, a specific valuation allowance is established for the excess carrying value of the loan over its estimated value. The loan’s estimated value is based on: the present value of expected future cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or the fair value of the loan’s collateral. Changes in valuation allowances are reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). General valuation allowances are primarily based on loss history adjusted for current conditions.
Valuation allowances are maintained at a level we believe is adequate to absorb estimated probable credit losses. Our periodic evaluation of the adequacy of the valuation allowances is based on historical loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors.
Our commercial loan portfolio is primarily comprised of long-term loans secured by existing commercial real estate. We believe all of the commercial loans in our portfolio share three primary risks: borrower credit worthiness; sustainability of the cash flow of the property; and market risk; therefore, our methods of monitoring and assessing credit risk are consistent for our entire portfolio.
For our commercial mortgage loan portfolio, trends in market vacancy and rental rates are incorporated into the analysis that we perform for monitored loans and may contribute to the establishment of (or an increase or decrease in) a valuation allowance. In addition, we review each loan individually in our commercial mortgage loan portfolio on an annual basis to identify emerging risks. We focus on properties that experienced a reduction in debt-service coverage or that have significant exposure to tenants with deteriorating credit profiles. Where warranted, we establish or increase a valuation allowance for a specific loan based upon this analysis.
We measure and assess the credit quality of our commercial mortgage loans by using loan-to-value and debt-service coverage ratios. The loan-to-value ratio compares the principal amount of the loan to the fair value at origination of the underlying property collateralizing the loan and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the principal amount is greater than the collateral value. Therefore, all else being equal, a lower loan-to-value ratio generally indicates a higher quality loan. The debt-service coverage ratio compares a property’s net operating income to its debt-service payments. Debt-service coverage ratios of less than 1.0 indicate that property operations do not generate enough income to cover its current debt payments. Therefore, all else being equal, a higher debt-service coverage ratio generally indicates a higher quality loan.
Our residential loan portfolio is primarily comprised of first lien mortgages secured by existing residential real estate. In contrast to the commercial mortgage loan portfolio, residential mortgage loans are primarily smaller-balance homogenous loans that share similar risk characteristics. Therefore, these pools of loans are collectively evaluated for inherent credit losses. Such evaluations consider numerous factors, including, but not limited to borrower credit scores, collateral values, loss forecasts, geographic location, delinquency rates and economic trends. These evaluations and assessments are revised as conditions change and new information becomes available, which can cause the valuation allowances to increase or decrease over time as such evaluations are revised. Residential mortgage loan pools exclude loans that have been impaired as those loans are evaluated individually using the evaluation framework for specific valuation allowances described above.
For residential mortgage loans, our primary credit quality indicator is whether the loan is performing or nonperforming. We generally define nonperforming residential mortgage loans as those that are 90 or more days past due and/or in nonaccrual status. There is generally a higher risk of experiencing credit losses when a residential mortgage loan is nonperforming.
Policy Loans
Policy loans represent loans we issue to contract holders that use the cash surrender value of their life insurance policy as collateral. Policy loans are carried at unpaid principal balances.
Real Estate
Real estate includes both real estate held for the production of income and real estate held-for-sale. Real estate held for the production of income is carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset. We periodically review properties held for the production of income for impairment. Properties whose carrying values are greater than their projected undiscounted cash flows are written down to estimated fair value, with impairment losses reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). The estimated fair value of real estate is generally computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks. Real estate classified as held-for-sale is stated at the lower of depreciated cost or fair value less expected disposition costs at the time classified as held-for-sale. Real estate is not depreciated while it is classified as held-for-sale. Also, valuation allowances are established, as appropriate, for real estate held-for-sale and any changes to the valuation allowances are reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). Real estate acquired through foreclosure proceedings is recorded at fair value at the settlement date.
Derivative Instruments
We hedge certain portions of our exposure to interest rate risk, foreign currency exchange risk, equity market risk and credit risk by entering into derivative transactions. All of our derivative instruments are recognized as either assets or liabilities on our Consolidated Balance Sheets at estimated fair value. We categorized derivatives into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique as discussed above in “Fair Value Measurement.” The accounting for changes in the estimated fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument based upon the exposure being hedged: as a cash flow hedge or a fair value hedge.
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI and reclassified into net income in the same period or periods during which the hedged transaction affects net income. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of designated future cash flows of the hedged item (hedge ineffectiveness), if any, is recognized in net income during the period of change. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in net income during the period of
change in estimated fair values. For derivative instruments not designated as hedging instruments, but that are economic hedges, the gain or loss is recognized in net income.
We purchase and issue financial instruments and products that contain embedded derivative instruments. When it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes. The embedded derivative is carried at fair value with changes in fair value recognized in net income during the period of change.
We employ several different methods for determining the fair value of our derivative instruments. The fair value of our derivative contracts are measured based on current settlement values, which are based on quoted market prices, industry standard models that are commercially available and broker quotes. These techniques project cash flows of the derivatives using current and implied future market conditions. We calculate the present value of the cash flows to measure the current fair market value of the derivative.
Cash and Invested Cash
Cash and invested cash is carried at cost and includes all highly liquid debt instruments purchased with an original maturity of three months or less.
DAC, VOBA, DSI and DFEL
Acquisition costs directly related to successful contract acquisitions or renewals of UL insurance, VUL insurance, traditional life insurance, annuities and other investment contracts have been deferred (i.e., DAC) to the extent recoverable. VOBA is an intangible asset that reflects the estimated fair value of in-force contracts in a life insurance company acquisition and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in force at the acquisition date. Bonus credits and excess interest for dollar cost averaging contracts are considered DSI. Contract sales charges that are collected in the early years of an insurance contract are deferred (i.e., DFEL), and the unamortized balance is reported in other contract holder funds on our Consolidated Balance Sheets.
Both DAC and VOBA amortization, excluding amounts reported in realized gain (loss), is reported within commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss). DSI amortization, excluding amounts reported in realized gain (loss), is reported in interest credited on our Consolidated Statements of Comprehensive Income (Loss). The amortization of DFEL, excluding amounts reported in realized gain (loss), is reported within fee income on our Consolidated Statements of Comprehensive Income (Loss). The methodology for determining the amortization of DAC, VOBA, DSI and DFEL varies by product type. For all insurance contracts, amortization is based on assumptions consistent with those used in the development of the underlying contract adjusted for emerging experience and expected trends.
Acquisition costs for UL and VUL insurance and investment-type products, which include fixed and variable deferred annuities, are generally amortized over the lives of the policies in relation to the incidence of estimated gross profits (“EGPs”) from surrender charges, investment, mortality net of reinsurance ceded and expense margins and actual realized gain (loss) on investments. Contract lives for UL and VUL policies are estimated to be 40 years based on the expected lives of the contracts. Contract lives for fixed and variable deferred annuities are generally between 15 and 30 years, while some of our fixed multi-year guarantee products have amortization periods equal to the guarantee period. The front-end load annuity product has an assumed life of 25 years. Longer lives are assigned to those blocks that have demonstrated lower lapse experience.
Acquisition costs for all traditional contracts, including traditional life insurance contracts, such as individual whole life, group business and term life insurance, are amortized over the expected premium-paying period that generally results in amortization less than 30 years. Acquisition costs are either amortized on a straight-line basis or as a level percent of premium of the related policies depending on the block of business. There is currently no DAC, VOBA, DSI or DFEL balance or related amortization for fixed and variable payout annuities.
We account for modifications of insurance contracts that result in a substantially unchanged contract as a continuation of the replaced contract. We account for modifications of insurance contracts that result in a substantially changed contract as an extinguishment of the replaced contract.
The carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of realized and unrealized gains and losses on securities classified as fixed maturity AFS and certain derivatives and embedded derivatives. Amortization expense of DAC, VOBA, DSI and DFEL reflects an assumption for an expected level of credit-related investment losses. When actual credit-related investment losses are realized, we recognize a true-up to our DAC, VOBA, DSI and DFEL amortization within realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss) reflecting the incremental effect of actual versus expected credit-related investment losses. These actual to expected amortization adjustments can create volatility from period to period in realized gain (loss).
During the third quarter of each year, we conduct our annual comprehensive review of the assumptions and the projection models used for our estimates of future gross profits underlying the amortization of DAC, VOBA, DSI and DFEL and the calculations of the embedded derivatives and reserves for life insurance and annuity products. These assumptions include, but are not limited to, capital markets, investment margins, mortality, retention, rider utilization and maintenance expenses (costs associated with maintaining records
relating to insurance and individual and group annuity contracts, and with the processing of premium collections, deposits, withdrawals and commissions). Based on our review, the cumulative balances of DAC, VOBA, DSI and DFEL included on our Consolidated Balance Sheets are adjusted with an offsetting benefit or charge to revenue or amortization expense to reflect such change related to our expectations of future EGPs (“unlocking”). We may have unlocking in other quarters as we become aware of information that warrants updating assumptions outside of our annual comprehensive review. We may also identify and implement actuarial modeling refinements that result in increases or decreases to the carrying values of DAC, VOBA, DSI, DFEL, embedded derivatives and reserves for life insurance and annuity products with living benefit and death benefit guarantees.
DAC, VOBA, DSI and DFEL are reviewed to ensure that the unamortized portion does not exceed the expected recoverable amounts.
Reinsurance
Our insurance subsidiaries enter into reinsurance agreements in the normal course of business to limit our exposure to the risk of loss and to enhance our capital management.
In order for a reinsurance agreement to qualify for reinsurance accounting, the agreement must satisfy certain risk transfer conditions that include, among other items, a reasonable possibility of a significant loss for the assuming entity. When we apply reinsurance accounting, premiums, benefits and DAC amortization are reported net of insurance ceded on our Consolidated Statements of Comprehensive Income (Loss). Amounts currently recoverable, such as ceded reserves, are reported in reinsurance recoverables and amounts currently payable to the reinsurers, such as premiums, are included in other liabilities on our Consolidated Balance Sheets. Assets and liabilities and premiums and benefits from certain reinsurance contracts that grant statutory surplus relief to our insurance companies are netted on our Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss), respectively, if there is a contractual right of offset.
We use deposit accounting to recognize reinsurance agreements that do not transfer significant insurance risk. This accounting treatment results in amounts paid or received by our insurance subsidiaries to be considered on deposit with the reinsurer and such amounts are reported in other assets and other liabilities, respectively, on our Consolidated Balance Sheets. As amounts are paid or received, consistent with the underlying contracts, deposit assets or liabilities are adjusted.
Goodwill
We recognize the excess of the purchase price, plus the fair value of any noncontrolling interest in the acquiree, over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed for impairment annually as of October 1 and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
We perform a quantitative goodwill impairment test where the fair value of the reporting unit is determined and compared to the carrying value of the reporting unit. If the carrying value of the reporting unit is greater than the reporting unit’s fair value, goodwill is impaired and written down to the reporting unit’s fair value; and a charge is reported in impairment of intangibles on our Consolidated Statements of Comprehensive Income (Loss). The results of one goodwill impairment test on one reporting unit cannot subsidize the results of another reporting unit.
Other Assets and Other Liabilities
Other assets consist primarily of DSI, specifically identifiable intangible assets, property and equipment owned by the Company, balances associated with corporate-owned and bank-owned life insurance, certain reinsurance assets, receivables resulting from sales of securities that had not yet settled as of the balance sheet date, debt issuance costs associated with line-of-credit arrangements, operating lease right-of-use (“ROU”) assets, finance lease assets, certain financing arrangements and other prepaid expenses. Other liabilities consist primarily of current and deferred taxes, pension and other employee benefit liabilities, derivative instrument liabilities, certain reinsurance payables, payables resulting from purchases of securities that had not yet settled as of the balance sheet date, interest on borrowed funds, long-term operating lease liabilities, finance lease liabilities, certain financing arrangements, deferred gain on business sold through reinsurance and other accrued expenses.
Other assets and other liabilities on our Consolidated Balance Sheets include guaranteed living benefit (“GLB”) features and remaining guaranteed interest and similar contracts that are carried at fair value, which may be reported in either other assets or other liabilities. The fair value of these items represents approximate exit price including an estimate for our NPR. Certain of these features have elements of both insurance benefits and embedded derivatives. Through our hybrid accounting approach, for reserve calculation purposes we assign product cash flows to the embedded derivative or insurance portion of the reserves based on the life-contingent nature of the benefits. We classify these GLB reserves embedded derivatives in Level 3 within the hierarchy levels described above in “Fair Value Measurement.” We report the insurance portion of the reserves in future contract benefits.
The carrying values of specifically identifiable intangible assets are reviewed at least annually for indicators of impairment in value that are other-than-temporary, including unexpected or adverse changes in the following: the economic or competitive environments in which the company operates; profitability analyses; cash flow analyses; and the fair value of the relevant business operation. If there was an indication of impairment, then the discounted cash flow method would be used to measure the impairment, and the carrying value would be adjusted as necessary and reported in impairment of intangibles on our Consolidated Statements of Comprehensive Income
(Loss). Sales force intangibles are attributable to the value of the new business distribution system acquired through business combinations. These assets are amortized on a straight-line basis over their useful life of 25 years. Specifically identifiable intangible assets also includes the value of customer relationships acquired (“VOCRA”) and value of distribution agreements (“VODA”) that were acquired through our business combination during 2018. The carrying values of VOCRA and VODA are amortized using a straight-line basis over their weighted average life of 20 years and 13 years, respectively. See Note 10 for more information regarding specifically identifiable intangible assets acquired.
Property and equipment owned for company use is carried at cost less allowances for depreciation. Provisions for depreciation of investment real estate and property and equipment owned for company use are computed principally on the straight-line method over the estimated useful lives of the assets, which include buildings, computer hardware and software and other property and equipment. Certain assets on our Consolidated Balance Sheets are related to finance leases and certain financing arrangements and are depreciated in a manner consistent with our current depreciation policy for owned assets. We periodically review the carrying value of our long-lived assets, including property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. For long-lived assets to be held and used, impairments are recognized when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Long-lived assets to be disposed of by abandonment or in an exchange for a similar productive long-lived asset are classified as held-for-use until they are disposed. Long-lived assets to be sold are classified as held-for-sale and are no longer depreciated. Certain criteria have to be met in order for the long-lived asset to be classified as held-for-sale, including that a sale is probable and expected to occur within one year. Long-lived assets classified as held-for-sale are recorded at the lower of their carrying amount or fair value less cost to sell.
Effective January 1, 2019, we adopted ASU 2016-02, which resulted in a new measurement and recognition of our long-term operating leases on our Consolidated Balance Sheets. We lease office space and certain equipment under various long-term lease agreements. We determine if an arrangement is a lease at inception. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Our leases do not provide an implicit rate; therefore, we use our incremental borrowing rate at the commencement date in determining the present value of future payments. The ROU asset is calculated using the lease liability carrying amount, plus or minus prepaid/accrued lease payments, minus the unamortized balance of lease incentives received, plus unamortized initial direct costs. Lease terms used to calculate our lease obligation include options when we are reasonably certain that we will exercise such options. Our lease agreements may contain both lease and non-lease components, which are accounted for separately. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. See Notes 2 and 14 for additional information.
Other liabilities includes a deferred gain on business sold through reinsurance attributable to our annuity reinsurance agreement with Athene Holding Ltd. (“Athene”) effective October 1, 2018. We are recognizing the gain related to this transaction over the period over which the majority of account values are expected to run off, or 20 years.
Separate Account Assets and Liabilities
We maintain separate account assets, which are reported at fair value. The related liabilities are reported at an amount equivalent to the separate account assets. Investment risks associated with market value changes are borne by the contract holders, except to the extent of minimum guarantees made by the Company with respect to certain accounts.
We issue variable annuity contracts through our separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder (traditional variable annuities). We also issue variable annuity and life contracts through separate accounts that may include various types of guaranteed death benefit (“GDB”), guaranteed withdrawal benefit (“GWB”) and guaranteed income benefit (“GIB”) features. The GDB features include those where we contractually guarantee to the contract holder either: return of no less than total deposits made to the contract less any partial withdrawals (“return of net deposits”); total deposits made to the contract less any partial withdrawals plus a minimum return (“minimum return”); or the highest contract value on any contract anniversary date through age 80. The highest contract value is increased by purchase payments and is decreased by withdrawals subsequent to that anniversary date in the same proportion that withdrawals reduce the contract value.
As discussed in Note 6, certain features of these guarantees are accounted for as embedded derivative reserves, whereas other guarantees are accounted for as benefit reserves. Other guarantees contain characteristics of both and are accounted for under an approach that calculates the value of the embedded derivative reserve and the benefit reserve based on the specific characteristics of each GLB feature. We use derivative instruments to hedge our exposure to the risks and earnings volatility that result from the embedded derivatives for living benefits in certain of our variable annuity products. The change in fair value of these instruments tends to move in the opposite direction of the change in the value of the associated reserves. The net impact of these changes is reported as a component of realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
The “market consistent scenarios” used in the determination of the fair value of the GLB liability are similar to those used by an investment bank to value derivatives for which the pricing is not transparent and the aftermarket is nonexistent or illiquid. We use risk-neutral Monte Carlo simulations in our calculation to value the entire block of guarantees, which involve 100 unique scenarios per policy or approximately 49 million scenarios. The market consistent scenario assumptions, as of each valuation date, are those we view to be appropriate for a hypothetical market participant. The market consistent inputs include, but are not limited to, assumptions for capital markets (e.g., implied volatilities, correlation among indices, risk-free swap curve, etc.), policyholder behavior (e.g., policy lapse, rider
utilization, etc.), mortality, risk margins, maintenance expenses and a margin for profit. We believe these assumptions are consistent with those that would be used by a market participant; however, as the related markets develop we will continue to reassess our assumptions. It is possible that different valuation techniques and assumptions could produce a materially different estimate of fair value.
Future Contract Benefits and Other Contract Holder Funds
Future contract benefits represent liability reserves that we have established and carry based on estimates of how much we will need to pay for future benefits and claims. Other contract holder funds represent liabilities for fixed account values, including the fixed portion of variable, dividends payable, premium deposit funds, undistributed earnings on participating business and other contract holder funds as well as the carrying value of DFEL discussed above.
The liabilities for future contract benefits and claim reserves for UL and VUL insurance policies consist of contract account balances that are equal to deposits net of withdrawals, excluding surrender charges and fees, plus interest credited, and if applicable an additional reserve for other insurance benefit guarantees. The liabilities for future insurance contract benefits and claim reserves for traditional life policies are computed using assumptions for investment yields, mortality and withdrawals based principally on generally accepted actuarial methods and assumptions at the time of contract issue. Investment yield assumptions for traditional direct individual life reserves for all contracts range from 2.25% to 7.75% depending on the time of contract issue. The investment yield assumptions for immediate and deferred paid-up annuities range from 1.25% to 12.75%. These investment yield assumptions are intended to represent an estimation of the interest rate experience for the period that these contract benefits are payable.
The liabilities for future claim reserves for variable annuity products containing GDB features are calculated by estimating the present value of total expected benefit payments over the life of the contract from inception divided by the present value of total expected assessments over the life of the contract (“benefit ratio”) multiplied by the cumulative assessments recorded from the contract inception through the balance sheet date less the cumulative GDB payments plus interest on the liability. The change in the liability for a period is the benefit ratio multiplied by the assessments recorded for the period less GDB claims paid in the period plus interest. As experience or assumption changes result in a change in expected benefit payments or assessments, the benefit ratio is unlocked, that is, recalculated using the updated expected benefit payments and assessments over the life of the contract since inception. The revised benefit ratio is then applied to the liability calculation described above, with the resulting change in liability reported in benefits on our Consolidated Statements of Comprehensive Income (Loss).
The liability for future claim reserves for long-term disability contracts for incurred and reported claims are calculated based on assumptions as to interest, claim resolution rates and offsets for other insurance including social security. Claim resolution rate assumptions and social security offsets are based on our actual experience. The interest rate assumptions used for discounting claim reserves are based on projected portfolio yield rates, after consideration for defaults and investment expenses, for assets supporting the liabilities. The incurred but not reported claim reserves are based on our experiences as to the reporting lags and ultimate loss experience. Claim reserves are subject to revision as current claim experience and projections of future factors affecting claim experience change. Claim reserves do not include a provision for adverse deviation.
With respect to our future contract benefits and other contract holder funds, we continually review overall reserve position, reserving techniques and reinsurance arrangements. As experience develops and new information becomes known, liabilities are adjusted as deemed necessary. The effects of changes in estimates are included in the operating results for the period in which such changes occur.
The business written or assumed by us includes participating life insurance contracts, under which the contract holder is entitled to share in the earnings of such contracts via receipt of dividends. The dividend scale for participating policies is reviewed annually and may be adjusted to reflect recent experience and future expectations. As of December 31, 2019 and 2018, participating policies comprised less than 1% of the face amount of business in force, and dividend expenses were $51 million, $56 million and $57 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Liabilities for the secondary guarantees on UL-type products are calculated by multiplying the benefit ratio by the cumulative assessments recorded from contract inception through the balance sheet date less the cumulative secondary guarantee benefit payments plus interest. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes in a manner similar to the unlocking of DAC, VOBA, DFEL and DSI. The accounting for secondary guarantee benefits impacts, and is impacted by, EGPs used to calculate amortization of DAC, VOBA, DFEL and DSI.
Certain of our variable annuity contracts reported within future contract benefits contain GLB reserves embedded derivatives, a portion of which may be reported in either other assets or other liabilities, and include guaranteed interest and similar contracts, that are carried at fair value on our Consolidated Balance Sheets, which represents approximate exit price including an estimate for our NPR. Certain of these features have elements of both insurance benefits and embedded derivatives. Through our hybrid accounting approach, for reserve calculation purposes we assign product cash flows to the embedded derivative or insurance portion of the reserves based on the life-contingent nature of the benefits. We classify these GLB reserves embedded derivatives items in Level 3 within the hierarchy levels described above in “Fair Value Measurement.” We report the insurance portion of the reserves in future contract benefits.
The fair value of our indexed annuity contracts is based on their approximate surrender values.
Borrowed Funds
LNC’s short-term borrowings are defined as borrowings with contractual or expected maturities of one year or less. Long-term borrowings have contractual or expected maturities greater than one year.
Contingencies and Commitments
Contingencies arising from environmental remediation costs, regulatory judgments, claims, assessments, guarantees, litigation, recourse reserves, fines, penalties and other sources are recorded when deemed probable and reasonably estimable.
Fee Income
Fee income for investment and interest-sensitive life insurance contracts consists of asset-based fees, percent of premium charges, contract administration charges and surrender charges that are assessed against contract holder account balances. Investment products consist primarily of individual and group variable and fixed deferred annuities. Interest-sensitive life insurance products include UL insurance, VUL insurance and other interest-sensitive life insurance policies. These products include life insurance sold to individuals, corporate-owned life insurance and bank-owned life insurance.
In bifurcating the embedded derivative of our GLB features on our variable annuity products, we attribute to the embedded derivative the portion of total fees collected from the contract holder that relate to the GLB riders (the “attributed fees”), which are not reported within fee income on our Consolidated Statements of Comprehensive Income (Loss). These attributed fees represent the present value of future claims expected to be paid for the GLB at the inception of the contract plus a margin that a theoretical market participant would include for risk/profit and are reported within realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
The timing of revenue recognition as it relates to fees assessed on investment contracts is determined based on the nature of such fees. Asset-based fees, cost of insurance and contract administration charges are assessed on a daily or monthly basis and recognized as revenue as performance obligations are met, over the period underlying customer assets are owned or advisory services are provided. Wholesaling-related 12b-1 fees received from separate account fund sponsors as compensation for servicing the underlying mutual funds are recorded as revenues based on a contractual percentage of the market value of mutual fund assets over the period shares are owned by customers. Net investment advisory fees related to asset management of certain separate account funds are recorded as revenues based on a contractual percentage of the customer’s managed assets over the period advisory services are provided. Percent of premium charges are assessed at the time of premium payment and recognized as revenue when assessed and earned. Certain amounts assessed that represent compensation for services to be provided in future periods are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are recognized upon surrender of a contract by the contract holder in accordance with contractual terms. For investment and interest-sensitive life insurance contracts, the amounts collected from contract holders are considered deposits and are not included in revenue.
Insurance Premiums
Our insurance premiums for traditional life insurance and group insurance products are recognized as revenue when due from the contract holder. Our traditional life insurance products include those products with fixed and guaranteed premiums and benefits and consist primarily of whole life insurance, limited-payment life insurance, term life insurance and certain annuities with life contingencies. Our group insurance products consist primarily of term life, disability and dental.
Net Investment Income
We earn investment income on the underlying general account investments supporting our fixed products less related expenses. Dividends and interest income, recorded in net investment income, are recognized when earned. Amortization of premiums and accretion of discounts on investments in debt securities are reflected in net investment income over the contractual terms of the investments in a manner that produces a constant effective yield.
For CLOs and MBS, included in the trading and fixed maturity AFS securities portfolios, we recognize income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from originally anticipated prepayments, the retrospective effective yield is recalculated to reflect actual payments to date and a catch up adjustment is recorded in the current period. In addition, the new effective yield, which reflects anticipated future payments, is used prospectively. Any adjustments resulting from changes in effective yield are reflected in net investment income on our Consolidated Statements of Comprehensive Income (Loss).
Realized Gain (Loss)
Realized gain (loss) includes realized gains and losses from the sale of investments, write-downs for other-than-temporary impairments of investments, changes in fair value of equity securities, certain derivative and embedded derivative gains and losses, gains and losses on the sale of subsidiaries and businesses and net gains and losses on reinsurance embedded derivatives and trading securities. Realized gains and losses on the sale of investments are determined using the specific identification method. Realized gain (loss) is recognized in net income, net of associated amortization of DAC, VOBA, DSI and DFEL. Realized gain (loss) is also net of allocations of investment
gains and losses to certain contract holders and certain funds withheld on reinsurance arrangements for which we have a contractual obligation.
Other Revenues
Other revenues consists primarily of fees attributable to broker-dealer services recorded as performance obligations are met, either at the time of sale or over time based on a contractual percentage of customer account values, changes in the market value of our seed capital investments, and proceeds from reinsurance recaptures. The broker-dealer services primarily relate to our retail sales network and consist of commission revenue for the sale of non-affiliated securities recorded on a trade date basis and advisory fee income. Advisory fee income is asset-based revenues recorded as earned based on a contractual percentage of customer account values. Other revenues earned by our Group Protection segment consist of fees from administrative services performed, which are recognized as performance obligations are met over the terms of the underlying agreements.
Interest Credited
We credit interest to our contract holder account balances based on the contractual terms supporting our products.
Benefits
Benefits for UL and other interest-sensitive life insurance products include benefit claims incurred during the period in excess of contract account balances. Benefits also include the change in reserves for life insurance products with secondary guarantee benefits, annuity products with guaranteed death and living benefits and certain annuities with life contingencies. For traditional life, group health and disability income products, benefits are recognized when incurred in a manner consistent with the related premium recognition policies.
Strategic Digitization Expense
Strategic digitization expense consists primarily of costs related to our enterprise-wide digitization initiative.
Pension and Other Postretirement Benefit Plans
Pursuant to the accounting rules for our obligations to employees and agents under our various pension and other postretirement benefit plans, we are required to make a number of assumptions to estimate related liabilities and expenses. The mortality assumption is based on actual and anticipated plan experience, determined using acceptable actuarial methods. We use assumptions for the weighted-average discount rate and expected return on plan assets to estimate pension expense. The discount rate assumptions are determined using an analysis of current market information and the projected benefit flows associated with these plans. The expected long-term rate of return on plan assets is based on historical and projected future rates of return on the funds invested in the plan. The calculation of our accumulated postretirement benefit obligation also uses an assumption of weighted-average annual rate of increase in the per capita cost of covered benefits, which reflects a health care cost trend rate.
Stock-Based Compensation
In general, we expense the fair value of stock awards included in our incentive compensation plans. As of the date our stock awards are approved, the fair value of stock options is determined using a Black-Scholes options valuation methodology, and the fair value of other stock awards is based upon the market value of the stock. The fair value of the awards is expensed over the performance or service period, which generally corresponds to the vesting period, and is recognized as an increase to common stock in stockholders’ equity. We apply an estimated forfeiture rate to our accrual of compensation cost. We classify certain stock awards as liabilities. For these awards, the settlement value is classified as a liability on our Consolidated Balance Sheets, and the liability is marked-to-market through net income at the end of each reporting period. Stock-based compensation expense is reflected in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).
Interest and Debt Expense
Interest expense on our short-term and long-term debt is recognized as due and any associated premiums, discounts and costs are amortized (accreted) over the term of the related borrowing utilizing the effective interest method. In addition, gains or losses related to certain derivative instruments associated with debt are recognized in interest and debt expense during the period of the change.
Income Taxes
We file a U.S. consolidated income tax return that includes all of our eligible subsidiaries. Ineligible subsidiaries file separate individual corporate tax returns. Subsidiaries operating outside of the U.S. are taxed, and income tax expense is recorded, based on applicable foreign statutes. Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to the extent required. Considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary and, if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, we consider many factors, including: the nature and character of the deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of temporary differences; the length of time carryovers can be utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused.
Foreign Currency Translation
The balance sheet accounts and income statement items of foreign subsidiaries, reported in functional currencies other than the U.S. dollar are translated at the current and average exchange rates for the year, respectively. Resulting translation adjustments and other translation adjustments for foreign currency transactions that affect cash flows are reported in AOCI, a component of stockholders’ equity.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the average common shares outstanding. Diluted EPS is computed assuming the conversion or exercise of dilutive convertible preferred securities, nonvested stock, stock options, performance share units and warrants outstanding during the year.
Our deferred compensation plans allow participants the option to diversify from LNC stock to other investment alternatives. When calculating our weighted-average dilutive shares, we presume the investment option will be settled in cash and exclude these shares from our calculation, unless the effect of settlement in shares would be more dilutive to our diluted EPS calculation.
For any period where a net loss is experienced, shares used in the diluted EPS calculation represent basic shares, as the use of diluted shares would result in a lower loss per share.
2. New Accounting Standards
Adoption of New Accounting Standards
The following table provides a description of our adoption of new Accounting Standards Updates (“ASUs”) issued by the FASB and the impact of the adoption on our financial statements. ASUs not listed below were assessed and determined to be either not applicable or insignificant in presentation or amount.
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|
|
|
|
|
Standard
|
Description
|
Date of Adoption
|
Effect on Financial Statements or Other Significant Matters
|
|
ASU 2016-02, Leases and all related amendments
|
This standard establishes a new accounting model for leases. Lessees will recognize most leases on the balance sheet as a ROU 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 ROU 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 adopted this standard and all related amendments, which resulted in the recognition of $207 million in ROU assets and $214 million in operating lease liabilities reported in other assets and other liabilities, respectively, on our Consolidated Balance Sheets as of January 1, 2019. Comparative periods continue to be measured and presented under historical guidance, and only the period of adoption is subject to this ASU. Also, on transition, we have elected not to reassess: 1) whether expired or existing contracts contain a lease under the new definition of a lease; 2) lease classification for expired or existing leases; and 3) whether previously capitalized initial direct costs would qualify for capitalization under this ASU. Additionally, there is not a significant difference in our pattern of lease expense recognition under this ASU, and there is no impact on cash flows. For more information, see Note 1.
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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.
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January 1, 2019
|
We adopted the provisions of this ASU, which did not result in a change to our existing practices; therefore, no cumulative effect adjustment was recorded. As such, there was no impact on our consolidated financial condition and results of operations.
|
|
ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities
|
These amendments change both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. These amendments retain the threshold of highly effective for hedging relationships, remove the requirement to bifurcate between the portions of the hedging relationship that are effective and ineffective, record hedge item and hedging instrument results in the same financial statement line item, require quantitative assessment initially for all hedging relationships unless the hedging relationship meets the definition of either the shortcut method or critical terms match method and allow the contractual specified index rate to be designated as the hedged risk in a cash flow hedge of interest rate risk of a variable rate financial instrument. These amendments also eliminate the benchmark interest rate concept for variable rate instruments. Early adoption is permitted.
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January 1, 2019
|
We adopted the provisions of this ASU, which did not have an impact on our consolidated financial condition and results of operations. This ASU does result in our modification of certain hedge documentation and effectiveness methods, which we have reflected in applicable disclosures in Note 6.
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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:
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|
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|
|
|
Standard
|
Description
|
Projected Date of Adoption
|
Effect on Financial Statements or Other Significant Matters
|
|
ASU 2016-13, Measurement of Credit Losses on Financial Instruments and related amendments
|
These amendments adopt a new model in ASC Topic 326 to measure and recognize credit losses for most financial assets. The ASU requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected over the life of the asset using an allowance for credit losses. Changes in the allowance are charged to earnings. The measurement of expected credit losses is based on relevant information about past events, including historical experience, as well as current economic conditions and reasonable and supportable forecasts that affect the collectability of the financial asset. The method used to measure estimated credit losses for fixed maturity AFS 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 securities. The amendments will permit entities to recognize improvements in credit loss estimates on fixed maturity AFS 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.
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January 1, 2020
|
The adoption of this standard and related amendments will result in the recognition of a cumulative effect adjustment that is not expected to be material to our retained earnings, to record allowances for credit losses as of the date of adoption, primarily related to commercial and residential mortgage loans, as well as reinsurance recoverables.
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ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments
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These amendments clarify the measurement, recognition and presentation of the allowance for credit losses on accrued interest receivable balances; the inclusion of recoveries when estimating the allowance for credit losses; the inclusion of all ASC Topic 944 – Financial Services – Insurance reinsurance recoverables within the scope of ASC 326-20; and provide additional targeted clarifications on the calculation of the allowance for credit losses.
These amendments also make targeted clarifications to ASC Topics 815 and 825. Early adoption is permitted.
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January 1, 2020
|
Our adoption of ASU 2016-13 and related amendments is discussed above. The adoption of the remainder of this guidance will not have a material impact on our consolidated financial condition and results of operations.
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ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief
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The amendments provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments – Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASC Topic 326.
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January 1, 2020
|
We will recognize a cumulative effect increase to retained earnings of approximately $14 million, after-tax, to elect the fair value option for certain mortgage loans in connection with our adoption of ASC Topic 326.
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|
Standard
|
Description
|
Projected Date of Adoption
|
Effect on Financial Statements or Other Significant Matters
|
|
ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts and related amendments
|
These amendments make changes to the accounting and reporting for long-duration contracts issued by an insurance entity that will significantly change how insurers account for long-duration contracts, including how they measure, recognize and make disclosures about insurance liabilities and DAC. Under this ASU, insurers will be required to review cash flow assumptions at least annually and update them if necessary. They also will have to make quarterly updates to the discount rate assumptions they use to measure the liability for future policyholder benefits. The ASU creates a new category of market risk benefits (i.e., features that protect the contract holder from capital market risk and expose the insurer to that risk) that insurers will have to measure at fair value. The ASU provides various transition methods by topic that entities may elect upon adoption. The ASU is currently effective January 1, 2022, and early adoption is permitted.
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January 1, 2022
|
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.
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3. Acquisition
On May 1, 2018, we completed the acquisition from Liberty Mutual Insurance Company of 100% of the capital stock of Liberty Life, an operator of a group benefits business (the “Liberty Group Business”) and an individual life and individual and group annuity business (the “Liberty Life Business”). The acquisition expanded the scale and capabilities of the Group Protection business while further diversifying the Company’s sources of earnings.
In connection with the acquisition and pursuant to the Master Transaction Agreement (“MTA”), dated January 18, 2018, which is filed as Exhibit 2.1 to this Form 10-K, Liberty Life sold the Liberty Life Business on May 1, 2018, by entering into reinsurance agreements and related ancillary documents (including administrative services agreements and transition services agreements) with Protective Life Insurance Company and its wholly-owned subsidiary, Protective Life and Annuity Insurance Company (together with Protective Life Insurance Company, “Protective”), providing for the reinsurance and administration of the Liberty Life Business.
We recognized $85 million of acquisition-related costs, pre-tax, for the year ended December 31, 2018. These costs were included in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).
In the year following the May 1, 2018 acquisition date, we adjusted assets acquired by $(5) million and liabilities acquired by $23 million for an increase in goodwill of $28 million. Under the terms of the MTA, a final balance sheet will be agreed upon at a later date. The following table presents the adjusted fair values (in millions) of the net assets acquired related to the Liberty Group Business:
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
Fair Value
|
|
|
Assets
|
|
|
|
|
Investments
|
$
|
2,493
|
|
|
Mortgage loans on real estate
|
|
658
|
|
|
Cash and invested cash
|
|
107
|
|
|
Reinsurance recoverables
|
|
76
|
|
|
Premiums and fees receivable
|
|
83
|
|
|
Accrued investment income
|
|
24
|
|
|
Other intangible assets acquired
|
|
640
|
|
|
Other assets acquired
|
|
142
|
|
|
Separate account assets
|
|
99
|
|
|
Total assets acquired
|
$
|
4,322
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Future contract benefits
|
$
|
2,930
|
|
|
Other contract holder funds
|
|
46
|
|
|
Other liabilities acquired
|
|
140
|
|
|
Separate account liabilities
|
|
99
|
|
|
Total liabilities assumed
|
$
|
3,215
|
|
|
|
|
|
|
|
Net identifiable assets acquired
|
$
|
1,107
|
|
|
Goodwill
|
|
410
|
|
|
Net assets acquired
|
$
|
1,517
|
|
Financial Information
Since the acquisition date of May 1, 2018, the revenues and net income of the business acquired have been included in our Consolidated Statements of Comprehensive Income (Loss) in the Group Protection segment and were $1.5 billion and $36 million, respectively, for the period ended December 31, 2018.
The following unaudited pro forma condensed consolidated results of operations of the Company assume that the acquisition of Liberty Life was completed on January 1, 2017 (in millions):
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|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Revenue
|
|
$
|
17,163
|
|
$
|
16,189
|
|
|
Net income
|
|
|
1,707
|
|
|
2,066
|
|
|
|
|
|
|
|
|
|
|
Pro forma adjustments include the revenue and net income of the acquired business for each period as well as amortization of identifiable intangible assets acquired and the fair value adjustment to acquired insurance reserves and investments. Other pro forma adjustments include the incremental increase to interest expense attributable to financing the acquisition, and the impact of reflecting acquisition and integration costs and investment expenses directly attributable to the business combination in 2017 instead of in 2018. Pro forma adjustments do not include retrospective adjustments to defer and amortize acquisition costs as would be recorded under our accounting policy.
4. Variable Interest Entities
Consolidated VIEs
Reinsurance Related Notes
In July 2013, we formed a new limited liability company, Lincoln Financial Limited Liability Company I (“LFLLCI”), and we became the sole equity owner of LFLLCI through our capital contribution. The activities of LFLLCI relate solely to our captive reinsurance subsidiary, the Lincoln Reinsurance Company of Vermont V (“LRCVV”), and are primarily to acquire, hold and issue notes with LRCVV as well as pay and collect interest on the notes. LFLLCI holds a surplus note issued by LRCVV that had an outstanding principal balance of $613 million as of December 31, 2019. LFLLCI issued a long-term note to LRCVV that has a principal balance that moves concurrently with any variability in the face amount of the surplus note LFLLCI received from LRCVV. We concluded that LFLLCI is a VIE and that LNC is the primary beneficiary as we have the power to direct the most significant activities affecting the performance of LFLLCI.
Asset information (dollars in millions) for the consolidated VIEs included on our Consolidated Balance Sheets was as follows:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
As of December 31, 2018
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Notional
|
|
Carrying
|
|
|
of
|
|
|
Notional
|
|
Carrying
|
|
|
|
Instruments
|
|
Amounts
|
|
Value
|
|
Instruments
|
|
Amounts
|
|
Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swap
|
|
|
1
|
|
|
$
|
613
|
|
$
|
-
|
|
|
|
1
|
|
|
$
|
600
|
|
$
|
-
|
|
|
Total assets
|
|
|
1
|
|
|
$
|
613
|
|
$
|
-
|
|
|
|
1
|
|
|
$
|
600
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no gains or losses for consolidated VIEs recognized on our Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019 and 2018.
Unconsolidated VIEs
Reinsurance Related Notes
Effective September 30, 2014, we entered into a new transaction with a non-affiliated VIE whose primary activities are to acquire, hold and issue notes and loans, pay and collect interest on the notes and loans, and enter into derivative instruments. We issued a long-term senior note to the non-affiliated VIE in exchange for a corporate bond AFS security of like principal and duration that was assigned to one of our subsidiaries. The outstanding principal balance of this long-term senior note was $925 million as of December 31, 2019, and it is variable in nature; moving concurrently with any variability in the face amount of the corporate bond AFS security up to a maximum amount of $1.1 billion. We have concluded that we are not the primary beneficiary of the non-affiliated VIE because we do not have power over the activities that most significantly affect its economic performance. In addition, the terms of the senior note provide us with a set-off right with the corporate bond AFS security we purchased from the VIE; therefore, neither appears on our Consolidated Balance Sheets. The VIE has entered into a total return swap with an unaffiliated third party that supports any necessary principal funding of the corporate bond AFS security required by our subsidiaries while the security is outstanding.
Effective October 1, 2017, our captive reinsurance subsidiary, the Lincoln Reinsurance Company of Vermont VI, restructured the $275 million, long-term surplus note which was originally issued to a non-affiliated VIE in October 2015 in exchange for two corporate bond AFS securities of like principal and duration. The activities of the VIE are primarily to acquire, hold and issue notes and loans and to pay and collect interest on the notes and loans. The outstanding principal balance of the long-term surplus note is variable in nature; moving concurrently with any variability in the face amount of the corporate bond AFS securities. We have concluded that we are not the primary beneficiary of the non-affiliated VIE because we do not have power over the activities that most significantly affect its economic performance. As of December 31, 2019, the principal balance of the long-term surplus note was zero and we do not currently have any exposure to this VIE.
Effective November 1, 2019, we entered into a new transaction with a non-affiliated VIE whose primary activities are to acquire, hold and issue notes, as well as pay and collect interest on the notes. We issued a long-term senior note to the non-affiliated VIE in exchange for a corporate bond AFS security of like principal and duration that was assigned to one of our subsidiaries. The outstanding principal balance of this long-term senior note was $352 million as of December 31, 2019, and it is variable in nature, moving concurrently with any variability in the face amount of the corporate bond AFS security up to a maximum amount of $500 million. We have concluded that we are not the primary beneficiary of the non-affiliated VIE due to our lack of power over the activities that most significantly affect its economic performance as well as the extent of our obligation to absorb its losses. In addition, the terms of the senior note provide us with a set-off right with the corporate bond AFS security we purchased from the VIE; therefore, neither appears on our Consolidated Balance Sheets.
Structured Securities
Through our investment activities, we make passive investments in structured securities issued by VIEs for which we are not the manager. These structured securities include our ABS, RMBS, CMBS and CLOs. We have not provided financial or other support with respect to these VIEs other than our original investment. We have determined that we are not the primary beneficiary of these VIEs due to the relative size of our investment in comparison to the principal amount of the structured securities issued by the VIEs and the level of credit subordination that reduces our obligation to absorb losses or right to receive benefits. Our maximum exposure to loss on these structured securities is limited to the amortized cost for these investments. We recognize our variable interest in these VIEs at fair value on our Consolidated Balance Sheets. For information about these structured securities, see Note 5.
Limited Partnerships and Limited Liability Companies
We invest in certain 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.
The carrying amounts of our investments in the LPs and LLCs are recognized in other investments on our Consolidated Balance Sheets and were $1.9 billion and $1.7 billion as of December 31, 2019 and 2018, respectively. Included in these carrying amounts are our investments in qualified affordable housing projects, which were $13 million and $20 million as of December 31, 2019 and 2018, 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 $2 million and $1 million for the years ended December 31, 2019 and 2018, respectively.
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 December 31, 2019.
5. Investments
Fixed Maturity AFS Securities
The amortized cost, gross unrealized gains, losses and OTTI and fair value of fixed maturity AFS securities (in millions) were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
Amortized
|
|
Gross Unrealized
|
|
|
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
OTTI (1)
|
|
Value
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
79,417
|
|
$
|
9,479
|
|
$
|
184
|
|
$
|
(4
|
)
|
$
|
88,716
|
|
|
U.S. government bonds
|
|
384
|
|
|
51
|
|
|
-
|
|
|
-
|
|
|
435
|
|
|
State and municipal bonds
|
|
4,778
|
|
|
1,113
|
|
|
7
|
|
|
-
|
|
|
5,884
|
|
|
Foreign government bonds
|
|
329
|
|
|
64
|
|
|
-
|
|
|
-
|
|
|
393
|
|
|
RMBS
|
|
3,042
|
|
|
190
|
|
|
10
|
|
|
(19
|
)
|
|
3,241
|
|
|
CMBS
|
|
1,038
|
|
|
45
|
|
|
1
|
|
|
(1
|
)
|
|
1,083
|
|
|
ABS
|
|
4,810
|
|
|
62
|
|
|
18
|
|
|
(35
|
)
|
|
4,889
|
|
|
Hybrid and redeemable preferred securities
|
|
497
|
|
|
82
|
|
|
20
|
|
|
-
|
|
|
559
|
|
|
Total fixed maturity AFS securities
|
$
|
94,295
|
|
$
|
11,086
|
|
$
|
240
|
|
$
|
(59
|
)
|
$
|
105,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
Amortized
|
|
Gross Unrealized
|
|
|
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
OTTI (1)
|
|
Value
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
79,623
|
|
$
|
2,980
|
|
$
|
2,263
|
|
$
|
(8
|
)
|
$
|
80,348
|
|
|
U.S. government bonds
|
|
390
|
|
|
29
|
|
|
2
|
|
|
-
|
|
|
417
|
|
|
State and municipal bonds
|
|
4,647
|
|
|
716
|
|
|
18
|
|
|
-
|
|
|
5,345
|
|
|
Foreign government bonds
|
|
406
|
|
|
42
|
|
|
-
|
|
|
-
|
|
|
448
|
|
|
RMBS
|
|
3,308
|
|
|
118
|
|
|
67
|
|
|
(14
|
)
|
|
3,373
|
|
|
CMBS
|
|
811
|
|
|
6
|
|
|
16
|
|
|
(3
|
)
|
|
804
|
|
|
ABS
|
|
2,662
|
|
|
45
|
|
|
30
|
|
|
(19
|
)
|
|
2,696
|
|
|
Hybrid and redeemable preferred securities
|
|
582
|
|
|
45
|
|
|
34
|
|
|
-
|
|
|
593
|
|
|
Total fixed maturity AFS securities
|
$
|
92,429
|
|
$
|
3,981
|
|
$
|
2,430
|
|
$
|
(44
|
)
|
$
|
94,024
|
|
(1)Includes unrealized (gains) and losses on credit-impaired securities related to changes in the fair value of such securities subsequent to the impairment measurement date.
The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of December 31, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
|
Due in one year or less
|
$
|
2,825
|
|
$
|
2,811
|
|
|
Due after one year through five years
|
|
15,123
|
|
|
15,708
|
|
|
Due after five years through ten years
|
|
17,049
|
|
|
18,503
|
|
|
Due after ten years
|
|
50,408
|
|
|
58,965
|
|
|
Subtotal
|
|
85,405
|
|
|
95,987
|
|
|
Structured securities (RMBS, CMBS, ABS)
|
|
8,890
|
|
|
9,213
|
|
|
Total fixed maturity AFS securities
|
$
|
94,295
|
|
$
|
105,200
|
|
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 portion of OTTI recognized in OCI, of fixed maturity 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 December 31, 2019
|
|
|
|
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 AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
2,935
|
|
$
|
46
|
|
$
|
1,406
|
|
$
|
141
|
|
$
|
4,341
|
|
|
$
|
187
|
|
|
State and municipal bonds
|
|
333
|
|
|
7
|
|
|
18
|
|
|
-
|
|
|
351
|
|
|
|
7
|
|
|
RMBS
|
|
536
|
|
|
10
|
|
|
15
|
|
|
-
|
|
|
551
|
|
|
|
10
|
|
|
CMBS
|
|
48
|
|
|
1
|
|
|
4
|
|
|
-
|
|
|
52
|
|
|
|
1
|
|
|
ABS
|
|
1,792
|
|
|
8
|
|
|
303
|
|
|
10
|
|
|
2,095
|
|
|
|
18
|
|
|
Hybrid and redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred securities
|
|
29
|
|
|
1
|
|
|
102
|
|
|
19
|
|
|
131
|
|
|
|
20
|
|
|
Total fixed maturity AFS securities
|
$
|
5,673
|
|
$
|
73
|
|
$
|
1,848
|
|
$
|
170
|
|
$
|
7,521
|
|
|
$
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of fixed maturity AFS securities in an unrealized loss position
|
|
|
|
895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
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 AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
32,493
|
|
$
|
1,530
|
|
$
|
7,228
|
|
$
|
735
|
|
$
|
39,721
|
|
|
$
|
2,265
|
|
|
U.S. government bonds
|
|
70
|
|
|
1
|
|
|
23
|
|
|
1
|
|
|
93
|
|
|
|
2
|
|
|
State and municipal bonds
|
|
404
|
|
|
8
|
|
|
96
|
|
|
10
|
|
|
500
|
|
|
|
18
|
|
|
RMBS
|
|
472
|
|
|
10
|
|
|
863
|
|
|
60
|
|
|
1,335
|
|
|
|
70
|
|
|
CMBS
|
|
470
|
|
|
11
|
|
|
82
|
|
|
5
|
|
|
552
|
|
|
|
16
|
|
|
ABS
|
|
1,241
|
|
|
23
|
|
|
246
|
|
|
17
|
|
|
1,487
|
|
|
|
40
|
|
|
Hybrid and redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred securities
|
|
96
|
|
|
6
|
|
|
133
|
|
|
28
|
|
|
229
|
|
|
|
34
|
|
|
Total fixed maturity AFS securities
|
$
|
35,246
|
|
$
|
1,589
|
|
$
|
8,671
|
|
$
|
856
|
|
$
|
43,917
|
|
|
$
|
2,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of fixed maturity AFS securities in an unrealized loss position
|
|
|
|
3,414
|
|
The fair value, gross unrealized losses, the portion of OTTI recognized in OCI (in millions) and number of fixed maturity AFS securities where the fair value had declined and remained below amortized cost by greater than 20% were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
Fair
|
|
Gross Unrealized
|
|
|
of
|
|
|
|
Value
|
|
Losses
|
|
OTTI
|
|
Securities (1)
|
|
Less than six months
|
$
|
15
|
|
$
|
5
|
|
$
|
-
|
|
|
|
7
|
|
|
Six months or greater, but less than nine months
|
|
10
|
|
|
3
|
|
|
-
|
|
|
|
4
|
|
|
Twelve months or greater
|
|
132
|
|
|
76
|
|
|
-
|
|
|
|
31
|
|
|
Total
|
$
|
157
|
|
$
|
84
|
|
$
|
-
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
Fair
|
|
Gross Unrealized
|
|
|
of
|
|
|
|
Value
|
|
Losses
|
|
OTTI
|
|
Securities (1)
|
|
Less than six months
|
$
|
395
|
|
$
|
124
|
|
$
|
1
|
|
|
|
45
|
|
|
Six months or greater, but less than nine months
|
|
96
|
|
|
49
|
|
|
-
|
|
|
|
11
|
|
|
Nine months or greater, but less than twelve months
|
|
11
|
|
|
8
|
|
|
-
|
|
|
|
2
|
|
|
Twelve months or greater
|
|
143
|
|
|
74
|
|
|
8
|
|
|
|
32
|
|
|
Total
|
$
|
645
|
|
$
|
255
|
|
$
|
9
|
|
|
|
90
|
|
(1)We may reflect a security in more than one aging category based on various purchase dates.
We regularly review our investment holdings for OTTI. Our gross unrealized losses, including the portion of OTTI recognized in OCI, on fixed maturity AFS securities decreased by $2.2 billion for the year ended December 31, 2019. As discussed further below, we believe the unrealized loss position as of December 31, 2019, did not represent OTTI as (i) we did not intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis; and (iii) the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities.
Based upon this evaluation as of December 31, 2019, management believes we have the ability to generate adequate amounts of cash from our normal operations (e.g., insurance premiums, fee income and investment income) to meet cash requirements with a prudent margin of safety without requiring the sale of our temporarily-impaired securities.
As of December 31, 2019, the unrealized losses associated with our corporate bond securities were attributable primarily to widening credit spreads and rising interest rates since purchase. We performed a detailed analysis of the financial performance of the underlying issuers and determined that we expected to recover the entire amortized cost for each temporarily-impaired security.
As of December 31, 2019, the unrealized losses associated with our MBS and ABS were attributable primarily to widening credit spreads and rising interest rates since purchase. We assessed for credit impairment using a cash flow model that incorporates key assumptions
including default rates, severities and prepayment rates. We estimated losses for a security by forecasting the underlying loans in each transaction. The forecasted loan performance was used to project cash flows to the various tranches in the structure, as applicable. Our forecasted cash flows also considered, as applicable, independent industry analyst reports and forecasts and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our subordination or other credit enhancement, we expected to recover the entire amortized cost of each temporarily-impaired security.
As of December 31, 2019, the unrealized losses associated with our hybrid and redeemable preferred securities were attributable primarily to wider credit spreads caused by illiquidity in the market and subordination within the capital structure, as well as credit risk of underlying issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the underlying issuers based upon credit performance and investment ratings and determined that we expected to recover the entire amortized cost of each temporarily-impaired security.
Changes in the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was recognized in OCI (in millions) on fixed maturity AFS securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Balance as of beginning-of-year
|
$
|
355
|
|
$
|
378
|
|
$
|
430
|
|
|
Increases attributable to:
|
|
|
|
|
|
|
|
|
|
|
Credit losses on securities for which an
|
|
|
|
|
|
|
|
|
|
|
OTTI was not previously recognized
|
|
13
|
|
|
5
|
|
|
13
|
|
|
Credit losses on securities for which an
|
|
|
|
|
|
|
|
|
|
|
OTTI was previously recognized
|
|
3
|
|
|
2
|
|
|
7
|
|
|
Decreases attributable to:
|
|
|
|
|
|
|
|
|
|
|
Securities sold, paid down or matured
|
|
(160
|
)
|
|
(30
|
)
|
|
(72
|
)
|
|
Balance as of end-of-year
|
$
|
211
|
|
$
|
355
|
|
$
|
378
|
|
During 2019, 2018 and 2017, we recorded credit losses on securities for which an OTTI was not previously recognized as we determined the cash flows expected to be collected would not be sufficient to recover the entire amortized cost basis of the debt security. The credit losses we recorded on securities for which an OTTI was not previously recognized were attributable primarily to one or a combination of the following reasons:
Failure of the issuer of the security to make scheduled payments;
Deterioration of creditworthiness of the issuer;
Deterioration of conditions specifically related to the security;
Deterioration of fundamentals of the industry in which the issuer operates; and
Deterioration of the rating of the security by a rating agency.
We recognize the OTTI attributed to the noncredit portion as a separate component in OCI referred to as unrealized OTTI on fixed maturity AFS securities.
Determination of Credit Losses on Corporate Bonds
As of December 31, 2019 and 2018, we reviewed our corporate bond portfolio for potential shortfalls in contractual principal and interest based on numerous subjective and objective inputs. The factors used to determine the amount of credit loss for each individual security, include, but are not limited to, near-term risk, substantial discrepancy between book and market value, sector or company-specific volatility, negative operating trends and trading levels wider than peers.
Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is those rated BBB- or higher by Standard & Poor’s (“S&P”) Rating Services or Baa3 or higher by Moody’s Investors Service (“Moody’s”), are generally considered by the rating agencies and market participants to be low credit risk. As of December 31, 2019 and 2018, 96% of the fair value of our corporate bond portfolio was rated investment grade. As of December 31, 2019 and 2018, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $3.2 billion and a fair value of $3.3 billion and $3.0 billion, respectively. Based upon the analysis discussed above, we believed as of December 31, 2019 and 2018, that we would recover the amortized cost of each corporate bond.
Determination of Credit Losses on MBS and ABS
As of December 31, 2019 and 2018, default rates were projected by considering underlying MBS and ABS loan performance and collateral type. Projected default rates on existing delinquencies vary depending on loan type and severity of delinquency status. In addition, we estimate the potential contributions of currently performing loans that may become delinquent in the future based on the change in delinquencies and loan liquidations experienced in the recent history. Finally, we develop a default rate timing curve by aggregating the defaults for all loans in the pool (delinquent loans, foreclosure and real estate owned and new delinquencies from currently performing loans) and the associated loan-level loss severities.
We use certain available loan characteristics such as lien status, loan sizes and occupancy to estimate the loss severity of loans. Second lien loans are assigned 100% severity, if defaulted. For first lien loans, we assume a minimum of 30% severity, with higher severity assumed for investor properties and further adjusted by housing price assumptions. With the default rate timing curve and loan-level loss severity, we derive the future expected credit losses.
Trading Securities
Trading securities at fair value (in millions) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2019
|
|
2018
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
2,947
|
|
$
|
1,639
|
|
|
U.S. government bonds
|
|
45
|
|
|
43
|
|
|
State and municipal bonds
|
|
17
|
|
|
16
|
|
|
Foreign government bonds
|
|
44
|
|
|
23
|
|
|
RMBS
|
|
170
|
|
|
79
|
|
|
CMBS
|
|
163
|
|
|
7
|
|
|
ABS
|
|
1,238
|
|
|
121
|
|
|
Hybrid and redeemable preferred securities
|
|
49
|
|
|
22
|
|
|
Total trading securities
|
$
|
4,673
|
|
$
|
1,950
|
|
The portion of the market adjustment for trading gains and losses recognized in realized gain (loss) that relate to trading securities still held as of December 31, 2019, 2018 and 2017, was $228 million, $(58) million and $7 million, respectively.
Mortgage Loans on Real Estate
The following provides the current and past due composition of our mortgage loans on real estate (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
|
|
|
Commercial
|
|
Residential
|
|
Total
|
|
Commercial
|
|
Residential
|
|
Total
|
|
|
Current
|
$
|
15,620
|
|
$
|
659
|
|
$
|
16,279
|
|
$
|
13,029
|
|
$
|
230
|
|
$
|
13,259
|
|
|
30 to 59 days past due
|
|
3
|
|
|
27
|
|
|
30
|
|
|
-
|
|
|
9
|
|
|
9
|
|
|
60 to 89 days past due
|
|
-
|
|
|
10
|
|
|
10
|
|
|
-
|
|
|
1
|
|
|
1
|
|
|
90 or more days past due
|
|
-
|
|
|
16
|
|
|
16
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Valuation allowance
|
|
-
|
|
|
(2
|
)
|
|
(2
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Unamortized premium (discount)
|
|
(17
|
)
|
|
23
|
|
|
6
|
|
|
(17
|
)
|
|
8
|
|
|
(9
|
)
|
|
Total carrying value
|
$
|
15,606
|
|
$
|
733
|
|
$
|
16,339
|
|
$
|
13,012
|
|
$
|
248
|
|
$
|
13,260
|
|
As of December 31, 2019, we had 38 residential mortgage loans that were either delinquent or in foreclosure. As of December 31, 2018, we had no loans that were either delinquent or in foreclosure.
For our commercial mortgage loans, there was one specifically identified impaired loan with a carrying value of less than $1 million as of December 31, 2019. There were no specifically identified impaired commercial mortgage loans as of December 31, 2018.
For our residential mortgage loans, there were four specifically identified impaired loans with an aggregate carrying value of $1 million as of December 31, 2019. There were no specifically identified impaired residential mortgage loans as of December 31, 2018. The general allowance established on residential mortgage loans was $2 million and less than $1 million as of December 31, 2019 and 2018, respectively.
We establish a valuation allowance to provide for the risk of credit losses inherent in our portfolio. The valuation allowance includes specific valuation allowances for loans that are deemed to be impaired as well as general valuation allowances for pools of loans with
similar risk characteristics where a property risk or market specific risk has not been identified but for which we anticipate a loss has occurred.
The changes in the valuation allowance associated with impaired commercial mortgage loans on real estate (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Valuation Allowance
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year
|
$
|
-
|
|
$
|
3
|
|
$
|
2
|
|
|
Additions
|
|
-
|
|
|
-
|
|
|
1
|
|
|
Charge-offs, net of recoveries
|
|
-
|
|
|
(3
|
)
|
|
-
|
|
|
Balance as of end-of-year
|
$
|
-
|
|
$
|
-
|
|
$
|
3
|
|
Additional information related to impaired commercial mortgage loans on real estate (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Average carrying value for impaired commercial
|
|
|
|
|
|
|
|
|
|
|
mortgage loans on real estate
|
$
|
-
|
|
$
|
5
|
|
$
|
6
|
|
|
Interest income recognized on impaired commercial
|
|
|
|
|
|
|
|
|
|
|
mortgage loans on real estate
|
|
-
|
|
|
1
|
|
|
-
|
|
|
Interest income collected on impaired commercial
|
|
|
|
|
|
|
|
|
|
|
mortgage loans on real estate
|
|
-
|
|
|
1
|
|
|
-
|
|
As described in Note 1, we use loan-to-value and debt-service coverage ratios as credit quality indicators for our commercial mortgage loans on real estate (dollars in millions) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
Debt-
|
|
|
|
|
|
|
Debt-
|
|
|
|
|
|
|
|
|
Service
|
|
|
|
|
|
|
Service
|
|
|
|
Carrying
|
|
% of
|
|
Coverage
|
|
Carrying
|
|
% of
|
|
Coverage
|
|
|
Loan-to-Value Ratio
|
Value
|
|
Total
|
|
Ratio
|
|
Value
|
|
Total
|
|
Ratio
|
|
|
Less than 65%
|
$
|
14,206
|
|
91.0%
|
|
2.35
|
|
$
|
11,716
|
|
90.1%
|
|
2.30
|
|
|
65% to 74%
|
|
1,399
|
|
9.0%
|
|
1.87
|
|
|
1,238
|
|
9.5%
|
|
1.76
|
|
|
75% to 100%
|
|
1
|
|
0.0%
|
|
1.09
|
|
|
58
|
|
0.4%
|
|
0.95
|
|
|
Total
|
$
|
15,606
|
|
100.0%
|
|
|
|
$
|
13,012
|
|
100.0%
|
|
|
|
As described in Note 1, we use loan performance status as the primary credit quality indicator for our residential mortgage loans on real estate (dollars in millions) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
|
|
|
Carrying
|
|
% of
|
|
Carrying
|
|
% of
|
|
|
Performance Indicator
|
Value
|
|
Total
|
|
Value
|
|
Total
|
|
|
Performing
|
$
|
716
|
|
97.7%
|
|
$
|
247
|
|
99.6%
|
|
|
Nonperforming
|
|
17
|
|
2.3%
|
|
|
1
|
|
0.4%
|
|
|
Total
|
$
|
733
|
|
100.0%
|
|
$
|
248
|
|
100.0%
|
|
Our commercial mortgage loan portfolio is geographically diversified with the largest concentrations in California, which accounted for 24% and 23% of commercial mortgage loans on real estate as of December 31, 2019 and 2018, respectively, and Texas, which accounted for 11% and 12% of commercial mortgage loans on real estate as of December 31, 2019 and 2018, respectively.
Our residential mortgage loan portfolio is geographically diversified with the largest concentrations in California, which accounted for 34% of residential mortgage loans on real estate as of December 31, 2019 and 2018, and Florida, which accounted for 20% and 19% of residential mortgage loans on real estate as of December 31, 2019 and 2018, respectively.
Alternative Investments
As of December 31, 2019 and 2018, alternative investments included investments in 258 and 237 different partnerships, respectively, and the portfolios represented approximately 1% of our total investments.
Net Investment Income
The major categories of net investment income (in millions) on our Consolidated Statements of Comprehensive Income (Loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Fixed maturity AFS securities
|
$
|
4,281
|
|
$
|
4,209
|
|
$
|
4,163
|
|
|
Equity AFS securities
|
|
-
|
|
|
-
|
|
|
12
|
|
|
Trading securities
|
|
191
|
|
|
84
|
|
|
94
|
|
|
Equity securities
|
|
4
|
|
|
4
|
|
|
-
|
|
|
Mortgage loans on real estate
|
|
629
|
|
|
496
|
|
|
440
|
|
|
Real estate
|
|
1
|
|
|
1
|
|
|
2
|
|
|
Policy loans
|
|
129
|
|
|
123
|
|
|
135
|
|
|
Invested cash
|
|
40
|
|
|
26
|
|
|
11
|
|
|
Commercial mortgage loan prepayment
|
|
|
|
|
|
|
|
|
|
|
and bond make-whole premiums
|
|
119
|
|
|
79
|
|
|
139
|
|
|
Alternative investments
|
|
22
|
|
|
222
|
|
|
165
|
|
|
Consent fees
|
|
8
|
|
|
4
|
|
|
6
|
|
|
Other investments
|
|
30
|
|
|
23
|
|
|
2
|
|
|
Investment income
|
|
5,454
|
|
|
5,271
|
|
|
5,169
|
|
|
Investment expense
|
|
(231
|
)
|
|
(186
|
)
|
|
(179
|
)
|
|
Net investment income
|
$
|
5,223
|
|
$
|
5,085
|
|
$
|
4,990
|
|
Realized Gain (Loss)
Details underlying realized gain (loss) (in millions) reported on our Consolidated Statements of Comprehensive Income (Loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
$
|
45
|
|
$
|
38
|
|
$
|
19
|
|
|
Gross losses
|
|
(73
|
)
|
|
(80
|
)
|
|
(44
|
)
|
|
Gross OTTI
|
|
(16
|
)
|
|
(7
|
)
|
|
(20
|
)
|
|
Equity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
-
|
|
|
-
|
|
|
6
|
|
|
Gain (loss) on other investments (1)
|
|
(16
|
)
|
|
(13
|
)
|
|
(12
|
)
|
|
Associated amortization of DAC, VOBA, DSI and DFEL
|
|
|
|
|
|
|
|
|
|
|
and changes in other contract holder funds
|
|
(13
|
)
|
|
(22
|
)
|
|
(21
|
)
|
|
Total realized gain (loss) related to certain investments
|
|
(73
|
)
|
|
(84
|
)
|
|
(72
|
)
|
|
Realized gain (loss) on the mark-to-market on certain
|
|
|
|
|
|
|
|
|
|
|
instruments (2)
|
|
(127
|
)
|
|
4
|
|
|
(11
|
)
|
|
Indexed annuity and IUL contracts net derivatives results: (3)
|
|
|
|
|
|
|
|
|
|
|
Gross gain (loss)
|
|
(80
|
)
|
|
(51
|
)
|
|
(22
|
)
|
|
Associated amortization of DAC, VOBA, DSI and DFEL
|
|
2
|
|
|
12
|
|
|
(2
|
)
|
|
Variable annuity net derivatives results: (4)
|
|
|
|
|
|
|
|
|
|
|
Gross gain (loss)
|
|
(389
|
)
|
|
295
|
|
|
(71
|
)
|
|
Associated amortization of DAC, VOBA, DSI and DFEL
|
|
57
|
|
|
(35
|
)
|
|
8
|
|
|
Total realized gain (loss)
|
$
|
(610
|
)
|
$
|
141
|
|
$
|
(170
|
)
|
(1)Includes market adjustments on equity securities still held of $(4) million and $(17) million for the years ended December 31, 2019 and 2018, respectively.
(2)Represents changes in the fair values of certain derivative investments (not including those associated with our variable and indexed annuity and IUL contracts net derivative results), reinsurance related embedded derivatives and trading securities. See Notes 1 and 9 for information regarding Modco.
(3)Represents the net difference between the change in fair value of the index options that we hold and the change in the fair value of the embedded derivative liabilities of our indexed annuity and IUL contracts along with changes in the fair value of embedded derivative liabilities related to index options we may purchase or sell in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products.
(4)Includes the net difference in the change in embedded derivative reserves of our GLB riders and the change in the fair value of the derivative instruments we own to hedge the change in embedded derivative reserves on our GLB riders and the benefit ratio unlocking on our GLB and GDB riders, including the cost of purchasing the hedging instruments.
Details underlying write-downs taken as a result of OTTI that were recognized in net income (loss) and included in realized gain (loss) on fixed maturity AFS securities above and the portion of OTTI recognized in OCI (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
OTTI Recognized in Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
(14
|
)
|
$
|
(5
|
)
|
$
|
(13
|
)
|
|
State and municipal bonds
|
|
-
|
|
|
-
|
|
|
(1
|
)
|
|
RMBS
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
CMBS
|
|
-
|
|
|
-
|
|
|
(2
|
)
|
|
ABS
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
Gross OTTI recognized in net income (loss)
|
|
(16
|
)
|
|
(7
|
)
|
|
(20
|
)
|
|
Associated amortization of DAC, VOBA, DSI and DFEL
|
|
1
|
|
|
-
|
|
|
2
|
|
|
Net OTTI recognized in net income (loss)
|
$
|
(15
|
)
|
$
|
(7
|
)
|
$
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
OTTI Recognized in OCI
|
|
|
|
|
|
|
|
|
|
|
Gross OTTI recognized in OCI
|
$
|
16
|
|
$
|
-
|
|
$
|
-
|
|
|
Change in DAC, VOBA, DSI and DFEL
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
Net OTTI recognized in OCI
|
$
|
15
|
|
$
|
-
|
|
$
|
-
|
|
Payables for Collateral on Investments
The carrying value of the payables for collateral on investments included on our Consolidated Balance Sheets and the fair value of the related investments or collateral (in millions) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
|
Collateral payable for derivative investments (1)
|
$
|
1,388
|
|
$
|
1,388
|
|
$
|
637
|
|
$
|
637
|
|
|
Securities pledged under securities lending agreements (2)
|
|
114
|
|
|
110
|
|
|
88
|
|
|
85
|
|
|
Securities pledged under repurchase agreements (3)
|
|
-
|
|
|
-
|
|
|
150
|
|
|
185
|
|
|
Investments pledged for Federal Home Loan Bank of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indianapolis (“FHLBI”) (4)
|
|
3,580
|
|
|
5,480
|
|
|
3,930
|
|
|
5,923
|
|
|
Total payables for collateral on investments
|
$
|
5,082
|
|
$
|
6,978
|
|
$
|
4,805
|
|
$
|
6,830
|
|
(1)We obtain collateral based upon contractual provisions with our counterparties. These agreements take into consideration the counterparties’ credit rating as compared to ours, the fair value of the derivative investments and specified thresholds that if exceeded result in the receipt of cash that is typically invested in cash and invested cash. See Note 6 for additional information.
(2)Our pledged securities under securities lending agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We generally obtain collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. We value collateral daily and obtain additional collateral when deemed appropriate. The cash received in our securities lending program is typically invested in cash and invested cash or fixed maturity AFS securities.
(3)Our pledged securities under repurchase agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets. The collateral requirements are generally 80% to 95% of the fair value of the securities, and our agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received in our repurchase program is typically invested in fixed maturity AFS securities. As of December 31, 2019, we are not participating in any open repurchase agreements.
(4)Our pledged investments for FHLBI are included in fixed maturity AFS securities and mortgage loans on real estate on our Consolidated Balance Sheets. The collateral requirements are generally 105% to 115% of the fair value for fixed maturity AFS securities and 155% to 175% of the fair value for mortgage loans on real estate. The cash received in these transactions is primarily invested in cash and invested cash or fixed maturity AFS securities.
Increase (decrease) in payables for collateral on investments (in millions) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Collateral payable for derivative investments
|
$
|
751
|
|
$
|
(128
|
)
|
$
|
(129
|
)
|
|
Securities pledged under securities lending agreements
|
|
26
|
|
|
(134
|
)
|
|
6
|
|
|
Securities pledged under repurchase agreements
|
|
(150
|
)
|
|
(380
|
)
|
|
(5
|
)
|
|
Investments pledged for FHLBI
|
|
(350
|
)
|
|
1,030
|
|
|
(450
|
)
|
|
Total increase (decrease) in payables for collateral on investments
|
$
|
277
|
|
$
|
388
|
|
$
|
(578
|
)
|
We have elected not to offset our securities lending and repurchase agreements transactions in our financial statements. The remaining contractual maturities of securities lending and repurchase agreements transactions accounted for as secured borrowings (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
Overnight and Continuous
|
|
Up to 30 Days
|
|
30 - 90
Days
|
|
Greater Than 90 Days
|
|
Total
|
|
|
Securities Lending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
114
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
114
|
|
|
Total gross secured borrowings
|
$
|
114
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
Overnight and Continuous
|
|
Up to 30 Days
|
|
30 - 90
Days
|
|
Greater Than 90 Days
|
|
Total
|
|
|
Securities Lending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
88
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
88
|
|
|
Repurchase Agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
-
|
|
|
-
|
|
|
-
|
|
|
150
|
|
|
150
|
|
|
Total gross secured borrowings
|
$
|
88
|
|
$
|
-
|
|
$
|
-
|
|
$
|
150
|
|
$
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We accept collateral in the form of securities in connection with repurchase agreements. In instances where we are permitted to sell or re-pledge the securities received, we report the fair value of the collateral received and a related obligation to return the collateral in the financial statements. In addition, we receive securities in connection with securities borrowing agreements which we are permitted to sell or re-pledge. As of December 31, 2019, the fair value of all collateral received that we are permitted to sell or re-pledge was $25 million. As of December 31, 2019, we have re-pledged $25 million of this collateral to cover initial margin and over-the-counter collateral requirements on certain derivative investments.
Investment Commitments
As of December 31, 2019, our investment commitments were $2.0 billion, which included $1.0 billion of LPs, $553 million of mortgage loans on real estate and $425 million of private placement securities.
Concentrations of Financial Instruments
As of December 31, 2019 and 2018, our most significant investments in one issuer were our investments in securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $1.3 billion and $1.4 billion, respectively, or 1% of total investments, and our investments in securities issued by the Federal National Mortgage Association with a fair value of $1.0 billion and $1.3 billion, respectively, or 1% of total investments. These concentrations include fixed maturity AFS, trading and equity securities.
As of December 31, 2019 and 2018, our most significant investments in one industry were our investments in securities in the financial services industry with a fair value of $16.4 billion and $14.2 billion, respectively, or 12% of total investments, and our investments in securities in the consumer non-cyclical industry with a fair value of $16.3 billion and $14.5 billion, respectively, or 12% and 13%, respectively, of total investments. These concentrations include fixed maturity AFS, trading and equity securities.
6. Derivative Instruments
We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate risk, foreign currency exchange risk, equity market risk, basis risk and credit risk. We assess these risks by continually identifying and monitoring changes in our exposures that may adversely affect expected future cash flows and by evaluating hedging opportunities.
Derivative activities are monitored by various management committees. The committees are responsible for overseeing the implementation of various hedging strategies that are developed through the analysis of financial simulation models and other internal and industry sources. The resulting hedging strategies are incorporated into our overall risk management strategies.
See Note 1 for a detailed discussion of the accounting treatment for derivative instruments. See Note 20 for additional disclosures related to the fair value of our derivative instruments and Note 4 for derivative instruments related to our consolidated VIEs.
We adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in 2019. See Note 2 for additional information.
Interest Rate Contracts
We use derivative instruments as part of our interest rate risk management strategy. These instruments are economic hedges unless otherwise noted and include:
Forward-Starting Interest Rate Swaps
We use forward-starting interest rate swaps designated and qualifying as cash flow hedges to hedge our exposure to interest rate fluctuations related to the forecasted purchases of certain assets and anticipated issuances of fixed-rate securities.
We also use forward-starting interest rate swaps to hedge the interest rate exposure within our life products related to the forecasted purchases of certain assets.
Interest Rate Cap Corridors
We use interest rate cap corridors to provide a level of protection from the effect of rising interest rates for certain life insurance products and annuity contracts. Interest rate cap corridors involve purchasing an interest rate cap at a specific cap rate and selling an interest rate cap with a higher cap rate. For each corridor, the amount of quarterly payments, if any, is determined by the rate at which the underlying index rate resets above the original capped rate. The corridor limits the benefit the purchaser can receive as the related interest rate index rises above the higher capped rate. There is no additional liability to us other than the purchase price associated with the interest rate cap corridor.
Interest Rate Futures
We use interest rate futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures contracts require payment between our counterparty and us on a daily basis for changes in the futures index price.
Interest Rate Swap Agreements
We use interest rate swap agreements to hedge the liability exposure on certain options in variable annuity products.
We also use interest rate swap agreements designated and qualifying as cash flow hedges to hedge the interest rate risk of floating-rate bond coupon payments by replicating a fixed-rate bond.
Finally, we use interest rate swap agreements designated and qualifying as fair value hedges to hedge against changes in the fair value of certain fixed-rate long-term debt and fixed maturity securities due to interest rate risks.
Treasury and Reverse Treasury Locks
We use treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to our issuance of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest rates. In addition, we use reverse treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to the anticipated purchase of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest rates. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.
Foreign Currency Contracts
We use derivative instruments as part of our foreign currency risk management strategy. These instruments are economic hedges unless otherwise noted and include:
Currency Futures
We use currency futures to hedge foreign exchange risk associated with certain options in variable annuity products. Currency futures exchange one currency for another at a specified date in the future at a specified exchange rate.
Foreign Currency Swaps
We use foreign currency swaps to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. A foreign currency swap is a contractual agreement to exchange one currency for another at specified dates in the future at a specified exchange rate.
We also use foreign currency swaps designated and qualifying as cash flow hedges to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies.
Foreign Currency Forwards
We use foreign currency forwards to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. A foreign currency forward is a contractual agreement to exchange one currency for another at specified dates in the future at a specified current exchange rate.
Equity Market Contracts
We use derivative instruments as part of our equity market risk management strategy that are economic hedges and include:
Call Options Based on the S&P 500 and Other Indices
We use call options to hedge the liability exposure on certain options in variable annuity products.
Our indexed annuity and IUL contracts permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the Standard & Poor's 500 Index (“S&P 500”) or other indices. Contract holders may elect to rebalance index options at renewal dates. At the end of each indexed term, which can be up to 6 years, we have the opportunity to re-price the indexed component by establishing participation rates, caps, spreads and specified rates, subject to contractual guarantees. We use call options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period.
Consumer Price Index Swaps
We use consumer price index swaps to hedge the liability exposure on certain options in fixed annuity products. Consumer price index swaps are contracts entered into at no cost and whose payoff is the difference between the consumer price index inflation rate and the fixed-rate determined as of inception.
Equity Futures
We use equity futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures contracts require payment between our counterparty and us on a daily basis for changes in the futures index price.
Put Options
We use put options to hedge the liability exposure on certain options in variable annuity products. Put options are contracts that require the seller to pay the buyer at a specified future date the amount, if any, by which a specified equity index is less than the strike rate stated in the agreement, applied to a notional amount.
Total Return Swaps
We use total return swaps to hedge the liability exposure on certain options in variable annuity products.
In addition, we use total return swaps to hedge a portion of the liability related to our deferred compensation plans. We receive the total return on a portfolio of indexes and pay a floating-rate of interest.
Credit Contracts
We use derivative instruments as part of our credit risk management strategy that are economic hedges and include:
Credit Default Swaps – Buying Protection
We use credit default swaps to hedge the liability exposure on certain options in variable annuity products.
We buy credit default swaps to hedge against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap allows us to put the bond back to the counterparty at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring.
Credit Default Swaps – Selling Protection
We use credit default swaps to hedge the liability exposure on certain options in variable annuity products.
We sell credit default swaps to offer credit protection to contract holders and investors. The credit default swaps hedge the contract holders and investors against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap allows the investor to put the bond back to us at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring.
Embedded Derivatives
We have embedded derivatives that include:
GLB Reserves Embedded Derivatives
We use a hedging strategy designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest rates and volatility associated with GLBs offered in our variable annuity products, including products with GWB and GIB features. Changes in the value of the hedge contracts due to changes in equity markets, interest rates and implied volatilities hedge the income statement effect of changes in embedded derivative GLB reserves caused by those same factors. We rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions, these hedge positions may not be totally effective in offsetting changes in the embedded derivative reserve due to, among other things, differences in timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets and interest rates, market volatility, contract holder behavior, divergence between the performance of the underlying funds and the hedging indices, divergence between the actual and expected performance of the hedge instruments and our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off.
Certain features of these guarantees have elements of both insurance benefits accounted for under the Financial Services – Insurance – Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC (“benefit reserves”) and embedded derivatives accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC (“embedded derivative reserves”). We calculate the value of the benefit reserves and the embedded derivative reserves based on the specific characteristics of each GLB feature.
Indexed Annuity and IUL Contracts Embedded Derivatives
Our indexed annuity and IUL contracts permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500 or other indices. Contract holders may elect to rebalance index options at renewal dates. At the end of each indexed term, which can be up to 6 years, we have the opportunity to re-price the indexed component by establishing participation rates, caps, spreads and specified rates, subject to contractual guarantees. We use options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period.
Reinsurance Related Embedded Derivatives
We have certain Modco and coinsurance with funds withheld reinsurance agreements with embedded derivatives related to the withheld assets of the related funds. These derivatives are considered total return swaps with contractual returns that are attributable to various assets and liabilities associated with these reinsurance agreements.
We have derivative instruments with off-balance-sheet risks whose notional or contract amounts exceed the related credit exposure. Outstanding derivative instruments with off-balance-sheet risks (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
|
|
|
Notional
|
|
Fair Value
|
|
Notional
|
|
Fair Value
|
|
|
|
Amounts
|
|
Asset
|
|
Liability
|
|
Amounts
|
|
Asset
|
|
Liability
|
|
|
Qualifying Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1)
|
$
|
2,387
|
|
$
|
108
|
|
$
|
245
|
|
$
|
2,741
|
|
$
|
70
|
|
$
|
9
|
|
|
Foreign currency contracts (1)
|
|
2,874
|
|
|
191
|
|
|
51
|
|
|
2,326
|
|
|
167
|
|
|
39
|
|
|
Total cash flow hedges
|
|
5,261
|
|
|
299
|
|
|
296
|
|
|
5,067
|
|
|
237
|
|
|
48
|
|
|
Fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1)
|
|
1,261
|
|
|
123
|
|
|
203
|
|
|
1,268
|
|
|
55
|
|
|
137
|
|
|
Non-Qualifying Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1)
|
|
112,921
|
|
|
1,082
|
|
|
219
|
|
|
100,628
|
|
|
464
|
|
|
138
|
|
|
Foreign currency contracts (1)
|
|
262
|
|
|
1
|
|
|
3
|
|
|
47
|
|
|
-
|
|
|
-
|
|
|
Equity market contracts (1)
|
|
43,555
|
|
|
1,442
|
|
|
664
|
|
|
30,487
|
|
|
676
|
|
|
162
|
|
|
Credit contracts (1)
|
|
55
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Embedded derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct (2)
|
|
-
|
|
|
450
|
|
|
-
|
|
|
-
|
|
|
123
|
|
|
-
|
|
|
GLB ceded (2)
|
|
-
|
|
|
60
|
|
|
9
|
|
|
-
|
|
|
72
|
|
|
-
|
|
|
Reinsurance related (3)
|
|
-
|
|
|
-
|
|
|
327
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
Indexed annuity and IUL contracts (2) (4)
|
|
-
|
|
|
927
|
|
|
2,585
|
|
|
-
|
|
|
902
|
|
|
1,305
|
|
|
Total derivative instruments
|
$
|
163,315
|
|
$
|
4,384
|
|
$
|
4,306
|
|
$
|
137,497
|
|
$
|
2,529
|
|
$
|
1,793
|
|
(1)Reported in derivative investments and other liabilities on our Consolidated Balance Sheets.
(2)Reported in other assets on our Consolidated Balance Sheets.
(3)Reported in reinsurance related embedded derivatives on our Consolidated Balance Sheets.
(4)Reported in future contract benefits on our Consolidated Balance Sheets.
The maturity of the notional amounts of derivative instruments (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Life as of December 31, 2019
|
|
|
|
Less Than
|
|
1 - 5
|
|
6 - 10
|
|
11 - 30
|
|
Over 30
|
|
|
|
|
|
1 Year
|
|
Years
|
|
Years
|
|
Years
|
|
Years
|
|
Total
|
|
|
Interest rate contracts (1)
|
$
|
11,341
|
|
$
|
53,011
|
|
$
|
20,948
|
|
$
|
29,556
|
|
$
|
1,713
|
|
$
|
116,569
|
|
|
Foreign currency contracts (2)
|
|
218
|
|
|
383
|
|
|
961
|
|
|
1,473
|
|
|
101
|
|
|
3,136
|
|
|
Equity market contracts
|
|
27,594
|
|
|
7,992
|
|
|
3,762
|
|
|
13
|
|
|
4,194
|
|
|
43,555
|
|
|
Credit contracts
|
|
-
|
|
|
55
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
55
|
|
|
Total derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with notional amounts
|
$
|
39,153
|
|
$
|
61,441
|
|
$
|
25,671
|
|
$
|
31,042
|
|
$
|
6,008
|
|
$
|
163,315
|
|
(1)As of December 31, 2019, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was April 20, 2067.
(2)As of December 31, 2019, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was February 26, 2050.
The following amounts (in millions) were recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
Hedging
|
|
|
|
|
|
|
Adjustment
|
|
|
|
Amortized
|
|
Included in
|
|
|
|
Cost of the
|
|
the Amortized
|
|
|
|
Hedged
|
|
Cost of the
|
|
|
|
Assets (Liabilities)
|
|
Hedged Assets
|
|
|
|
(Liabilities)
|
|
(Liabilities)
|
|
|
Line Items in which the Hedged Items are Recorded
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities, at fair value
|
$
|
776
|
|
$
|
202
|
|
|
|
|
Long-term debt (1)
|
|
(1,035
|
)
|
|
(160
|
)
|
|
|
(1)Includes $(118) million of unamortized adjustments from discontinued hedges as of December 31, 2019.
The change in our unrealized gain (loss) on derivative instruments within AOCI (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Unrealized Gain (Loss) on Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year
|
$
|
139
|
|
$
|
(29
|
)
|
$
|
49
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the period:
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect from adoption of
|
|
|
|
|
|
|
|
|
|
|
new accounting standard
|
|
-
|
|
|
(6
|
)
|
|
-
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
(201
|
)
|
|
100
|
|
|
7
|
|
|
Foreign currency contracts
|
|
108
|
|
|
44
|
|
|
20
|
|
|
Change in foreign currency exchange rate adjustment
|
|
(52
|
)
|
|
111
|
|
|
(137
|
)
|
|
Change in DAC, VOBA, DSI and DFEL
|
|
(4
|
)
|
|
(13
|
)
|
|
2
|
|
|
Income tax benefit (expense)
|
|
31
|
|
|
(51
|
)
|
|
38
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for gains (losses)
|
|
|
|
|
|
|
|
|
|
|
included in net income (loss):
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1)
|
|
3
|
|
|
4
|
|
|
4
|
|
|
Interest rate contracts (2)
|
|
(5
|
)
|
|
(7
|
)
|
|
(18
|
)
|
|
Foreign currency contracts (1)
|
|
35
|
|
|
27
|
|
|
18
|
|
|
Foreign currency contracts (3)
|
|
9
|
|
|
-
|
|
|
9
|
|
|
Associated amortization of DAC, VOBA, DSI and DFEL
|
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
Income tax benefit (expense)
|
|
(9
|
)
|
|
(5
|
)
|
|
(4
|
)
|
|
Balance as of end-of-period
|
$
|
(11
|
)
|
$
|
139
|
|
$
|
(29
|
)
|
(1)The OCI offset is reported within net investment income on our Consolidated Statements of Comprehensive Income (Loss).
(2)The OCI offset is reported within interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss).
(3)The OCI offset is reported within realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
The effects of qualifying and non-qualifying hedges (in millions) on the Consolidated Statements of Comprehensive Income (Loss) were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Income
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
|
|
|
Realized
|
|
|
Net
|
|
|
Interest
|
|
|
|
|
|
|
|
Gain
|
|
|
Investment
|
|
|
and Debt
|
|
|
|
|
|
|
|
(Loss)
|
|
|
Income
|
|
|
Expense
|
|
|
|
|
|
Total Line Items in which the Effects of Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or Cash Flow Hedges are Recorded
|
|
$
|
(610
|
)
|
|
$
|
5,223
|
|
|
$
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (loss) on fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
|
|
-
|
|
|
|
63
|
|
|
|
(93
|
)
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
-
|
|
|
|
(63
|
)
|
|
|
93
|
|
|
|
|
|
Gain or (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from AOCI into income
|
|
|
-
|
|
|
|
3
|
|
|
|
(5
|
)
|
|
|
|
|
Foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from AOCI into income
|
|
|
9
|
|
|
|
35
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Qualifying Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
984
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Foreign currency contracts
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Equity market contracts
|
|
|
(137
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Embedded derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB
|
|
|
306
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Reinsurance related
|
|
|
(324
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Indexed annuity and IUL contracts
|
|
|
(742
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gains (losses) on derivative instruments (in millions) recorded within income (loss) from continuing operations on our Consolidated Statements of Comprehensive Income (Loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
Qualifying Hedges
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1)
|
|
$
|
4
|
|
$
|
4
|
|
|
|
|
Interest rate contracts (2)
|
|
|
(7
|
)
|
|
(18
|
)
|
|
|
|
Foreign currency contracts (1)
|
|
|
-
|
|
|
18
|
|
|
|
|
Foreign currency contracts (3)
|
|
|
27
|
|
|
9
|
|
|
|
|
Total cash flow hedges
|
|
|
24
|
|
|
13
|
|
|
|
|
Fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1)
|
|
|
(14
|
)
|
|
(23
|
)
|
|
|
|
Interest rate contracts (2)
|
|
|
13
|
|
|
27
|
|
|
|
|
Interest rate contracts (3)
|
|
|
37
|
|
|
7
|
|
|
|
|
Total fair value hedges
|
|
|
36
|
|
|
11
|
|
|
|
|
Non-Qualifying Hedges
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (3)
|
|
|
(150
|
)
|
|
103
|
|
|
|
|
Foreign currency contracts (3)
|
|
|
5
|
|
|
-
|
|
|
|
|
Equity market contracts (3)
|
|
|
444
|
|
|
(1,427
|
)
|
|
|
|
Equity market contracts (4)
|
|
|
(18
|
)
|
|
29
|
|
|
|
|
Credit contracts (3)
|
|
|
-
|
|
|
1
|
|
|
|
|
Embedded derivatives:
|
|
|
|
|
|
|
|
|
|
|
GLB (3)
|
|
|
(692
|
)
|
|
1,055
|
|
|
|
|
Reinsurance related (3)
|
|
|
54
|
|
|
10
|
|
|
|
|
Indexed annuity and IUL contracts (3)
|
|
|
81
|
|
|
(400
|
)
|
|
|
|
Total derivative instruments
|
|
$
|
(216
|
)
|
$
|
(605
|
)
|
|
|
(1)Reported in net investment income on our Consolidated Statements of Comprehensive Income (Loss).
(2)Reported in interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss).
(3)Reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
(4)Reported in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).
Gains (losses) recognized as a component of OCI (in millions) on derivative instruments designated and qualifying as cash flow hedges were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
Offset to net investment income
|
|
$
|
4
|
|
$
|
22
|
|
|
|
|
Offset to realized gain (loss)
|
|
|
27
|
|
|
9
|
|
|
|
|
Offset to interest and debt expense
|
|
|
(7
|
)
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019, $34 million of the deferred net gains (losses) on derivative instruments in AOCI were expected to be reclassified to earnings during the next 12 months. This reclassification would be due primarily to interest rate variances related to our interest rate swap agreements.
For the years ended December 31, 2019 and 2018, there were no material reclassifications to earnings due to hedged firm commitments no longer deemed probable or due to hedged forecasted transactions that had not occurred by the end of the originally specified time period.
As of December 31, 2019, information related to our credit default swaps for which we are the seller (dollars in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reason
|
|
Nature
|
|
Rating of
|
|
Number
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
for
|
|
of
|
Underlying
|
of
|
|
Fair
|
|
Potential
|
|
|
Credit Contract Type
|
|
Maturity
|
|
Entering
|
|
Recourse
|
Obligation (1)
|
Instruments
|
|
Value (2)
|
|
Payout
|
|
|
Basket credit default swaps
|
|
12/20/2024
|
|
(3)
|
|
(4)
|
|
BBB+
|
|
1
|
|
$
|
1
|
|
$
|
55
|
|
(1)Represents average credit ratings based on the midpoint of the applicable ratings among Moody’s, S&P and Fitch Ratings, as scaled to the corresponding S&P ratings.
(2)Broker quotes are used to determine the market value of our credit default swaps.
(3)Credit default swaps were entered into in order to hedge the liability exposure on certain variable annuity products.
(4)Sellers do not have the right to demand indemnification or compensation from third parties in case of a loss (payment) on the contract.
As of December 31, 2018, we had no exposure related to credit default swaps for which we are the seller.
Details underlying the associated collateral of our credit default swaps for which we are the seller if credit risk-related contingent features were triggered (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Maximum potential payout
|
|
$
|
55
|
|
|
$
|
-
|
|
|
Less: Counterparty thresholds
|
|
|
-
|
|
|
|
-
|
|
|
Maximum collateral potentially required to post
|
|
$
|
55
|
|
|
$
|
-
|
|
Certain of our credit default swap agreements contain contractual provisions that allow for the netting of collateral with our counterparties related to all of our collateralized financing transactions that we have outstanding. If these netting agreements were not in place, we would have been required to post collateral if the market value was less than zero.
Credit Risk
We are exposed to credit losses in the event of non-performance by our counterparties on various derivative contracts and reflect assumptions regarding the credit or NPR. The NPR is based upon assumptions for each counterparty’s credit spread over the estimated weighted average life of the counterparty exposure, less collateral held. As of December 31, 2019, the NPR adjustment was zero. The credit risk associated with such agreements is minimized by entering into agreements with financial institutions with long-standing, superior performance records. Additionally, we maintain a policy of requiring derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement. We are required to maintain minimum ratings as a matter of routine practice in negotiating ISDA agreements. Under some ISDA agreements, our insurance subsidiaries have agreed to maintain certain financial strength or claims-paying ratings. A downgrade below these levels could result in termination of derivative contracts, at which time any amounts payable by us would be dependent on the market value of the underlying derivative contracts. In certain transactions, we and the counterparty have entered into a credit support annex requiring either party to post collateral when net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. The amount of such exposure is essentially the net replacement cost or market value less collateral held for such agreements with each counterparty if the net market value is in our favor. We did not have any exposure as of December 31, 2019 or 2018.
The amounts recognized (in millions) by S&P credit rating of counterparty, for which we had the right to reclaim cash collateral or were obligated to return cash collateral, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
|
|
|
|
Collateral
|
|
Collateral
|
|
Collateral
|
|
Collateral
|
|
|
|
|
Posted by
|
|
Posted by
|
|
Posted by
|
|
Posted by
|
|
|
S&P
|
|
Counter-
|
|
LNC
|
|
Counter-
|
|
LNC
|
|
|
Credit
|
|
Party
|
|
(Held by
|
|
Party
|
|
(Held by
|
|
|
Rating of
|
|
(Held by
|
|
Counter-
|
|
(Held by
|
|
Counter-
|
|
|
Counterparty
|
|
LNC)
|
|
Party)
|
|
LNC)
|
|
Party)
|
|
|
AA-
|
|
$
|
441
|
|
$
|
(167
|
)
|
$
|
33
|
|
$
|
(3
|
)
|
|
A+
|
|
|
555
|
|
|
(339
|
)
|
|
296
|
|
|
(96
|
)
|
|
A
|
|
|
36
|
|
|
-
|
|
|
106
|
|
|
(56
|
)
|
|
A-
|
|
|
355
|
|
|
(51
|
)
|
|
4
|
|
|
-
|
|
|
BBB+
|
|
|
-
|
|
|
-
|
|
|
197
|
|
|
-
|
|
|
|
|
$
|
1,387
|
|
$
|
(557
|
)
|
$
|
636
|
|
$
|
(155
|
)
|
Balance Sheet Offsetting
Information related to the effects of offsetting on our Consolidated Balance Sheets (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
Embedded
|
|
|
|
|
|
|
Derivative
|
Derivative
|
|
|
|
|
|
|
Instruments
|
Instruments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amount of recognized assets
|
|
$
|
2,619
|
|
|
$
|
1,437
|
|
|
$
|
4,056
|
|
|
Gross amounts offset
|
|
|
(708
|
)
|
|
|
-
|
|
|
|
(708
|
)
|
|
Net amount of assets
|
|
|
1,911
|
|
|
|
1,437
|
|
|
|
3,348
|
|
|
Gross amounts not offset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collateral
|
|
|
(1,387
|
)
|
|
|
-
|
|
|
|
(1,387
|
)
|
|
Non-cash collateral
|
|
|
(242
|
)
|
|
|
-
|
|
|
|
(242
|
)
|
|
Net amount
|
|
$
|
282
|
|
|
$
|
1,437
|
|
|
$
|
1,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amount of recognized liabilities
|
|
$
|
1,005
|
|
|
$
|
2,921
|
|
|
$
|
3,926
|
|
|
Gross amounts offset
|
|
|
(138
|
)
|
|
|
-
|
|
|
|
(138
|
)
|
|
Net amount of liabilities
|
|
|
867
|
|
|
|
2,921
|
|
|
|
3,788
|
|
|
Gross amounts not offset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collateral
|
|
|
(557
|
)
|
|
|
-
|
|
|
|
(557
|
)
|
|
Non-cash collateral
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net amount
|
|
$
|
310
|
|
|
$
|
2,921
|
|
|
$
|
3,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
Embedded
|
|
|
|
|
|
|
Derivative
|
Derivative
|
|
|
|
|
|
|
Instruments
|
Instruments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amount of recognized assets
|
|
$
|
1,330
|
|
|
$
|
1,097
|
|
|
$
|
2,427
|
|
|
Gross amounts offset
|
|
|
(223
|
)
|
|
|
-
|
|
|
|
(223
|
)
|
|
Net amount of assets
|
|
|
1,107
|
|
|
|
1,097
|
|
|
|
2,204
|
|
|
Gross amounts not offset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collateral
|
|
|
(636
|
)
|
|
|
-
|
|
|
|
(636
|
)
|
|
Non-cash collateral
|
|
|
(58
|
)
|
|
|
-
|
|
|
|
(58
|
)
|
|
Net amount
|
|
$
|
413
|
|
|
$
|
1,097
|
|
|
$
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amount of recognized liabilities
|
|
$
|
784
|
|
|
$
|
1,308
|
|
|
$
|
2,092
|
|
|
Gross amounts offset
|
|
|
(103
|
)
|
|
|
-
|
|
|
|
(103
|
)
|
|
Net amount of liabilities
|
|
|
681
|
|
|
|
1,308
|
|
|
|
1,989
|
|
|
Gross amounts not offset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collateral
|
|
|
(155
|
)
|
|
|
-
|
|
|
|
(155
|
)
|
|
Non-cash collateral
|
|
|
(190
|
)
|
|
|
-
|
|
|
|
(190
|
)
|
|
Net amount
|
|
$
|
336
|
|
|
$
|
1,308
|
|
|
$
|
1,644
|
|
7. Federal Income Taxes
The federal income tax expense (benefit) on continuing operations (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Current
|
$
|
181
|
|
$
|
91
|
|
$
|
210
|
|
|
Deferred
|
|
(148
|
)
|
|
153
|
|
|
(1,159
|
)
|
|
Federal income tax expense (benefit)
|
$
|
33
|
|
$
|
244
|
|
$
|
(949
|
)
|
A reconciliation of the effective tax rate differences (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Income (loss) before taxes
|
$
|
919
|
|
$
|
1,885
|
|
$
|
1,130
|
|
|
Federal statutory rate
|
|
21%
|
|
|
21%
|
|
|
35%
|
|
|
Federal income tax expense (benefit) at federal statutory rate
|
|
193
|
|
|
396
|
|
|
396
|
|
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
Tax-preferred investment income (1)
|
|
(99
|
)
|
|
(87
|
)
|
|
(280
|
)
|
|
Tax credits
|
|
(40
|
)
|
|
(39
|
)
|
|
(29
|
)
|
|
Excess tax benefits from stock-based compensation
|
|
(9
|
)
|
|
(5
|
)
|
|
(12
|
)
|
|
Goodwill impairment
|
|
-
|
|
|
-
|
|
|
316
|
|
|
Tax impact associated with the Tax Cuts and Jobs Act (2)
|
|
(17
|
)
|
|
(19
|
)
|
|
(1,322
|
)
|
|
Other items
|
|
5
|
|
|
(2
|
)
|
|
(18
|
)
|
|
Federal income tax expense (benefit)
|
$
|
33
|
|
$
|
244
|
|
$
|
(949
|
)
|
|
Effective tax rate
|
|
4%
|
|
|
13%
|
|
|
-84%
|
|
(1)Relates primarily to separate account dividends eligible for the dividends-received deduction. As a result of the Tax Cuts and Jobs Act (the “Tax Act”), the recorded tax benefit for the separate account dividends-received deduction was substantially less in 2019 and 2018 as compared to 2017.
(2)As a result of the enactment of the Tax Act in 2017, we remeasured our existing deferred tax balances at the prevailing corporate federal income tax rate of 21% and recognized a $1.3 billion tax benefit. In 2018, we recognized a $27 million net tax benefit from the impact of the reduced federal statutory rate under the Tax Act on our adoption of an Internal Revenue Service pronouncement related to variable annuity contracts. In 2019, we recognized a $17 million net tax benefit from the impact of the reduced corporate tax rate under the Tax Act on our election to revalue policyholder tax reserves.
The federal income tax asset (liability) (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2019
|
|
2018
|
|
|
Current
|
$
|
60
|
|
$
|
(24
|
)
|
|
Deferred
|
|
(2,443
|
)
|
|
(1,158
|
)
|
|
Total federal income tax asset (liability)
|
$
|
(2,383
|
)
|
$
|
(1,182
|
)
|
Significant components of our deferred tax assets and liabilities (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2019
|
|
2018
|
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
Future contract benefits and other contract holder funds
|
$
|
643
|
|
$
|
649
|
|
|
Reinsurance related embedded derivative asset
|
|
69
|
|
|
1
|
|
|
Compensation and benefit plans
|
|
190
|
|
|
179
|
|
|
Intangibles
|
|
26
|
|
|
40
|
|
|
Net operating losses
|
|
216
|
|
|
264
|
|
|
Other
|
|
14
|
|
|
56
|
|
|
Total deferred tax assets
|
$
|
1,158
|
|
$
|
1,189
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
DAC
|
$
|
813
|
|
$
|
1,339
|
|
|
VOBA
|
|
194
|
|
|
305
|
|
|
Net unrealized gain on fixed maturity AFS securities
|
|
2,308
|
|
|
338
|
|
|
Net unrealized gain on trading securities
|
|
72
|
|
|
27
|
|
|
Investment activity
|
|
109
|
|
|
332
|
|
|
Other
|
|
105
|
|
|
6
|
|
|
Total deferred tax liabilities
|
$
|
3,601
|
|
$
|
2,347
|
|
|
Net deferred tax asset (liability)
|
$
|
(2,443
|
)
|
$
|
(1,158
|
)
|
As of December 31, 2019, we have $1.0 billion of net operating losses to carry forward to future years. The net operating losses arose in tax year 2018, and under the Tax Act changes, have an unlimited carryforward period. As a result, management believes that it is more likely than not that the deferred tax asset associated with the loss carryforwards will be realized. Inclusive of the tax attribute for the net operating losses, although realization is not assured, management believes that it is more likely than not that we will realize the benefits of all of our deferred tax assets, and, accordingly, no valuation allowance has been recorded.
As of December 31, 2019 and 2018, $48 million and $16 million, respectively, of our unrecognized tax benefits presented below, if recognized, would have affected our federal income tax expense (benefit) and our effective tax rate. We are not aware of any events for which it is likely that unrecognized tax benefits will significantly increase or decrease within the next year. A reconciliation of the unrecognized tax benefits (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
|
Balance as of beginning-of-year
|
$
|
16
|
|
$
|
11
|
|
|
Increases for prior year tax positions
|
|
32
|
|
|
-
|
|
|
Increases for current year tax positions
|
|
-
|
|
|
5
|
|
|
Balance as of end-of-year
|
$
|
48
|
|
$
|
16
|
|
We recognize interest and penalties accrued, if any, related to unrecognized tax benefits as a component of tax expense. For the years ended December 31, 2019, 2018 and 2017, we recognized no interest and penalty expense (benefit), and there was no accrued interest and penalty expense related to the unrecognized tax benefits as of December 31, 2019 and 2018.
We are subject to examination by U.S. federal, state, local and non-U.S. income authorities. We are currently not under examination by the Internal Revenue Service; however, tax years 2016 and forward remain open under the applicable statute of limitations. We are currently under examination by several state and local taxing jurisdictions; however, we do not expect these examinations will materially impact us.
8. DAC, VOBA, DSI and DFEL
Changes in DAC (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Balance as of beginning-of-year
|
$
|
9,448
|
|
$
|
7,887
|
|
$
|
8,243
|
|
|
Business acquired (sold) through reinsurance
|
|
-
|
|
|
(246
|
)
|
|
-
|
|
|
Deferrals
|
|
1,902
|
|
|
1,600
|
|
|
1,348
|
|
|
Amortization, net of interest:
|
|
|
|
|
|
|
|
|
|
|
Amortization, excluding unlocking, net of interest
|
|
(950
|
)
|
|
(951
|
)
|
|
(965
|
)
|
|
Unlocking
|
|
(489
|
)
|
|
(115
|
)
|
|
61
|
|
|
Adjustment related to realized (gains) losses
|
|
54
|
|
|
(47
|
)
|
|
(12
|
)
|
|
Adjustment related to unrealized (gains) losses
|
|
(2,613
|
)
|
|
1,320
|
|
|
(788
|
)
|
|
Balance as of end-of-year
|
$
|
7,352
|
|
$
|
9,448
|
|
$
|
7,887
|
|
Changes in VOBA (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Balance as of beginning-of-year
|
$
|
816
|
|
$
|
516
|
|
$
|
891
|
|
|
Business acquired (sold) through reinsurance
|
|
-
|
|
|
(11
|
)
|
|
-
|
|
|
Business acquired
|
|
-
|
|
|
30
|
|
|
-
|
|
|
Deferrals
|
|
6
|
|
|
7
|
|
|
7
|
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
Amortization, excluding unlocking
|
|
(114
|
)
|
|
(127
|
)
|
|
(105
|
)
|
|
Unlocking
|
|
140
|
|
|
(60
|
)
|
|
(48
|
)
|
|
Accretion of interest (1)
|
|
45
|
|
|
48
|
|
|
52
|
|
|
Adjustment related to realized (gains) losses
|
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
Adjustment related to unrealized (gains) losses
|
|
(550
|
)
|
|
415
|
|
|
(280
|
)
|
|
Balance as of end-of-year
|
$
|
342
|
|
$
|
816
|
|
$
|
516
|
|
(1)The interest accrual rates utilized to calculate the accretion of interest ranged from 4.2% to 6.9%.
Estimated future amortization of VOBA, net of interest (in millions), as of December 31, 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
2020
|
$
|
72
|
|
|
2021
|
|
66
|
|
|
2022
|
|
67
|
|
|
2023
|
|
65
|
|
|
2024
|
|
61
|
|
Changes in DSI (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Balance as of beginning-of-year
|
$
|
248
|
|
$
|
238
|
|
$
|
243
|
|
|
Business acquired (sold) through reinsurance
|
|
-
|
|
|
(21
|
)
|
|
-
|
|
|
Deferrals
|
|
26
|
|
|
47
|
|
|
29
|
|
|
Amortization, net of interest:
|
|
|
|
|
|
|
|
|
|
|
Amortization, excluding unlocking, net of interest
|
|
(29
|
)
|
|
(28
|
)
|
|
(30
|
)
|
|
Unlocking
|
|
(3
|
)
|
|
-
|
|
|
(4
|
)
|
|
Adjustment related to realized (gains) losses
|
|
2
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Adjustment related to unrealized (gains) losses
|
|
(10
|
)
|
|
13
|
|
|
1
|
|
|
Balance as of end-of-year
|
$
|
234
|
|
$
|
248
|
|
$
|
238
|
|
Changes in DFEL (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Balance as of beginning-of-year
|
$
|
2,769
|
|
$
|
1,445
|
|
$
|
1,874
|
|
|
Deferrals
|
|
1,095
|
|
|
875
|
|
|
755
|
|
|
Amortization, net of interest:
|
|
|
|
|
|
|
|
|
|
|
Amortization, excluding unlocking, net of interest
|
|
(544
|
)
|
|
(482
|
)
|
|
(396
|
)
|
|
Unlocking
|
|
(426
|
)
|
|
(53
|
)
|
|
1
|
|
|
Adjustment related to realized (gains) losses
|
|
-
|
|
|
(20
|
)
|
|
(14
|
)
|
|
Adjustment related to unrealized (gains) losses
|
|
(2,244
|
)
|
|
1,004
|
|
|
(775
|
)
|
|
Balance as of end-of-year
|
$
|
650
|
|
$
|
2,769
|
|
$
|
1,445
|
|
9. Reinsurance
The following summarizes reinsurance amounts (in millions) recorded on our Consolidated Statements of Comprehensive Income (Loss), excluding amounts attributable to the indemnity reinsurance agreements with Protective and Swiss Re Life & Health America, Inc. (“Swiss Re”):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Direct insurance premiums and fee income
|
$
|
13,498
|
|
$
|
12,041
|
|
$
|
10,269
|
|
|
Reinsurance assumed
|
|
91
|
|
|
89
|
|
|
91
|
|
|
Reinsurance ceded
|
|
(1,579
|
)
|
|
(1,543
|
)
|
|
(1,485
|
)
|
|
Total insurance premiums and fee income
|
$
|
12,010
|
|
$
|
10,587
|
|
$
|
8,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct insurance benefits
|
$
|
9,574
|
|
$
|
8,592
|
|
$
|
6,770
|
|
|
Reinsurance recoveries netted against benefits
|
|
(1,694
|
)
|
|
(1,806
|
)
|
|
(1,610
|
)
|
|
Total benefits
|
$
|
7,880
|
|
$
|
6,786
|
|
$
|
5,160
|
|
Our insurance companies cede insurance to other companies. The portion of our life insurance and annuity risks exceeding each of our insurance companies’ retention limit is reinsured with other insurers. We seek reinsurance coverage to limit our exposure to mortality losses and to enhance our capital management.
As of December 31, 2019, the policy for our reinsurance program was to retain up to $20 million on a single insured life. As the amount we retain varies by policy, we reinsured approximately 25% of the mortality risk on newly issued life insurance contracts in 2019.
We focus on obtaining reinsurance from a diverse group of reinsurers, and we monitor concentration as well as financial strength ratings of our reinsurers. Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. The amounts recoverable from reinsurers were $17.1 billion and $17.7 billion as of December 31, 2019 and 2018, respectively.
Protective represents our largest reinsurance exposure following the sale of the Liberty Life Business as discussed in Note 3, which resulted in amounts recoverable from Protective of $11.8 billion and $12.1 billion as of December 31, 2019 and 2018, respectively. Protective has funded trusts, of which the balance in the trusts changes as a result of ongoing reinsurance activity, to support the business ceded, which totaled $14.7 billion and $13.7 billion as of December 31, 2019 and 2018, respectively.
Our reinsurance operations were acquired by Swiss Re in December 2001 through a series of indemnity reinsurance transactions. As such, Swiss Re reinsured certain liabilities and obligations under the indemnity reinsurance agreements. As we are not relieved of our liability to the ceding companies for this business, the liabilities and obligations associated with the reinsured policies remain on our Consolidated Balance Sheets with a corresponding reinsurance receivable from Swiss Re, which totaled $1.3 billion and $1.5 billion as of December 31, 2019 and 2018, respectively. Swiss Re has funded a trust, with a balance of $2.7 billion as of December 31, 2019, to support this business. In addition to various remedies that we would have in the event of a default by Swiss Re, we continue to hold assets in support of certain of the transferred reserves. These assets consist of those reported as trading securities and certain mortgage loans. Our liabilities for funds withheld and embedded derivatives as of December 31, 2019, included $164 million and $31 million, respectively, related to the business sold to Swiss Re.
Some portions of our annuity business have been reinsured on a Modco basis with other companies. In a Modco agreement, we as the ceding company retain the reserves, as well as the assets backing those reserves, and the reinsurer shares proportionally in all financial terms of the reinsured policies based on their respective percentage of the risk. Effective October 1, 2018, we entered into one such Modco agreement with Athene Holding Ltd. (“Athene”) to reinsure fixed and fixed indexed annuity products, which resulted in a deposit asset of $6.6 billion and $7.5 billion as of December 31, 2019 and 2018, respectively, within other assets on our Consolidated Balance Sheets. We held investments of $6.9 billion as of December 31, 2019, in support of reserves associated with the transaction in a Modco investment portfolio. As of December 31, 2019, the portfolio included trading securities, fixed maturity AFS securities, commercial
mortgage loans, derivative investments, other investments, cash, accrued investment income and equity securities that had carrying values of $3.5 billion, $2.3 billion, $698 million, $130 million, $94 million, $62 million, $57 million and $14 million, respectively. In addition, the portfolio was supported by $201 million of over-collateralization and a $200 million letter of credit as of December 31, 2019. As described in Note 1, we recorded a deferred gain on business sold through reinsurance related to the transaction with Athene and amortized $30 million and $8 million of the gain during 2019 and 2018, respectively.
In repositioning the Modco investment portfolio, purchases of securities classified as trading during 2019 primarily resulted in negative cash flows from operating activities that were largely offset by sales of securities classified as fixed maturity AFS within investing activities in our Consolidated Statements of Cash Flows.
See “Realized Gain (Loss)” in Note 5 for information on reinsurance related embedded derivatives.
10. Goodwill and Specifically Identifiable Intangible Assets
The changes in the carrying amount of goodwill (in millions) by reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
|
|
Gross
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
Impairment
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
as of
|
as of
|
|
Acquisition
|
|
|
|
|
|
Goodwill
|
|
|
|
|
Beginning-
|
Beginning-
|
|
Accounting
|
|
|
|
|
|
as of End-
|
|
|
|
|
|
of-Year
|
|
|
of-Year
|
|
|
Adjustments
|
|
|
Impairment
|
|
|
of-Year
|
|
|
|
Annuities
|
|
$
|
1,040
|
|
|
$
|
(600
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
440
|
|
|
|
Retirement Plan Services
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
Life Insurance
|
|
|
2,188
|
|
|
|
(1,554
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
634
|
|
|
|
Group Protection
|
|
|
688
|
|
|
|
-
|
|
|
|
(4)
|
|
|
|
-
|
|
|
|
684
|
|
|
|
Total goodwill
|
|
$
|
3,936
|
|
|
$
|
(2,154
|
)
|
|
$
|
(4)
|
|
|
$
|
-
|
|
|
$
|
1,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
|
|
Gross
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
Impairment
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
as of
|
as of
|
|
Acquisition
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
Beginning-
|
Beginning-
|
|
Accounting
|
|
|
|
|
|
as of End-
|
|
|
|
|
|
of-Year
|
|
|
of-Year
|
|
|
Adjustments
|
|
|
Impairment
|
|
|
of-Year
|
|
|
|
Annuities
|
|
$
|
1,040
|
|
|
$
|
(600
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
440
|
|
|
|
Retirement Plan Services
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
Life Insurance
|
|
|
2,188
|
|
|
|
(1,554
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
634
|
|
|
|
Group Protection
|
|
|
274
|
|
|
|
-
|
|
|
|
414
|
|
|
|
-
|
|
|
|
688
|
|
|
|
Total goodwill
|
|
$
|
3,522
|
|
|
$
|
(2,154
|
)
|
|
$
|
414
|
|
|
$
|
-
|
|
|
$
|
1,782
|
|
|
The fair values of our reporting units (Level 3 fair value estimates) are comprised of the value of in-force (i.e., existing) business and the value of new business. Specifically, new business is representative of cash flows and profitability associated with policies or contracts we expect to issue in the future, reflecting our forecasts of future sales volume and product mix over a 10-year period. To determine the values of in-force and new business, we use a discounted cash flows technique that applies a discount rate reflecting the market expected, weighted-average rate of return adjusted for the risk factors associated with operations to the projected future cash flows for each reporting unit.
As of October 1, 2019 and 2018, we performed our annual quantitative goodwill impairment test for our reporting units, and, as of each such date, the fair value was in excess of each reporting unit’s carrying value for Annuities, Retirement Plan Services, Life Insurance and Group Protection.
As of October 1, 2017, the date of our annual quantitative assessment of goodwill, our Annuities, Retirement Plan Services and Group Protection reporting units had fair values that exceeded the carrying value of each reporting unit. Our early adoption of ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” resulted in impairment of the Life Insurance reporting unit goodwill of $905 million during the fourth quarter of 2017 driven primarily from the impact of the December 22, 2017, enactment of the Tax Act that increased the carrying value of the Life Insurance reporting unit in excess of its fair value.
The gross carrying amounts and accumulated amortization (in millions) for each major specifically identifiable intangible asset class by reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
As of December 31, 2018
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Accumulated
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
|
Retirement Plan Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund contract rights (1)
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
5
|
|
|
$
|
-
|
|
|
|
Life Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales force
|
|
100
|
|
|
|
55
|
|
|
|
100
|
|
|
|
51
|
|
|
|
Group Protection:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VOCRA
|
|
576
|
|
|
|
25
|
|
|
|
576
|
|
|
|
5
|
|
|
|
VODA
|
|
31
|
|
|
|
2
|
|
|
|
31
|
|
|
|
-
|
|
|
|
Insurance licenses (1)
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
Total
|
$
|
715
|
|
|
$
|
82
|
|
|
$
|
715
|
|
|
$
|
56
|
|
|
(1)No amortization recorded as the intangible asset has indefinite life.
Future estimated amortization of specifically identifiable intangible assets (in millions) as of December 31, 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
2020
|
$
|
37
|
|
|
2021
|
|
37
|
|
|
2022
|
|
37
|
|
|
2023
|
|
37
|
|
|
2024
|
|
37
|
|
|
Thereafter
|
|
440
|
|
11. Guaranteed Benefit Features
Information on the GDB features outstanding (dollars in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019 (1)
|
|
|
2018 (1)
|
|
|
|
Return of Net Deposits
|
|
|
|
|
|
|
|
|
|
Total account value
|
$
|
101,601
|
|
|
$
|
89,783
|
|
|
|
Net amount at risk (2)
|
|
71
|
|
|
|
1,002
|
|
|
|
Average attained age of contract holders
|
|
65 years
|
|
|
|
65 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Return
|
|
|
|
|
|
|
|
|
|
Total account value
|
$
|
92
|
|
|
$
|
88
|
|
|
|
Net amount at risk (2)
|
|
13
|
|
|
|
18
|
|
|
|
Average attained age of contract holders
|
|
77 years
|
|
|
|
77 years
|
|
|
|
Guaranteed minimum return
|
|
5%
|
|
|
|
5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anniversary Contract Value
|
|
|
|
|
|
|
|
|
|
Total account value
|
$
|
25,763
|
|
|
$
|
23,365
|
|
|
|
Net amount at risk (2)
|
|
384
|
|
|
|
2,007
|
|
|
|
Average attained age of contract holders
|
|
71 years
|
|
|
|
71 years
|
|
|
(1)Our variable contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive.
(2)Represents the amount of death benefit in excess of the account balance that is subject to market fluctuations.
The determination of GDB liabilities is based on models that involve a range of scenarios and assumptions, including those regarding expected market rates of return and volatility, contract surrender rates and mortality experience. The following summarizes the balances of and changes in the liabilities for GDBs (in millions), which were recorded in future contract benefits on our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
Balance as of beginning-of-year
|
$
|
161
|
|
$
|
100
|
|
$
|
110
|
|
|
|
Changes in reserves
|
|
(24
|
)
|
|
77
|
|
|
8
|
|
|
|
Benefits paid
|
|
(20
|
)
|
|
(16
|
)
|
|
(18
|
)
|
|
|
Balance as of end-of-year
|
$
|
117
|
|
$
|
161
|
|
$
|
100
|
|
|
Variable Annuity Contracts
Account balances of variable annuity contracts, including those with guarantees, (in millions) were invested in separate account investment options as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Asset Type
|
|
|
|
|
|
|
|
|
|
Domestic equity
|
$
|
64,093
|
|
|
$
|
54,060
|
|
|
|
International equity
|
|
19,852
|
|
|
|
18,359
|
|
|
|
Fixed income
|
|
41,405
|
|
|
|
37,942
|
|
|
|
Total
|
$
|
125,350
|
|
|
$
|
110,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total variable annuity separate account values
|
|
98%
|
|
|
|
99%
|
|
|
Secondary Guarantee Products
Future contract benefits and other contract holder funds include reserves for our secondary guarantee products sold through our Life Insurance segment. Reserves on UL and VUL products with secondary guarantees represented 37% and 35% of total life insurance in-force reserves as of December 31, 2019 and 2018, respectively. UL and VUL products with secondary guarantees represented 27%, 36% and 27% of total life insurance sales for the years ended December 31, 2019, 2018 and 2017, respectively.
12. Liability for Unpaid Claims
The liability for unpaid claims consists primarily of long-term disability claims and is reported in future contract benefits on our Consolidated Balance Sheets. Changes in the liability for unpaid claims (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Balance as of beginning-of-year
|
$
|
5,335
|
|
$
|
2,222
|
|
$
|
2,242
|
|
|
Reinsurance recoverable
|
|
143
|
|
|
57
|
|
|
69
|
|
|
Net balance as of beginning-of-year
|
|
5,192
|
|
|
2,165
|
|
|
2,173
|
|
|
Business acquired (1)
|
|
-
|
|
|
2,842
|
|
|
-
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
3,193
|
|
|
2,531
|
|
|
1,346
|
|
|
Prior years:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
151
|
|
|
120
|
|
|
69
|
|
|
All other incurred (2)
|
|
(308
|
)
|
|
(208
|
)
|
|
(76
|
)
|
|
Total incurred
|
|
3,036
|
|
|
2,443
|
|
|
1,339
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
(1,518
|
)
|
|
(1,197
|
)
|
|
(798
|
)
|
|
Prior years
|
|
(1,310
|
)
|
|
(1,061
|
)
|
|
(549
|
)
|
|
Total paid
|
|
(2,828
|
)
|
|
(2,258
|
)
|
|
(1,347
|
)
|
|
Net balance as of end-of-year
|
|
5,400
|
|
|
5,192
|
|
|
2,165
|
|
|
Reinsurance recoverable
|
|
152
|
|
|
143
|
|
|
57
|
|
|
Balance as of end-of-year
|
$
|
5,552
|
|
$
|
5,335
|
|
$
|
2,222
|
|
(1)Represents acquired group life and disability reserves, net, as of May 1, 2018. See Note 3 for additional information.
(2)All other incurred is primarily impacted by the level of claim resolutions in the period compared to that which is expected by the reserve assumption. A negative number implies a favorable result where claim resolutions were more favorable than assumed. Our claim resolution rate assumption used in determining reserves is our expectation of the resolution rate we will experience over the long-term life of the block of claims. It will vary from actual experience in any one period, both favorably and unfavorably.
The interest rate assumption used for discounting long-term claim reserves is an important part of the reserving process due to the long benefit period for these claims. Interest accrued on prior years’ reserves has been calculated on the opening reserve balance less one-half of the prior years’ incurred claim payments at our average reserve discount rate.
Long-term disability benefits may extend for many years, and claim development schedules do not reflect these longer benefit periods. As a result, we use longer term retrospective runoff studies, experience studies and prospective studies to develop our liability estimates. Long-term disability reserves are discounted using rates ranging from 3.25% to 5%. The discount rates vary by year of claim incurral.
13. Short-Term and Long-Term Debt
Details underlying short-term and long-term debt (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
|
|
|
Short-Term Debt
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
$
|
300
|
|
$
|
-
|
|
|
|
Total short-term debt
|
$
|
300
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt, Excluding Current Portion
|
|
|
|
|
|
|
|
|
Senior notes:
|
|
|
|
|
|
|
|
|
6.25% notes, due 2020 (1)
|
$
|
-
|
|
$
|
300
|
|
|
|
4.85% notes, due 2021 (1)
|
|
296
|
|
|
300
|
|
|
|
4.20% notes, due 2022 (1)
|
|
300
|
|
|
300
|
|
|
|
LIBOR + 100 bps loan, due 2023
|
|
-
|
|
|
200
|
|
|
|
4.00% notes, due 2023 (1)
|
|
500
|
|
|
500
|
|
|
|
LIBOR + 87.5 bps loan, due 2024
|
|
250
|
|
|
-
|
|
|
|
3.35% notes, due 2025 (1)
|
|
300
|
|
|
300
|
|
|
|
3.63% notes, due 2026 (1)
|
|
400
|
|
|
400
|
|
|
|
3.80% notes, due 2028 (1)
|
|
500
|
|
|
500
|
|
|
|
3.05% notes, due 2030 (1)
|
|
500
|
|
|
-
|
|
|
|
6.15% notes, due 2036 (1)
|
|
243
|
|
|
348
|
|
|
|
6.30% notes, due 2037 (1)(2)
|
|
375
|
|
|
375
|
|
|
|
7.00% notes, due 2040 (1)(2)
|
|
500
|
|
|
500
|
|
|
|
4.35% notes, due 2048 (1)
|
|
450
|
|
|
450
|
|
|
|
Total senior notes
|
|
4,614
|
|
|
4,473
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital securities:
|
|
|
|
|
|
|
|
|
LIBOR + 236 bps, due 2066 (3)
|
|
722
|
|
|
722
|
|
|
|
LIBOR + 204 bps, due 2067 (3)
|
|
491
|
|
|
491
|
|
|
|
Total capital securities
|
|
1,213
|
|
|
1,213
|
|
|
|
Unamortized premiums (discounts)
|
|
(4
|
)
|
|
(3
|
)
|
|
|
Unamortized debt issuance costs
|
|
(34
|
)
|
|
(33
|
)
|
|
|
Unamortized adjustments from discontinued hedges
|
|
118
|
|
|
123
|
|
|
|
Fair value hedge on interest rate swap agreements
|
|
160
|
|
|
66
|
|
|
|
Total long-term debt
|
$
|
6,067
|
|
$
|
5,839
|
|
|
(1)We have the option to repurchase the outstanding notes by paying the greater of 100% of the principal amount of the notes to be redeemed or the make-whole amount (as defined in each note agreement), plus in each case any accrued and unpaid interest as of the date of redemption.
(2)Categorized as operating debt for leverage ratio calculations as the proceeds were primarily used as a long-term structured solution to reduce the strain on increasing statutory reserves associated with secondary guarantee UL and term policies.
(3)To hedge the variability in rates, we purchased interest rate swaps to lock in a fixed rate of approximately 5% over the remaining terms of the capital securities.
Details underlying the recognition of a gain (loss) on the early extinguishment of debt (in millions) reported within interest expense on our Consolidated Statements of Comprehensive Income (Loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Principal balance outstanding prior to payoff (1)
|
$
|
109
|
|
$
|
287
|
|
$
|
-
|
|
|
Unamortized debt issuance costs and discounts
|
|
(1
|
)
|
|
(1
|
)
|
|
5
|
|
|
Amount paid to retire debt
|
|
(150
|
)
|
|
(309
|
)
|
|
-
|
|
|
Gain (loss) on early extinguishment of debt, pre-tax
|
$
|
(42
|
)
|
$
|
(23
|
)
|
$
|
5
|
|
(1)During the third quarter of 2019, we repurchased $105 million of our 6.15% senior notes due 2036 and $4 million of our 4.85% senior notes due 2021. During the first quarter of 2018, we repurchased $287 million of our 8.75% senior notes due 2019.
Future principal payments due on long-term debt (in millions) as of December 31, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
$
|
300
|
|
|
|
2021
|
|
296
|
|
|
|
2022
|
|
300
|
|
|
|
2023
|
|
500
|
|
|
|
2024
|
|
250
|
|
|
|
Thereafter
|
|
4,481
|
|
|
|
Total
|
$
|
6,127
|
|
|
For our long-term debt outstanding, unsecured senior debt, which consists of senior notes, fixed-rate notes and other notes with varying interest rates, ranks highest in priority, followed by capital securities.
Credit Facilities and Letters of Credit
Credit facilities, which allow for borrowing or issuances of letters of credit (“LOCs”), and LOCs (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
Expiration
|
|
Maximum
|
|
LOCs
|
|
|
|
Date
|
|
Available
|
|
Issued
|
|
|
Credit Facilities
|
|
|
|
|
|
|
|
|
|
Five-year revolving credit facility
|
July 31, 2024
|
|
$
|
2,250
|
|
$
|
346
|
|
|
LOC facility (1)
|
August 26, 2031
|
|
|
990
|
|
|
965
|
|
|
LOC facility (1)
|
October 1, 2031
|
|
|
982
|
|
|
982
|
|
|
Total
|
|
|
$
|
4,222
|
|
$
|
2,293
|
|
(1)Our wholly-owned subsidiaries entered into irrevocable LOC facility agreements with third-party lenders supporting inter-company reinsurance agreements.
On July 31, 2019, we refinanced our existing credit facility with a syndicate of banks. This facility (the “credit facility”) allows for the issuance of LOCs and borrowing of up to $2.25 billion. The credit facility is unsecured and has a commitment termination date of July 31, 2024. The LOCs under the credit facility are used primarily to satisfy reserve credit requirements of (i) our domestic insurance companies for which reserve credit is provided by our affiliated reinsurance companies and (ii) certain ceding companies of our legacy reinsurance business.
The credit agreement governing the credit facility contains or includes:
Customary terms and conditions, including covenants restricting our ability to incur liens, merge or consolidate with another entity where we are not the surviving entity and dispose of all or substantially all of our assets;
Financial covenants including maintenance of a minimum consolidated net worth (as defined in the credit agreement) equal to the sum of $10.6 billion plus 50% of the aggregate net proceeds of equity issuances received by us as set forth in the credit agreement; and a debt-to-capital ratio as defined in accordance with the credit facility not to exceed 0.35 to 1.00;
A cap on secured non-operating indebtedness and non-operating indebtedness of our subsidiaries equal to 7.5% of total capitalization, as defined in accordance with the credit agreement; and
Customary events of default, subject to certain materiality thresholds and grace periods for certain of those events of default.
Upon an event of default, the credit agreement provides that, among other things, the commitments may be terminated and the loans then outstanding may be declared due and payable. As of December 31, 2019, we were in compliance with all such covenants.
Our LOC facility agreements each contain customary terms and conditions, including early termination fees, covenants restricting the ability of the subsidiaries to incur liens, merge or consolidate with another entity and dispose of all or substantially all of their assets. Upon an event of early termination, the agreements require the immediate payment of all or a portion of the present value of the future LOC fees that would have otherwise been paid. Further, the agreements contain customary events of default, subject to certain materiality thresholds and grace periods for certain of those events of default. The events of default include payment defaults, covenant defaults, material inaccuracies in representations and warranties, bankruptcy and liquidation proceedings and other customary defaults. Upon an event of default, the agreements provide that, among other things, obligations to issue, amend or increase the amount of any LOC shall be terminated and any obligations shall become immediately due and payable. As of December 31, 2019, we were in compliance with all such covenants.
Shelf Registration
We currently have an effective shelf registration statement, which allows us to issue, in unlimited amounts, securities, including debt securities, preferred stock, common stock, warrants, stock purchase contracts, stock purchase units and depository shares.
Certain Debt Covenants on Capital Securities
Our $1.2 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following trigger events exists as of the 30th day prior to an interest payment date (“determination date”):
LNL’s risk-based capital (“RBC”) ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or
(i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative; and (ii) our consolidated stockholders’ equity (excluding AOCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is 10 fiscal quarters prior to the last completed quarter, or the “benchmark quarter.”
The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. We would have to utilize the ACSM until the trigger events no longer existed. Our failure to pay interest pursuant to the ACSM will not result in an event of default with respect to the capital securities nor will a nonpayment of interest unless it lasts for 10 consecutive years, although such breaches may result in monetary damages to the holders of the capital securities. As of December 31, 2019, we were in compliance with all such covenants.
14. Contingencies and Commitments
Contingencies
Regulatory and Litigation Matters
Regulatory bodies, such as state insurance departments, the SEC, Financial Industry Regulatory Authority and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, laws governing the activities of broker-dealers, registered investment advisers and unclaimed property laws.
LNC is involved in various pending or threatened legal or regulatory proceedings, including purported class actions, arising from the conduct of business both in the ordinary course and otherwise. In some of the matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding verdicts obtained in the jurisdiction for similar matters. This variability in pleadings, together with the actual experiences of LNC in litigating or resolving through settlement numerous claims over an extended period of time, demonstrates to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value.
Due to the unpredictable nature of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time is normally difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law in the context of the pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
We establish liabilities for litigation and regulatory loss contingencies when information related to the loss contingencies shows both that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. It is possible that some matters could require us to pay damages or make other expenditures or establish accruals in amounts that could not be estimated as of December 31, 2019. While the potential future charges could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known by management, management does not believe any such charges are likely to have a material adverse effect on LNC’s financial condition.
For some matters, the Company is able to estimate a reasonably possible range of loss. For such matters in which a loss is probable, an accrual has been made. For such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made. Accordingly, the estimate contained in this paragraph reflects two types of matters. For some matters included within this estimate, an accrual has been made, but there is a reasonable possibility that an exposure exists in excess of the amount accrued. In these cases, the estimate reflects the reasonably possible range of loss in excess of the accrued amount. For other matters included within this estimation, no accrual has been made because a loss, while potentially estimable, is believed to be reasonably possible but not probable. In these
cases, the estimate reflects the reasonably possible loss or range of loss. As of December 31, 2019, we estimate the aggregate range of reasonably possible losses, including amounts in excess of amounts accrued for these matters as of such date, to be up to approximately $90 million. Any estimate is not an indication of expected loss, if any, or of the Company’s maximum possible loss exposure on such matters.
For other matters, we are not currently able to estimate the reasonably possible loss or range of loss. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts and the progress of settlement negotiations. On a quarterly and annual basis, we review relevant information with respect to litigation contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.
Certain reinsurers have sought rate increases on certain yearly renewable term treaties. We are disputing the requested rate increases under these treaties. We have initiated and will initiate arbitration proceedings, as necessary, under these treaties in order to protect our contractual rights. Additionally, reinsurers may initiate arbitration proceedings against us. We believe it is unlikely the outcome of these disputes will have a material adverse effect on our financial condition. For more information about reinsurance, see Note 9.
Cost of Insurance Litigation
Glover v. Connecticut General Life Insurance Company and The Lincoln National Life Insurance Company, filed in the U.S. District Court for the District of Connecticut, No. 3:16-cv-00827, is a putative class action that was served on LNL on June 8, 2016. Plaintiff is the owner of a universal life insurance policy who alleges that LNL charged more for non-guaranteed cost of insurance than permitted by the policy. Plaintiff seeks to represent all universal life and variable universal life policyholders who owned policies containing non-guaranteed cost of insurance provisions that are similar to those of Plaintiff’s policy and seeks damages on behalf of all such policyholders. On January 11, 2019, the court dismissed Plaintiff’s complaint in its entirety. In response, Plaintiff filed a motion for leave to amend the complaint, which we have opposed.
Hanks v. The Lincoln Life and Annuity Company of New York (“LLANY”) and Voya Retirement Insurance and Annuity Company (“Voya”), filed in the U.S. District Court for the Southern District of New York, No. 1:16-cv-6399, is a putative class action that was served on LLANY on August 12, 2016. Plaintiff owns a universal life policy originally issued by Aetna (now Voya) and alleges that (i) Voya breached the terms of the policy when it increased non-guaranteed cost of insurance rates on Plaintiff’s policy; and (ii) LLANY, as reinsurer and administrator of Plaintiff’s policy, engaged in wrongful conduct related to the cost of insurance increase and was unjustly enriched as a result. Plaintiff seeks to represent all owners of Aetna life insurance policies that were subject to non-guaranteed cost of insurance rate increases in 2016 and seeks damages on their behalf. On March 13, 2019, the court issued an order granting plaintiff’s motion for class certification for the breach of contract claim and denying such motion with respect to the unjust enrichment claim against LLANY, and, on September 12, 2019, the court issued an order approving the parties’ joint stipulation of dismissal with respect to the unjust enrichment claim and dismissed LLANY as a defendant in the case. In light of LLANY’s role as reinsurer and administrator under the 1998 coinsurance agreement with Aetna (now Voya), and of the parties’ rights and obligations thereunder, LLANY continues to be actively engaged in the vigorous defense of this action.
EFG Bank AG, Cayman Branch, et al. v. The Lincoln National Life Insurance Company, pending in the U.S. District Court for the Eastern District of Pennsylvania, No. 2:17-cv-02592, is a civil action filed on February 1, 2017. Plaintiffs own Legend Series universal life insurance policies originally issued by Jefferson-Pilot (now LNL). Plaintiffs allege that LNL breached the terms of policyholders’ contracts when it increased non-guaranteed cost of insurance rates beginning in 2016. We are vigorously defending this matter.
In re: Lincoln National COI Litigation, pending in the U.S. District Court for the Eastern District of Pennsylvania, Master File No. 2:16-cv-06605-GJP, is a consolidated litigation matter related to multiple putative class action filings that were consolidated by an order dated March 20, 2017. In addition to consolidating a number of existing matters, the order also covers any future cases filed in the same district related to the same subject matter. Plaintiffs own universal life insurance policies originally issued by Jefferson-Pilot (now LNL). Plaintiffs allege that LNL and LNC breached the terms of policyholders’ contracts by increasing non-guaranteed cost of insurance rates beginning in 2016. Plaintiffs seek to represent classes of policyowners and seek damages on their behalf. We are vigorously defending this matter.
In re: Lincoln National 2017 COI Rate Litigation, Master File No. 2:17-cv-04150 is a consolidated litigation matter related to multiple putative class action filings that were consolidated by an order of the court in March 2018. Plaintiffs own universal life insurance policies originally issued by former Jefferson-Pilot (now LNL). Plaintiffs allege that LNL and LNC breached the terms of policyholders’ contracts by increasing non-guaranteed cost of insurance rates beginning in 2017. Plaintiffs seek to represent classes of policyholders and seek damages on their behalf. We are vigorously defending this matter.
Iwanski v. First Penn-Pacific Life Insurance Company (“FPP”), No. 2:18-cv-01573 filed in the U.S. District Court for the District Court, Eastern District of Pennsylvania is a putative class action that was filed on April 13, 2018. Plaintiff alleges that defendant FPP breached the terms of his life insurance policy by deducting non-guaranteed cost of insurance charges in excess of what is permitted by the policies. Plaintiff seeks to represent all owners of universal life insurance policies issued by FPP containing non-guaranteed cost of insurance provisions that are similar to those of Plaintiff’s policy and seeks damages on their behalf. Breach of contract is the only cause of action asserted. We are vigorously defending this matter.
TVPX ARS INC., as Securities Intermediary for Consolidated Wealth Management, LTD. v. The Lincoln National Life Insurance Company, filed in the U.S. District Court for the Eastern District of Pennsylvania, No. 2:18-cv-02989, is a putative class action that was filed on July 17, 2018. Plaintiff alleges that LNL charged more for non-guaranteed cost of insurance than permitted by the policy. Plaintiff seeks to represent all universal life and variable universal life policyholders who own policies issued by LNL or its predecessors containing non-guaranteed cost of insurance provisions that are similar to those of Plaintiff’s policy and seeks damages on behalf of all such policyholders. We are vigorously defending this matter.
LSH Co. and Wells Fargo Bank, National Association, as securities intermediary for LSH Co. v. Lincoln National Corporation and The Lincoln National Life Insurance Company, pending in the U.S. District Court for the Eastern District of Pennsylvania, No. 2:18-cv-05529, is a civil action filed on December 21, 2018. Plaintiffs own universal life insurance policies originally issued by Jefferson-Pilot (now LNL). Plaintiffs allege that LNL breached the terms of policyholders’ contracts when it increased non-guaranteed cost of insurance rates in 2016 and 2017. We are vigorously defending this matter.
Vida Longevity Fund, LP v. Lincoln Life & Annuity Company of New York, pending in the U.S. District Court for the Southern District of New York, No. 1:19-cv-06004, is a putative class action that was filed on June 27, 2019. Plaintiff alleges that LLANY charged more for non-guaranteed cost of insurance than was permitted by the policies. Plaintiff seeks to represent all current and former owners of universal life (including variable universal life) policies who own or owned policies issued by LLANY and its predecessors in interest that were in force at any time on or after June 27, 2013, and which contain non-guaranteed cost of insurance provisions that are similar to those of Plaintiff’s policies. Plaintiff also seeks to represent a sub-class of such policyholders who own or owned “life insurance policies issued in the State of New York.” Plaintiff seeks damages on behalf of the policyholder class and sub-class. We are vigorously defending this matter.
Commitments
Leases
We recognized operating lease ROU assets of $233 million and associated lease liabilities of $240 million as of December 31, 2019. We classified the operating lease ROU assets within other assets and the lease liabilities within other liabilities on our Consolidated Balance Sheets. The weighted-average discount rate and remaining lease term were 3.2% and 6 years, respectively, as of December 31, 2019. Operating lease expense for the years ended December 31, 2019, 2018 and 2017, was $54 million, $50 million and $43 million, respectively, and reported in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).
As of December 31, 2019, the net book value of assets recorded as finance leases was $128 million, and the associated accumulated amortization was $345 million. These transactions have been classified as other assets on our Consolidated Balance Sheets. These assets will continue to be amortized on a straight-line basis over the assets’ remaining lives. The weighted-average discount rate and remaining lease term were 2.2% and 2 years, respectively, as of December 31, 2019.
Finance lease expense (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2019
|
|
|
|
Amortization of ROU assets (1)
|
|
$
|
67
|
|
|
|
Interest on lease liabilities (2)
|
|
|
13
|
|
|
|
Total
|
|
$
|
80
|
|
|
(1)Amortization of ROU assets is reported in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).
(2)Interest on lease liabilities is reported in interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss).
The table below presents cash flow information (in millions) related to leases:
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2019
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
56
|
|
|
|
Financing cash flows from finance leases
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
Supplemental Non-cash Information
|
|
|
|
|
|
|
ROU assets obtained in exchange for new lease obligations:
|
|
|
|
|
|
|
Operating leases
|
|
$
|
80
|
|
|
Our future minimum lease payments (in millions) under non-cancellable leases as of December 31, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Finance
|
|
|
|
Leases
|
|
Leases
|
|
|
2020
|
$
|
49
|
|
$
|
56
|
|
|
2021
|
|
48
|
|
|
66
|
|
|
2022
|
|
44
|
|
|
66
|
|
|
2023
|
|
42
|
|
|
90
|
|
|
2024
|
|
28
|
|
|
17
|
|
|
Thereafter
|
|
67
|
|
|
12
|
|
|
Total future minimum lease payments
|
|
278
|
|
|
307
|
|
|
Less: Amount representing interest
|
|
38
|
|
|
26
|
|
|
Present value of minimum lease payments
|
$
|
240
|
|
$
|
281
|
|
As of December 31, 2019, we had no leases that had not yet commenced.
Vulnerability from Concentrations
As of December 31, 2019, we did not have a concentration of: business transactions with a particular customer or lender; sources of supply of labor or services used in the business; or a market or geographic area in which business is conducted that makes us vulnerable to an event that is at least reasonably possible to occur in the near term and which could cause a severe impact to our financial condition. For information on our investment and reinsurance concentrations, see Notes 5 and 9, respectively.
Other Contingency Matters
State guaranty funds assess insurance companies to cover losses to contract holders of insolvent or rehabilitated companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states. We have accrued for expected assessments and the related reductions in future state premium taxes, which net to assessments (recoveries) of $(12) million and $(17) million as of December 31, 2019 and 2018, respectively.
15. Shares and Stockholders’ Equity
Common Shares
The changes in our common stock (number of shares) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Common Stock
|
|
|
|
|
|
|
|
Balance as of beginning-of-year
|
205,862,760
|
|
218,090,114
|
|
226,335,105
|
|
|
Stock issued for exercise of warrants
|
258,633
|
|
212,670
|
|
344,901
|
|
|
Stock compensation/issued for benefit plans
|
942,318
|
|
800,325
|
|
1,793,234
|
|
|
Retirement/cancellation of shares
|
(10,395,179
|
)
|
(13,240,349
|
)
|
(10,383,126
|
)
|
|
Balance as of end-of-year
|
196,668,532
|
|
205,862,760
|
|
218,090,114
|
|
|
|
|
|
|
|
|
|
|
Common Stock as of End-of-Year
|
|
|
|
|
|
|
|
Basic basis
|
196,668,532
|
|
205,862,760
|
|
218,090,114
|
|
|
Diluted basis
|
199,196,043
|
|
209,034,686
|
|
221,309,830
|
|
Our common stock is without par value.
Average Shares
A reconciliation of the denominator (number of shares) in the calculations of basic and diluted earnings (loss) per common share was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Weighted-average shares, as used in basic calculation
|
200,608,737
|
|
215,936,448
|
|
222,128,687
|
|
|
Shares to cover exercise of outstanding warrants
|
58,765
|
|
568,602
|
|
761,353
|
|
|
Shares to cover non-vested stock
|
973,901
|
|
1,534,142
|
|
1,626,908
|
|
|
Average stock options outstanding during the year
|
1,507,049
|
|
1,739,029
|
|
2,360,372
|
|
|
Assumed acquisition of shares with assumed proceeds
|
|
|
|
|
|
|
|
from exercising outstanding warrants
|
(9,594
|
)
|
(81,260
|
)
|
(109,034
|
)
|
|
Assumed acquisition of shares with assumed
|
|
|
|
|
|
|
|
proceeds and benefits from exercising stock
|
|
|
|
|
|
|
|
options (at average market price for the year)
|
(1,033,507
|
)
|
(1,074,406
|
)
|
(1,414,857
|
)
|
|
Shares repurchasable from measured but
|
|
|
|
|
|
|
|
unrecognized stock option expense
|
(217
|
)
|
(14,600
|
)
|
(53,241
|
)
|
|
Average deferred compensation shares
|
-
|
|
944,151
|
|
920,792
|
|
|
Weighted-average shares, as used in diluted calculation
|
202,105,134
|
|
219,552,106
|
|
226,220,980
|
|
In the event the average market price of LNC common stock exceeds the issue price of stock options and the options have a dilutive effect to our EPS, such options will be shown in the table above.
We have participants in our deferred compensation plans who selected LNC stock as the measure for the investment return attributable to all or a portion of their deferral amounts. For the years ended December 31, 2018 and 2017, the effect of settling this obligation in LNC stock (“equity classification”) was more dilutive than the scenario of settling in cash (“liability classification”). Therefore, for our EPS calculation for these periods, we added these shares to the denominator and adjusted the numerator to present net income as if the shares had been accounted for under equity classification by removing the mark-to-market adjustment included in net income attributable to these deferred units of LNC stock. The amount of this adjustment was $18 million and $(7) million for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2019, we had no outstanding warrants. The remaining outstanding warrants issued in 2009, each representing the right to purchase one share of our common stock, expired on July 10, 2019.
AOCI
The following summarizes the components and changes in AOCI (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Unrealized Gain (Loss) on AFS Securities
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year
|
$
|
557
|
|
$
|
3,486
|
|
$
|
1,784
|
|
|
Cumulative effect from adoption of new accounting standards
|
|
-
|
|
|
674
|
|
|
-
|
|
|
Unrealized holding gains (losses) arising during the year
|
|
9,267
|
|
|
(6,274
|
)
|
|
3,032
|
|
|
Change in foreign currency exchange rate adjustment
|
|
46
|
|
|
(107
|
)
|
|
134
|
|
|
Change in DAC, VOBA, DSI, future contract benefits and other contract holder funds
|
|
(2,462
|
)
|
|
1,748
|
|
|
(705
|
)
|
|
Income tax benefit (expense)
|
|
(1,457
|
)
|
|
981
|
|
|
(797
|
)
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for gains (losses) included in net income (loss)
|
|
(28
|
)
|
|
(42
|
)
|
|
(39
|
)
|
|
Associated amortization of DAC, VOBA, DSI and DFEL
|
|
(12
|
)
|
|
(20
|
)
|
|
(20
|
)
|
|
Income tax benefit (expense)
|
|
8
|
|
|
13
|
|
|
21
|
|
|
Balance as of end-of-year
|
$
|
5,983
|
|
$
|
557
|
|
$
|
3,486
|
|
|
Unrealized OTTI on AFS Securities
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year
|
$
|
33
|
|
$
|
44
|
|
$
|
25
|
|
|
(Increases) attributable to:
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect from adoption of new accounting standards
|
|
-
|
|
|
9
|
|
|
-
|
|
|
Gross OTTI recognized in OCI during the year
|
|
(16
|
)
|
|
-
|
|
|
-
|
|
|
Change in DAC, VOBA, DSI and DFEL
|
|
1
|
|
|
-
|
|
|
-
|
|
|
Income tax benefit (expense)
|
|
3
|
|
|
-
|
|
|
-
|
|
|
Decreases attributable to:
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, sales, maturities or other settlements of AFS securities
|
|
31
|
|
|
(19
|
)
|
|
34
|
|
|
Change in DAC, VOBA, DSI and DFEL
|
|
(1
|
)
|
|
(6
|
)
|
|
(5
|
)
|
|
Income tax benefit (expense)
|
|
(6
|
)
|
|
5
|
|
|
(10
|
)
|
|
Balance as of end-of-year
|
$
|
45
|
|
$
|
33
|
|
$
|
44
|
|
|
Unrealized Gain (Loss) on Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year
|
$
|
139
|
|
$
|
(29
|
)
|
$
|
49
|
|
|
Cumulative effect from adoption of new accounting standard
|
|
-
|
|
|
(6
|
)
|
|
-
|
|
|
Unrealized holding gains (losses) arising during the year
|
|
(93
|
)
|
|
144
|
|
|
27
|
|
|
Change in foreign currency exchange rate adjustment
|
|
(52
|
)
|
|
111
|
|
|
(137
|
)
|
|
Change in DAC, VOBA, DSI and DFEL
|
|
(4
|
)
|
|
(13
|
)
|
|
2
|
|
|
Income tax benefit (expense)
|
|
31
|
|
|
(51
|
)
|
|
38
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for gains (losses) included in net income (loss)
|
|
42
|
|
|
24
|
|
|
13
|
|
|
Associated amortization of DAC, VOBA, DSI and DFEL
|
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
Income tax benefit (expense)
|
|
(9
|
)
|
|
(5
|
)
|
|
(4
|
)
|
|
Balance as of end-of-year
|
$
|
(11
|
)
|
$
|
139
|
|
$
|
(29
|
)
|
|
Foreign Currency Translation Adjustment
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year
|
$
|
(23
|
)
|
$
|
(14
|
)
|
$
|
(27
|
)
|
|
Foreign currency translation adjustment arising during the year
|
|
6
|
|
|
(9
|
)
|
|
13
|
|
|
Balance as of end-of-year
|
$
|
(17
|
)
|
$
|
(23
|
)
|
$
|
(14
|
)
|
|
Funded Status of Employee Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year
|
$
|
(299
|
)
|
$
|
(257
|
)
|
$
|
(265
|
)
|
|
Cumulative effect from adoption of new accounting standard
|
|
-
|
|
|
(35
|
)
|
|
-
|
|
|
Adjustment arising during the year
|
|
(20
|
)
|
|
(12
|
)
|
|
18
|
|
|
Income tax benefit (expense)
|
|
(8
|
)
|
|
5
|
|
|
(10
|
)
|
|
Balance as of end-of-year
|
$
|
(327
|
)
|
$
|
(299
|
)
|
$
|
(257
|
)
|
The following summarizes the reclassifications out of AOCI (in millions) and the associated line item in the Consolidated Statements of Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
Unrealized Gain (Loss) on AFS Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reclassification
|
$
|
(28
|
)
|
|
$
|
(42
|
)
|
|
$
|
(39
|
)
|
Total realized gain (loss)
|
|
Associated amortization of DAC,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VOBA, DSI and DFEL
|
|
(12
|
)
|
|
|
(20
|
)
|
|
|
(20
|
)
|
Total realized gain (loss)
|
|
Reclassification before income
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
|
|
tax benefit (expense)
|
|
(40
|
)
|
|
|
(62
|
)
|
|
|
(59
|
)
|
operations before taxes
|
|
Income tax benefit (expense)
|
|
8
|
|
|
|
13
|
|
|
|
21
|
|
Federal income tax expense (benefit)
|
|
Reclassification, net of income tax
|
$
|
(32
|
)
|
|
$
|
(49
|
)
|
|
$
|
(38
|
)
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized OTTI on AFS Securities
|
|
|
|
|
|
|
|
|
|
|
|
Gross reclassification
|
$
|
4
|
|
|
$
|
8
|
|
|
$
|
5
|
|
Total realized gain (loss)
|
|
Change in DAC, VOBA, DSI and DFEL
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
Total realized gain (loss)
|
|
Reclassification before income
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
|
|
tax benefit (expense)
|
|
4
|
|
|
|
8
|
|
|
|
4
|
|
operations before taxes
|
|
Income tax benefit (expense)
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Federal income tax expense (benefit)
|
|
Reclassification, net of income tax
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
3
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) on Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
Gross reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
4
|
|
Net investment income
|
|
Interest rate contracts
|
|
(5
|
)
|
|
|
(7
|
)
|
|
|
(18
|
)
|
Interest and debt expense
|
|
Foreign currency contracts
|
|
35
|
|
|
|
27
|
|
|
|
18
|
|
Net investment income
|
|
Foreign currency contracts
|
|
9
|
|
|
|
-
|
|
|
|
9
|
|
Total realized gain (loss)
|
|
Total gross reclassifications
|
|
42
|
|
|
|
24
|
|
|
|
13
|
|
|
|
Associated amortization of DAC,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VOBA, DSI and DFEL
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Commissions and other expenses
|
|
Reclassifications before income
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
|
|
tax benefit (expense)
|
|
41
|
|
|
|
22
|
|
|
|
12
|
|
operations before taxes
|
|
Income tax benefit (expense)
|
|
(9
|
)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
Federal income tax expense (benefit)
|
|
Reclassifications, net of income tax
|
$
|
32
|
|
|
$
|
17
|
|
|
$
|
8
|
|
Net income (loss)
|
16. Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Commissions
|
$
|
2,549
|
|
$
|
2,256
|
|
$
|
1,986
|
|
|
General and administrative expenses
|
|
2,210
|
|
|
1,953
|
|
|
1,766
|
|
|
Expenses associated with reserve financing and unrelated LOCs
|
|
88
|
|
|
84
|
|
|
87
|
|
|
DAC and VOBA deferrals and interest, net of amortization
|
|
(540
|
)
|
|
(402
|
)
|
|
(350
|
)
|
|
Broker-dealer expenses
|
|
481
|
|
|
465
|
|
|
438
|
|
|
Specifically identifiable intangible asset amortization
|
|
26
|
|
|
9
|
|
|
4
|
|
|
Taxes, licenses and fees
|
|
343
|
|
|
313
|
|
|
245
|
|
|
Acquisition and integration costs related to mergers and acquisitions
|
|
130
|
|
|
85
|
|
|
-
|
|
|
Total
|
$
|
5,287
|
|
$
|
4,763
|
|
$
|
4,176
|
|
17. Retirement and Deferred Compensation Plans
Defined Benefit Pension and Other Postretirement Benefit Plans
We maintain U.S. defined benefit pension plans in which certain U.S. employees and agents are participants, and a U.K. plan we retained after the sale of the Lincoln UK business. Our defined benefit pension plans are closed to new entrants and existing participants do not accrue any additional benefits. We comply with the minimum funding requirements in both the U.S. and the U.K. In accordance with such practice, we were not required to make contributions but elected to contribute $2 million and $8 million for the years ended December 31, 2019 and 2018, respectively. We do not expect to be required to make any contributions to these pension plans in 2020.
We sponsor other postretirement benefit plans that provide health care and life insurance to certain retired employees and agents. Total net periodic cost (recovery) for these plans was $8 million, $(2) million and $(3) million during 2019, 2018 and 2017, respectively. In 2020, we expect the plans to make benefit payments of approximately $110 million.
Information (in millions) with respect to these plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or For the Years Ended December 31,
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
|
Pension Plans
|
|
Benefit Plans
|
|
|
|
Fair value of plan assets
|
$
|
1,520
|
|
$
|
1,356
|
|
$
|
69
|
|
$
|
64
|
|
|
|
Projected benefit obligation
|
|
1,646
|
|
|
1,477
|
|
|
78
|
|
|
74
|
|
|
|
Funded status
|
$
|
(126
|
)
|
$
|
(121
|
)
|
$
|
(9
|
)
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized on the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
$
|
12
|
|
$
|
52
|
|
$
|
-
|
|
$
|
-
|
|
|
|
Other liabilities
|
|
(138
|
)
|
|
(173
|
)
|
|
(9
|
)
|
|
(10
|
)
|
|
|
Net amount recognized
|
$
|
(126
|
)
|
$
|
(121
|
)
|
$
|
(9
|
)
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
3.14%
|
|
|
4.14%
|
|
|
3.50%
|
|
|
4.50%
|
|
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
4.10%
|
|
|
3.75%
|
|
|
4.50%
|
|
|
4.00%
|
|
|
|
Expected return on plan assets
|
|
6.48%
|
|
|
6.46%
|
|
|
6.50%
|
|
|
6.50%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average discount rate was determined based on a corporate yield curve as of December 31, 2019, and projected benefit obligation cash flows. The expected return on plan assets was determined based on historical and expected future returns of the various asset categories, using the plans’ target plan allocation. We reevaluate these assumptions each plan year.
The following summarizes our fair value measurements of our benefit plans’ assets (in millions) on a recurring basis by asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
274
|
|
$
|
249
|
|
|
|
U.S. government bonds
|
|
280
|
|
|
252
|
|
|
|
Foreign government bonds
|
|
67
|
|
|
216
|
|
|
|
State and municipal bonds
|
|
29
|
|
|
28
|
|
|
|
Common and preferred stock
|
|
599
|
|
|
485
|
|
|
|
Bulk annuity insurance policy
|
|
165
|
|
|
-
|
|
|
|
Cash and invested cash
|
|
106
|
|
|
125
|
|
|
|
Other investments
|
|
69
|
|
|
65
|
|
|
|
Total
|
$
|
1,589
|
|
$
|
1,420
|
|
|
|
|
|
|
|
|
|
|
|
See “Fair Value Measurement” in Note 1 for discussion on how we categorize our pension plans’ assets into the three-level fair value hierarchy. See “Financial Instruments Carried at Fair Value” in Note 20 for a summary of our fair value measurement of our pension plans’ assets by the three-level fair value hierarchy.
Defined Contribution Plans
We sponsor tax-qualified defined contribution plans for eligible employees and agents. We administer these plans in accordance with the plan documents and various limitations under section 401(a) of the Internal Revenue Code of 1986. For the years ended December 31, 2019, 2018 and 2017, expenses for these plans were $104 million, $93 million and $88 million, respectively.
Deferred Compensation Plans
We sponsor non-qualified, unfunded, deferred compensation plans for certain current and former employees, agents and non-employee directors. The results of certain notional investment options within some of the plans are hedged by total return swaps. Our expenses increase or decrease in direct proportion to the change in market value of the participants’ investment options. Participants of certain plans are able to select our stock as a notional investment option; however, it is not hedged by the total return swaps and is a primary
source of expense volatility related to these plans. For the years ended December 31, 2019, 2018 and 2017, expenses for these plans were $28 million, $4 million and $35 million, respectively. For further discussion of total return swaps related to our deferred compensation plans, see Note 6.
Information (in millions) with respect to these plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Total liabilities (1)
|
$
|
645
|
|
$
|
547
|
|
|
|
|
|
Investments dedicated to fund liabilities (2)
|
|
202
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Reported in other liabilities on our Consolidated Balance Sheets.
(2)Reported in other assets on our Consolidated Balance Sheets.
18. Stock-Based Incentive Compensation Plans
We sponsor stock-based incentive compensation plans for our employees and directors and for the employees and agents of our subsidiaries that provide for the issuance of stock options, performance shares, stock appreciation rights (“SARs”) and restricted stock units (“RSUs”) among other types of awards. We issue new shares to satisfy option exercises and vested performance shares and RSUs.
Total compensation expense (in millions) by award type for our stock-based incentive compensation plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Stock options
|
$
|
8
|
|
$
|
5
|
|
$
|
10
|
|
|
Performance shares
|
|
17
|
|
|
15
|
|
|
13
|
|
|
SARs
|
|
-
|
|
|
(1
|
)
|
|
2
|
|
|
RSUs
|
|
37
|
|
|
32
|
|
|
25
|
|
|
Total
|
$
|
62
|
|
$
|
51
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized tax benefit
|
$
|
13
|
|
$
|
11
|
|
$
|
18
|
|
Total unrecognized compensation expense (in millions) and expected weighted-average life (in years) by award type for our stock-based incentive compensation plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Expense
|
|
Period
|
|
Expense
|
|
Period
|
|
Expense
|
|
Period
|
|
|
Stock options
|
$
|
9
|
|
0.9
|
|
$
|
9
|
|
1.1
|
|
$
|
9
|
|
1.4
|
|
|
Performance shares
|
|
15
|
|
1.3
|
|
|
14
|
|
0.9
|
|
|
12
|
|
1.2
|
|
|
SARs
|
|
-
|
|
3.4
|
|
|
-
|
|
2.7
|
|
|
2
|
|
3.2
|
|
|
RSUs
|
|
42
|
|
1.4
|
|
|
50
|
|
1.2
|
|
|
32
|
|
1.1
|
|
|
Total unrecognized stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
incentive compensation expense
|
$
|
66
|
|
|
|
$
|
73
|
|
|
|
$
|
55
|
|
|
|
Stock Options
The option price assumptions used for our stock option awards were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Weighted-average fair value per option granted
|
$
|
13.23
|
|
$
|
18.74
|
|
$
|
18.27
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
2.8%
|
|
|
2.1%
|
|
|
2.0%
|
|
|
Expected volatility
|
|
26.9%
|
|
|
27.2%
|
|
|
31.5%
|
|
|
Risk-free interest rate
|
|
2.1-2.5%
|
|
|
2.5-2.9%
|
|
|
1.7-2.1%
|
|
|
Expected life (in years)
|
|
5.8
|
|
|
5.8
|
|
|
5.5
|
|
The fair value of options is determined using a Black-Scholes options valuation model with the assumptions disclosed in the table above. The dividend yield is based on the expected dividend rate during the expected life of the option. Expected volatility is based on the implied volatility of exchange-traded securities and the historical volatility of the LNC stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of the options granted represents the weighted-average period of time from the grant date to the date of exercise, expiration or cancellation based upon historical behavior.
Generally, stock options have a maximum contractual term of ten years and vest ratably over a three year period based solely on a service condition. Information with respect to our incentive plans involving stock options with service conditions (aggregate intrinsic value shown in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
|
|
Average
|
Remaining
|
Aggregate
|
|
|
|
|
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
|
|
Outstanding as of December 31, 2018
|
2,354,016
|
|
$
|
53.11
|
|
|
|
|
|
|
|
Granted – original
|
678,882
|
|
|
63.01
|
|
|
|
|
|
|
|
Exercised (includes shares tendered)
|
(84,271
|
)
|
|
33.32
|
|
|
|
|
|
|
|
Forfeited or expired
|
(53,971
|
)
|
|
71.16
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
2,894,656
|
|
$
|
55.67
|
|
6.61
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest as of December 31, 2019 (1)
|
2,671,151
|
|
$
|
54.52
|
|
6.47
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2019
|
1,865,223
|
|
$
|
48.94
|
|
5.48
|
|
$
|
25
|
|
(1)Includes estimated forfeitures.
The total fair value of stock options with service conditions that vested during the years ended December 31, 2019, 2018 and 2017 was $7 million, $6 million and $6 million, respectively. The total intrinsic value of such options exercised during the years ended December 31, 2019, 2018 and 2017, was $3 million, $11 million and $23 million, respectively.
We award to certain agents stock options that have a maximum contractual term of five years and generally vest ratably over a two year period depending on the satisfaction of the performance conditions. Information with respect to our incentive plans involving stock options with performance conditions (aggregate intrinsic value shown in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
|
|
Average
|
Remaining
|
Aggregate
|
|
|
|
|
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
|
|
Outstanding as of December 31, 2018
|
228,836
|
|
$
|
59.43
|
|
|
|
|
|
|
|
Granted – original
|
35,878
|
|
|
61.80
|
|
|
|
|
|
|
|
Exercised (includes shares tendered)
|
(41,898
|
)
|
|
50.78
|
|
|
|
|
|
|
|
Forfeited or expired
|
(13,712
|
)
|
|
65.59
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
209,104
|
|
$
|
61.17
|
|
2.07
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest as of December 31, 2019 (1)
|
198,345
|
|
$
|
60.89
|
|
1.96
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2019
|
187,585
|
|
$
|
60.58
|
|
1.85
|
|
$
|
1
|
|
(1)Includes estimated forfeitures.
The total fair value of stock options with performance conditions that vested during the years ended December 31, 2019, 2018 and 2017, was $1 million, $1 million and $2 million, respectively. The total intrinsic value of such options exercised during the years ended December 31, 2019, 2018 and 2017, was less than $1 million, $2 million and $12 million, respectively.
Performance Shares
LNC performance shares vest, if at all, on the third anniversary of the grant date; depending on the achievement level of performance measures pre-determined by the Compensation Committee for the three year performance period, payout could range from zero to 200% of the target award.
Information with respect to our performance shares was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
Nonvested as of December 31, 2018
|
546,225
|
|
|
$
|
59.46
|
|
|
|
Granted
|
202,484
|
|
|
|
66.89
|
|
|
|
Vested
|
(258,384
|
)
|
|
|
31.22
|
|
|
|
Forfeited
|
(19,254
|
)
|
|
|
80.53
|
|
|
|
Nonvested as of December 31, 2019
|
471,071
|
|
|
$
|
77.29
|
|
|
SARs
Under our incentive compensation plan, we issue SARs to certain planners and advisers who have full-time contracts with us. The SARs under this plan are rights on our stock that are cash settled and become exercisable in increments of 25% over the four year period following the SARs grant date. SARs are granted with an exercise price equal to the fair market value of our stock at the date of grant and, unless cancelled earlier due to certain terminations of employment, expire five years from the date of grant. Generally, such SARs are transferable only upon death.
We recognize compensation expense for SARs based on the fair value method using the Black-Scholes option-pricing model. Compensation expense and the related liability are recognized on a straight-line basis over the vesting period of the SARs. The SARs liability is marked-to-market through net income, which causes volatility in net income (loss) as a result of changes in the market value of our stock and reported within commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss). The SARs liability as of December 31, 2019 and 2018, was $1 million and $1 million, respectively, and reported within other liabilities on our Consolidated Balance Sheets.
The option price assumptions used for our SARs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Weighted-average fair value per SAR granted
|
$
|
13.93
|
|
$
|
19.09
|
|
$
|
20.06
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
2.4%
|
|
|
1.6%
|
|
|
1.5%
|
|
|
Expected volatility
|
|
28.3%
|
|
|
27.0%
|
|
|
34.4%
|
|
|
Risk-free interest rate
|
|
2.5%
|
|
|
2.8%
|
|
|
2.2%
|
|
|
Expected life (in years)
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
The assumptions above are the same as those discussed for options above, except the dividend yield is based on the current dividend rate at the date of grant, expected volatility is based on the implied volatility of exchange-traded securities and the expected life represents the contractual term.
Information with respect to our SARs plan (aggregate intrinsic value shown in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
|
|
Average
|
Remaining
|
Aggregate
|
|
|
|
|
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
|
|
Outstanding as of December 31, 2018
|
130,007
|
|
$
|
54.88
|
|
|
|
|
|
|
|
Granted – original
|
23,604
|
|
|
61.80
|
|
|
|
|
|
|
|
Exercised (includes shares tendered)
|
(39,863
|
)
|
|
48.69
|
|
|
|
|
|
|
|
Forfeited or expired
|
(9,317
|
)
|
|
60.75
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
104,431
|
|
$
|
58.17
|
|
2.14
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest as of December 31, 2019 (1)
|
102,944
|
|
$
|
58.20
|
|
2.12
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2019
|
71,375
|
|
$
|
55.26
|
|
1.56
|
|
$
|
-
|
|
(1)Includes estimated forfeitures.
The payment for SARs exercised was $1 million, $1 million and $3 million during the years ended December 31, 2019, 2018 and 2017, respectively.
RSUs
LNC RSUs generally cliff-vest on the third anniversary of the grant date, based solely on a service condition. Information with respect to our RSUs was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
Outstanding as of December 31, 2018
|
1,692,876
|
|
|
$
|
60.02
|
|
|
|
Granted
|
621,134
|
|
|
|
62.88
|
|
|
|
Vested
|
(680,494
|
)
|
|
|
38.40
|
|
|
|
Forfeited
|
(82,387
|
)
|
|
|
70.51
|
|
|
|
Outstanding as of December 31, 2019
|
1,551,129
|
|
|
$
|
70.09
|
|
|
19. Statutory Information and Restrictions
The Company’s domestic life insurance subsidiaries prepare financial statements in accordance with statutory accounting principles (“SAP”) prescribed or permitted by the insurance departments of their states of domicile, which may vary materially from GAAP.
Prescribed SAP includes the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners (“NAIC”) as well as state laws, regulations and administrative rules. Permitted SAP encompasses all accounting practices not so prescribed. The principal differences between statutory financial statements and financial statements prepared in accordance with GAAP are that statutory financial statements do not reflect DAC, some bond portfolios may be carried at amortized cost, assets and liabilities are presented net of reinsurance, contract holder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted.
Our insurance subsidiaries are subject to the applicable laws and regulations of their respective states. Changes in these laws and regulations could change capital levels or capital requirements for our insurance subsidiaries.
Statutory capital and surplus, net gain (loss) from operations, after-tax, net income (loss) and dividends to the LNC holding company amounts (in millions) below consist of all or a combination of the following entities: LNL, LLANY, LLACB, FPP, Lincoln Reinsurance Company of South Carolina, Lincoln Reinsurance Company of Vermont I, Lincoln Reinsurance Company of Vermont III, Lincoln Reinsurance Company of Vermont IV, Lincoln Reinsurance Company of Vermont V, Lincoln Reinsurance Company of Vermont VI and Lincoln Reinsurance Company of Vermont VII.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2019
|
|
2018
|
|
|
U.S. capital and surplus
|
$
|
8,564
|
|
$
|
8,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
U.S. net gain (loss) from operations, after-tax
|
$
|
409
|
|
$
|
692
|
|
$
|
1,329
|
|
|
U.S. net income (loss)
|
|
388
|
|
|
1,019
|
|
|
1,468
|
|
|
U.S. dividends to LNC holding company
|
|
600
|
|
|
925
|
|
|
974
|
|
Comparison of 2019 to 2018
Statutory net income (loss) decreased due primarily to lower dividends from affiliates, unfavorable reserve strain on certain products, and integration costs incurred as part of the acquisition of Liberty Life. See Note 3 for information regarding the acquisition.
Comparison of 2018 to 2017
Statutory net income (loss) decreased due primarily to lower dividends from affiliates, acquisition and integration costs incurred as part of the acquisition of Liberty Life and unfavorable reserve strain on certain products.
State Prescribed and Permitted Practices
The states of domicile of the Company’s insurance subsidiaries have adopted certain prescribed accounting practices that differ from those found in NAIC SAP. These prescribed practices are the use of continuous Commissioners’ Annuity Reserve Valuation Method in the calculation of reserves as prescribed by the state of New York, the calculation of reserves on universal life policies based on the Indiana universal life method as prescribed by the state of Indiana for policies issued before January 1, 2006, and the use of a more conservative valuation interest rate on certain annuities prescribed by the states of Indiana and New York. The Vermont reinsurance subsidiaries also have certain accounting practices permitted by the state of Vermont that differ from those found in NAIC SAP. One permitted practice involves accounting for the lesser of the face amount of all amounts outstanding under an LOC and the value of the Valuation of Life Insurance Policies Model Regulation (“XXX”) additional statutory reserves as an admitted asset and a form of surplus as of December 31, 2019 and 2018. Another permitted practice involves the acquisition of an LLC note in exchange for a variable value surplus note that is recognized as an admitted asset and a form of surplus as of December 31, 2019. Lastly, the state of Vermont has permitted a practice to account for certain excess of loss reinsurance treaties with unaffiliated reinsurers as an asset and form of surplus as of December 31, 2019. These permitted practices are related to structures that continue to be allowed in accordance with the grandfathered structures under the provisions of Actuarial Guideline 48 (“AG48”) or are compliant under AG48 requirements.
The favorable (unfavorable) effects on statutory surplus compared to NAIC statutory surplus from the use of these prescribed and permitted practices (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
State Prescribed Practices
|
|
|
|
|
|
|
|
Calculation of reserves using the Indiana universal life method
|
$
|
24
|
|
$
|
36
|
|
|
Conservative valuation rate on certain annuities
|
|
(49
|
)
|
|
(55
|
)
|
|
Vermont Subsidiaries Permitted Practices (1)
|
|
|
|
|
|
|
|
Lesser of LOC and XXX additional reserve as surplus
|
|
1,947
|
|
|
1,959
|
|
|
LLC notes and variable value surplus notes
|
|
1,648
|
|
|
1,634
|
|
|
Excess of loss reinsurance treaties
|
|
419
|
|
|
330
|
|
(1)These permitted practices are related to structures that continue to be allowed in accordance with the grandfathered structures under the provisions of AG48 or are compliant under AG48 requirements.
The NAIC has adopted RBC requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus appropriate for an insurance company to support its overall business operations based on its size and risk profile. Under RBC requirements, regulatory compliance is determined by the ratio of a company’s total adjusted capital, as defined by the NAIC, to its company action level of RBC (known as the “RBC ratio”), also as defined by the NAIC. The company action level may be triggered if the RBC ratio is between 75% and 100%, which would require the insurer to submit a plan to the regulator detailing corrective action it proposes to undertake. As of December 31, 2019, the consolidated RBC ratio for LNC’s statutory insurance companies was in excess of four times the aforementioned company action level RBC.
Our insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of dividends to the holding company. Under Indiana laws and regulations, our Indiana insurance subsidiaries, including our primary insurance subsidiary, LNL, may pay dividends to LNC without prior approval of the Indiana Insurance Commissioner (the “Commissioner”), only from unassigned surplus and must receive prior approval of the Commissioner to pay a dividend if such dividend, along with all other dividends paid within the preceding 12 consecutive months, would exceed the statutory limitation. The current statutory limitation is the greater of 10% of the insurer’s contract holders’ surplus, as shown on its last annual statement on file with the Commissioner or the insurer’s statutory net gain from operations for the previous 12 months, but in no event to exceed statutory unassigned surplus. Indiana law gives the Commissioner broad discretion to disapprove requests for dividends in excess of these limits. LNL’s subsidiaries, LLANY, a New York-domiciled insurance company, and LLACB, a New Hampshire-domiciled company, are bound by similar restrictions, under the laws of New York and New Hampshire, respectively. Under both New York and New Hampshire law, the applicable statutory limitation on dividends is equal to the lesser of 10% of surplus to contract holders as of the immediately preceding calendar year or net gain from operations for the immediately preceding calendar year, not including realized capital gains. We expect our direct domestic insurance subsidiaries could pay dividends to LNC of approximately $845 million in 2020 without prior approval from the respective Commissioner of Insurance.
All payments of principal and interest on surplus notes between LNC and our insurance subsidiaries must be approved by the respective Commissioner of Insurance.
20. Fair Value of Financial Instruments
The carrying values and estimated fair values of our financial instruments (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities
|
$
|
105,200
|
|
$
|
105,200
|
|
$
|
94,024
|
|
$
|
94,024
|
|
|
Trading securities
|
|
4,673
|
|
|
4,673
|
|
|
1,950
|
|
|
1,950
|
|
|
Equity securities
|
|
103
|
|
|
103
|
|
|
99
|
|
|
99
|
|
|
Mortgage loans on real estate
|
|
16,339
|
|
|
16,872
|
|
|
13,260
|
|
|
13,092
|
|
|
Derivative investments (1)
|
|
1,911
|
|
|
1,911
|
|
|
1,107
|
|
|
1,107
|
|
|
Other investments
|
|
2,983
|
|
|
2,983
|
|
|
2,255
|
|
|
2,255
|
|
|
Cash and invested cash
|
|
2,563
|
|
|
2,563
|
|
|
2,345
|
|
|
2,345
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives
|
|
450
|
|
|
450
|
|
|
123
|
|
|
123
|
|
|
GLB ceded embedded derivatives
|
|
60
|
|
|
60
|
|
|
72
|
|
|
72
|
|
|
Indexed annuity ceded embedded derivatives
|
|
927
|
|
|
927
|
|
|
902
|
|
|
902
|
|
|
Separate account assets
|
|
153,566
|
|
|
153,566
|
|
|
132,833
|
|
|
132,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future contract benefits – indexed annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives
|
|
(2,585
|
)
|
|
(2,585
|
)
|
|
(1,305
|
)
|
|
(1,305
|
)
|
|
Other contract holder funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining guaranteed interest and similar contracts
|
|
(1,900
|
)
|
|
(1,900
|
)
|
|
(542
|
)
|
|
(542
|
)
|
|
Account values of certain investment contracts
|
|
(38,639
|
)
|
|
(46,822
|
)
|
|
(34,535
|
)
|
|
(36,358
|
)
|
|
Short-term debt
|
|
(300
|
)
|
|
(304
|
)
|
|
-
|
|
|
-
|
|
|
Long-term debt
|
|
(6,067
|
)
|
|
(6,217
|
)
|
|
(5,839
|
)
|
|
(5,604
|
)
|
|
Reinsurance related embedded derivatives
|
|
(327
|
)
|
|
(327
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities (1)
|
|
(349
|
)
|
|
(349
|
)
|
|
(160
|
)
|
|
(160
|
)
|
|
GLB ceded embedded derivatives
|
|
(9
|
)
|
|
(9
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Plans’ Assets (2)
|
|
1,589
|
|
|
1,589
|
|
|
1,420
|
|
|
1,420
|
|
(1)We have master netting agreements with each of our derivative counterparties, which allow for the netting of our derivative asset and liability positions by counterparty.
(2)Included in the funded statuses of the benefit plans, which is reported in other liabilities on our Consolidated Balance Sheets. Refer to Note 17 for information regarding our benefit plans.
Valuation Methodologies and Associated Inputs for Financial Instruments Not Carried at Fair Value
The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments not carried at fair value on our Consolidated Balance Sheets. Considerable judgment is required to develop these assumptions used to measure fair value. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments.
Mortgage Loans on Real Estate
The fair value of mortgage loans on real estate is established using a discounted cash flow method based on credit rating, maturity and future income. The ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt-service coverage, loan-to-value, quality of tenancy, borrower and payment record. The fair value for impaired mortgage loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s market price or the fair value of the collateral if the loan is collateral dependent. The inputs used to measure the fair value of our mortgage loans on real estate are classified as Level 2 within the fair value hierarchy.
Other Investments
The carrying value of our assets classified as other investments approximates fair value. Other investments includes primarily LPs and other privately held investments that are accounted for using the equity method of accounting and the carrying value is based on our proportional share of the net assets of the LPs. Other investments also includes FHLB stock carried at cost and periodically evaluated for impairment based on ultimate recovery of par value. The inputs used to measure the fair value of our LPs, other privately held investments and FHLB stock are classified as Level 3 within the fair value hierarchy. The remaining assets in other investments include cash collateral receivables and securities that are not LPs or other privately held investments. The inputs used to measure the fair value of these assets are classified as Level 1 within the fair value hierarchy.
Separate Account Assets
Separate account assets are primarily carried at fair value. A portion of our separate account assets includes LPs, which are accounted for using the equity method of accounting. The carrying value is based on our proportional share of the net assets of the LPs and approximates fair value. The inputs used to measure the fair value of the separate account asset LPs are classified as Level 3 within the fair value hierarchy.
Other Contract Holder Funds
Other contract holder funds include remaining guaranteed interest and similar contracts and account values of certain investment contracts. The fair value for the remaining guaranteed interest and similar contracts is estimated using discounted cash flow calculations as of the balance sheet date. These calculations are based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued. As of December 31, 2019 and 2018, the remaining guaranteed interest and similar contracts carrying value approximated fair value. The fair value of the account values of certain investment contracts is based on their approximate surrender value as of the balance sheet date. The inputs used to measure the fair value of our other contract holder funds are classified as Level 3 within the fair value hierarchy.
Short-Term and Long-Term Debt
The fair value of short-term and long-term debt is based on quoted market prices. The inputs used to measure the fair value of our short-term and long-term debt are classified as Level 2 within the fair value hierarchy.
Financial Instruments Carried at Fair Value
We did not have any assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2019 or 2018, and we noted no changes in our valuation methodologies between these periods.
The following summarizes our financial instruments carried at fair value (in millions) on a recurring basis by the fair value hierarchy levels described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
Significant
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
Observable
|
Unobservable
|
|
Total
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
-
|
|
|
$
|
84,435
|
|
|
$
|
4,281
|
|
|
$
|
88,716
|
|
|
U.S. government bonds
|
|
|
424
|
|
|
|
6
|
|
|
|
5
|
|
|
|
435
|
|
|
State and municipal bonds
|
|
|
-
|
|
|
|
5,884
|
|
|
|
-
|
|
|
|
5,884
|
|
|
Foreign government bonds
|
|
|
-
|
|
|
|
303
|
|
|
|
90
|
|
|
|
393
|
|
|
RMBS
|
|
|
-
|
|
|
|
3,230
|
|
|
|
11
|
|
|
|
3,241
|
|
|
CMBS
|
|
|
-
|
|
|
|
1,082
|
|
|
|
1
|
|
|
|
1,083
|
|
|
ABS
|
|
|
-
|
|
|
|
4,621
|
|
|
|
268
|
|
|
|
4,889
|
|
|
Hybrid and redeemable preferred securities
|
|
|
77
|
|
|
|
404
|
|
|
|
78
|
|
|
|
559
|
|
|
Trading securities
|
|
|
50
|
|
|
|
3,957
|
|
|
|
666
|
|
|
|
4,673
|
|
|
Equity securities
|
|
|
25
|
|
|
|
48
|
|
|
|
30
|
|
|
|
103
|
|
|
Derivative investments (1)
|
|
|
-
|
|
|
|
1,212
|
|
|
|
1,735
|
|
|
|
2,947
|
|
|
Cash and invested cash
|
|
|
-
|
|
|
|
2,563
|
|
|
|
-
|
|
|
|
2,563
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
450
|
|
|
|
450
|
|
|
GLB ceded embedded derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
|
|
60
|
|
|
Indexed annuity ceded embedded derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
927
|
|
|
|
927
|
|
|
Separate account assets
|
|
|
639
|
|
|
|
152,916
|
|
|
|
-
|
|
|
|
153,555
|
|
|
Total assets
|
|
$
|
1,215
|
|
|
$
|
260,661
|
|
|
$
|
8,602
|
|
|
$
|
270,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future contract benefits – indexed annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,585
|
)
|
|
$
|
(2,585
|
)
|
|
Reinsurance related embedded derivatives
|
|
|
-
|
|
|
|
(327
|
)
|
|
|
-
|
|
|
|
(327
|
)
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities (1)
|
|
|
-
|
|
|
|
(518
|
)
|
|
|
(867
|
)
|
|
|
(1,385
|
)
|
|
GLB ceded embedded derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
(845
|
)
|
|
$
|
(3,461
|
)
|
|
$
|
(4,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Plans’ Assets
|
|
$
|
195
|
|
|
$
|
1,394
|
|
|
$
|
-
|
|
|
$
|
1,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
Significant
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
Observable
|
Unobservable
|
|
Total
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
-
|
|
|
$
|
77,079
|
|
|
$
|
3,269
|
|
|
$
|
80,348
|
|
|
U.S. government bonds
|
|
|
399
|
|
|
|
18
|
|
|
|
-
|
|
|
|
417
|
|
|
State and municipal bonds
|
|
|
-
|
|
|
|
5,345
|
|
|
|
-
|
|
|
|
5,345
|
|
|
Foreign government bonds
|
|
|
-
|
|
|
|
339
|
|
|
|
109
|
|
|
|
448
|
|
|
RMBS
|
|
|
-
|
|
|
|
3,366
|
|
|
|
7
|
|
|
|
3,373
|
|
|
CMBS
|
|
|
-
|
|
|
|
802
|
|
|
|
2
|
|
|
|
804
|
|
|
ABS
|
|
|
-
|
|
|
|
2,562
|
|
|
|
134
|
|
|
|
2,696
|
|
|
Hybrid and redeemable preferred securities
|
|
|
67
|
|
|
|
451
|
|
|
|
75
|
|
|
|
593
|
|
|
Trading securities
|
|
|
43
|
|
|
|
1,840
|
|
|
|
67
|
|
|
|
1,950
|
|
|
Equity securities
|
|
|
16
|
|
|
|
58
|
|
|
|
25
|
|
|
|
99
|
|
|
Derivative investments (1)
|
|
|
-
|
|
|
|
727
|
|
|
|
705
|
|
|
|
1,432
|
|
|
Other investments
|
|
|
150
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150
|
|
|
Cash and invested cash
|
|
|
-
|
|
|
|
2,345
|
|
|
|
-
|
|
|
|
2,345
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
123
|
|
|
|
123
|
|
|
GLB ceded embedded derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
72
|
|
|
|
72
|
|
|
Indexed annuity ceded embedded derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
902
|
|
|
|
902
|
|
|
Separate account assets
|
|
|
665
|
|
|
|
132,135
|
|
|
|
-
|
|
|
|
132,800
|
|
|
Total assets
|
|
$
|
1,340
|
|
|
$
|
227,067
|
|
|
$
|
5,490
|
|
|
$
|
233,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future contract benefits – indexed annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,305
|
)
|
|
$
|
(1,305
|
)
|
|
Reinsurance related embedded derivatives
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities (1)
|
|
|
-
|
|
|
|
(314
|
)
|
|
|
(171
|
)
|
|
|
(485
|
)
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
(317
|
)
|
|
$
|
(1,476
|
)
|
|
$
|
(1,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Plans’ Assets
|
|
$
|
158
|
|
|
$
|
1,262
|
|
|
$
|
-
|
|
|
$
|
1,420
|
|
(1)Derivative investment assets and liabilities are presented within the fair value hierarchy on a gross basis by derivative type and not on a master netting basis by counterparty.
The following summarizes changes to our financial instruments carried at fair value (in millions) and classified within Level 3 of the fair value hierarchy. This summary excludes any effect of amortization of DAC, VOBA, DSI and DFEL. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
Gains
|
Issuances,
|
Transfers
|
|
|
|
|
|
|
|
|
|
Items
|
|
(Losses)
|
Sales,
|
Into or
|
|
|
|
|
|
|
|
|
|
Included
|
|
in
|
Maturities,
|
Out
|
|
|
|
|
|
|
Beginning
|
|
in
|
|
OCI
|
Settlements,
|
of
|
|
Ending
|
|
|
|
Fair
|
|
Net
|
|
and
|
|
Calls,
|
|
Level 3,
|
|
Fair
|
|
|
|
Value
|
|
Income
|
|
Other (1)
|
|
Net
|
|
Net (3)
|
|
Value
|
|
|
Investments: (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
3,269
|
|
$
|
3
|
|
$
|
180
|
|
$
|
878
|
|
$
|
(49
|
)
|
$
|
4,281
|
|
|
U.S. government bonds
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5
|
|
|
5
|
|
|
Foreign government bonds
|
|
109
|
|
|
-
|
|
|
6
|
|
|
(25
|
)
|
|
-
|
|
|
90
|
|
|
RMBS
|
|
7
|
|
|
-
|
|
|
-
|
|
|
21
|
|
|
(17
|
)
|
|
11
|
|
|
CMBS
|
|
2
|
|
|
1
|
|
|
-
|
|
|
5
|
|
|
(7
|
)
|
|
1
|
|
|
ABS
|
|
134
|
|
|
-
|
|
|
1
|
|
|
619
|
|
|
(486
|
)
|
|
268
|
|
|
Hybrid and redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred securities
|
|
75
|
|
|
-
|
|
|
3
|
|
|
-
|
|
|
-
|
|
|
78
|
|
|
Trading securities
|
|
67
|
|
|
17
|
|
|
-
|
|
|
850
|
|
|
(268
|
)
|
|
666
|
|
|
Equity securities
|
|
25
|
|
|
(12
|
)
|
|
-
|
|
|
17
|
|
|
-
|
|
|
30
|
|
|
Derivative investments
|
|
534
|
|
|
10
|
|
|
163
|
|
|
161
|
|
|
-
|
|
|
868
|
|
|
Other assets: (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives
|
|
123
|
|
|
327
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
450
|
|
|
GLB ceded embedded derivatives
|
|
72
|
|
|
(12
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
60
|
|
|
Indexed annuity ceded embedded derivatives
|
|
902
|
|
|
158
|
|
|
-
|
|
|
(133
|
)
|
|
-
|
|
|
927
|
|
|
Future contract benefits – indexed annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives (6)
|
|
(1,305
|
)
|
|
(900
|
)
|
|
-
|
|
|
(380
|
)
|
|
-
|
|
|
(2,585
|
)
|
|
Other liabilities – GLB ceded embedded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivatives (6)
|
|
-
|
|
|
(9
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(9
|
)
|
|
Total, net
|
$
|
4,014
|
|
$
|
(417
|
)
|
$
|
353
|
|
$
|
2,013
|
|
$
|
(822
|
)
|
$
|
5,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
Gains
|
Issuances,
|
Transfers
|
|
|
|
|
|
|
|
|
|
Items
|
|
(Losses)
|
Sales,
|
Into or
|
|
|
|
|
|
|
|
|
|
Included
|
|
in
|
Maturities,
|
Out
|
|
|
|
|
|
|
Beginning
|
|
in
|
|
OCI
|
Settlements,
|
of
|
|
Ending
|
|
|
|
Fair
|
|
Net
|
|
and
|
|
Calls,
|
|
Level 3,
|
|
Fair
|
|
|
|
Value
|
|
Income
|
|
Other (1)
|
|
Net (2)
|
|
Net (3)(4)
|
|
Value
|
|
|
Investments: (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
3,091
|
|
$
|
10
|
|
$
|
(199
|
)
|
$
|
429
|
|
$
|
(62
|
)
|
$
|
3,269
|
|
|
U.S. government bonds
|
|
5
|
|
|
-
|
|
|
-
|
|
|
(5
|
)
|
|
-
|
|
|
-
|
|
|
Foreign government bonds
|
|
110
|
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
109
|
|
|
RMBS
|
|
12
|
|
|
-
|
|
|
-
|
|
|
7
|
|
|
(12
|
)
|
|
7
|
|
|
CMBS
|
|
6
|
|
|
-
|
|
|
-
|
|
|
35
|
|
|
(39
|
)
|
|
2
|
|
|
ABS
|
|
118
|
|
|
-
|
|
|
(1
|
)
|
|
223
|
|
|
(206
|
)
|
|
134
|
|
|
Hybrid and redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred securities
|
|
76
|
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
75
|
|
|
Equity AFS securities
|
|
162
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(162
|
)
|
|
-
|
|
|
Trading securities
|
|
49
|
|
|
(5
|
)
|
|
-
|
|
|
30
|
|
|
(7
|
)
|
|
67
|
|
|
Equity securities
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
26
|
|
|
25
|
|
|
Derivative investments
|
|
30
|
|
|
170
|
|
|
(69
|
)
|
|
403
|
|
|
-
|
|
|
534
|
|
|
Other assets: (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives
|
|
903
|
|
|
(780
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
123
|
|
|
GLB ceded embedded derivatives
|
|
51
|
|
|
21
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
72
|
|
|
Indexed annuity ceded embedded derivatives
|
|
11
|
|
|
(117
|
)
|
|
-
|
|
|
1,008
|
|
|
-
|
|
|
902
|
|
|
Future contract benefits – indexed annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives (6)
|
|
(1,418
|
)
|
|
198
|
|
|
-
|
|
|
(85
|
)
|
|
-
|
|
|
(1,305
|
)
|
|
Other liabilities – GLB ceded embedded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivatives (6)
|
|
(67
|
)
|
|
67
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total, net
|
$
|
3,139
|
|
$
|
(437
|
)
|
$
|
(271
|
)
|
$
|
2,045
|
|
$
|
(462
|
)
|
$
|
4,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
Gains
|
Issuances,
|
Transfers
|
|
|
|
|
|
|
|
|
|
Items
|
|
(Losses)
|
Sales,
|
Into or
|
|
|
|
|
|
|
|
|
|
Included
|
|
in
|
Maturities,
|
Out
|
|
|
|
|
|
|
Beginning
|
|
in
|
|
OCI
|
Settlements,
|
of
|
|
Ending
|
|
|
|
Fair
|
|
Net
|
|
and
|
|
Calls,
|
|
Level 3,
|
|
Fair
|
|
|
|
Value
|
|
Income
|
|
Other (1)
|
|
Net
|
|
Net (3)
|
|
Value
|
|
|
Investments: (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
2,405
|
|
$
|
19
|
|
$
|
198
|
|
$
|
99
|
|
$
|
370
|
|
$
|
3,091
|
|
|
U.S. government bonds
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5
|
|
|
5
|
|
|
Foreign government bonds
|
|
111
|
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
110
|
|
|
RMBS
|
|
3
|
|
|
-
|
|
|
-
|
|
|
20
|
|
|
(11
|
)
|
|
12
|
|
|
CMBS
|
|
7
|
|
|
-
|
|
|
1
|
|
|
54
|
|
|
(56
|
)
|
|
6
|
|
|
ABS
|
|
101
|
|
|
-
|
|
|
(1
|
)
|
|
124
|
|
|
(106
|
)
|
|
118
|
|
|
State and municipal bonds
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
Hybrid and redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred securities
|
|
76
|
|
|
-
|
|
|
15
|
|
|
(1
|
)
|
|
(14
|
)
|
|
76
|
|
|
Equity AFS securities
|
|
177
|
|
|
1
|
|
|
(2
|
)
|
|
(13
|
)
|
|
(1
|
)
|
|
162
|
|
|
Trading securities
|
|
65
|
|
|
3
|
|
|
8
|
|
|
(26
|
)
|
|
(1
|
)
|
|
49
|
|
|
Derivative investments
|
|
(93
|
)
|
|
(27
|
)
|
|
129
|
|
|
21
|
|
|
-
|
|
|
30
|
|
|
Other assets: (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives
|
|
-
|
|
|
903
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
903
|
|
|
GLB ceded embedded derivatives
|
|
203
|
|
|
(152
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
51
|
|
|
Indexed annuity ceded embedded derivatives
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11
|
|
|
-
|
|
|
11
|
|
|
Future contract benefits – indexed annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives (6)
|
|
(1,139
|
)
|
|
(400
|
)
|
|
-
|
|
|
121
|
|
|
-
|
|
|
(1,418
|
)
|
|
Other liabilities: (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives
|
|
(371
|
)
|
|
371
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
GLB ceded embedded derivatives
|
|
-
|
|
|
(67
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(67
|
)
|
|
Total, net
|
$
|
1,545
|
|
$
|
650
|
|
$
|
347
|
|
$
|
410
|
|
$
|
187
|
|
$
|
3,139
|
|
(1)The changes in fair value of the interest rate swaps are offset by an adjustment to derivative investments (see Note 6).
(2)Issuances, sales, maturities, settlements, calls, net, includes financial instruments acquired in the Liberty Life transaction as follows: corporate bonds of $67 million and ABS of $17 million.
(3)Transfers into or out of Level 3 for fixed maturity AFS and trading securities are reported at amortized cost as of the beginning-of-year. For fixed maturity AFS and trading securities, the difference between beginning-of-year amortized cost and beginning-of-year fair value was included in OCI and earnings, respectively, in the prior years.
(4)Transfers into or out of Level 3 for FHLB stock between equity securities and other investments are reported at cost on our Consolidated Balance Sheets.
(5)Amortization and accretion of premiums and discounts are included in net investment income on our Consolidated Statements of Comprehensive Income (Loss). Gains (losses) from sales, maturities, settlements and calls and OTTI are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
(6)Gains (losses) from sales, maturities, settlements and calls are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
The following provides the components of the items included in issuances, sales, maturities, settlements and calls, net, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, (in millions) as reported above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
|
Issuances
|
|
Sales
|
|
Maturities
|
Settlements
|
Calls
|
|
Total
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
1,170
|
|
$
|
(28
|
)
|
$
|
(78
|
)
|
$
|
(156
|
)
|
$
|
(30
|
)
|
$
|
878
|
|
|
Foreign government bonds
|
|
-
|
|
|
-
|
|
|
(25
|
)
|
|
-
|
|
|
-
|
|
|
(25
|
)
|
|
RMBS
|
|
21
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21
|
|
|
CMBS
|
|
7
|
|
|
-
|
|
|
-
|
|
|
(2
|
)
|
|
-
|
|
|
5
|
|
|
ABS
|
|
646
|
|
|
(8
|
)
|
|
-
|
|
|
(19
|
)
|
|
-
|
|
|
619
|
|
|
Trading securities
|
|
872
|
|
|
-
|
|
|
-
|
|
|
(22
|
)
|
|
-
|
|
|
850
|
|
|
Equity securities
|
|
50
|
|
|
(33
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17
|
|
|
Derivative investments
|
|
555
|
|
|
(63
|
)
|
|
(331
|
)
|
|
-
|
|
|
-
|
|
|
161
|
|
|
Other assets – indexed annuity ceded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives
|
|
56
|
|
|
-
|
|
|
-
|
|
|
(189
|
)
|
|
-
|
|
|
(133
|
)
|
|
Future contract benefits – indexed annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives
|
|
(591
|
)
|
|
-
|
|
|
-
|
|
|
211
|
|
|
-
|
|
|
(380
|
)
|
|
Total, net
|
$
|
2,786
|
|
$
|
(132
|
)
|
$
|
(434
|
)
|
$
|
(177
|
)
|
$
|
(30
|
)
|
$
|
2,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
Issuances
|
|
Sales
|
|
Maturities
|
Settlements
|
Calls
|
|
Total
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
947
|
|
$
|
(161
|
)
|
$
|
(3
|
)
|
$
|
(277
|
)
|
$
|
(77
|
)
|
$
|
429
|
|
|
U.S. government bonds
|
|
-
|
|
|
(5
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5
|
)
|
|
RMBS
|
|
7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7
|
|
|
CMBS
|
|
39
|
|
|
-
|
|
|
-
|
|
|
(4
|
)
|
|
-
|
|
|
35
|
|
|
ABS
|
|
240
|
|
|
(17
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
223
|
|
|
Trading securities
|
|
54
|
|
|
(24
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
30
|
|
|
Equity securities
|
|
1
|
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Derivative investments
|
|
365
|
|
|
464
|
|
|
(426
|
)
|
|
-
|
|
|
-
|
|
|
403
|
|
|
Other assets – indexed annuity ceded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives
|
|
1,030
|
|
|
-
|
|
|
-
|
|
|
(22
|
)
|
|
-
|
|
|
1,008
|
|
|
Future contract benefits – indexed annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives
|
|
(284
|
)
|
|
-
|
|
|
-
|
|
|
199
|
|
|
-
|
|
|
(85
|
)
|
|
Total, net
|
$
|
2,399
|
|
$
|
256
|
|
$
|
(429
|
)
|
$
|
(104
|
)
|
$
|
(77
|
)
|
$
|
2,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
|
|
Issuances
|
|
Sales
|
|
Maturities
|
Settlements
|
Calls
|
|
Total
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
747
|
|
$
|
(200
|
)
|
$
|
(98
|
)
|
$
|
(206
|
)
|
$
|
(144
|
)
|
$
|
99
|
|
|
RMBS
|
|
20
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
20
|
|
|
CMBS
|
|
55
|
|
|
-
|
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
54
|
|
|
ABS
|
|
124
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
124
|
|
|
Hybrid and redeemable preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
(1
|
)
|
|
Equity AFS securities
|
|
18
|
|
|
(31
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(13
|
)
|
|
Trading securities
|
|
2
|
|
|
(27
|
)
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
(26
|
)
|
|
Derivative investments
|
|
197
|
|
|
234
|
|
|
(410
|
)
|
|
-
|
|
|
-
|
|
|
21
|
|
|
Other assets – indexed annuity ceded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives
|
|
11
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11
|
|
|
Future contract benefits – indexed annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives
|
|
(71
|
)
|
|
-
|
|
|
-
|
|
|
192
|
|
|
-
|
|
|
121
|
|
|
Total, net
|
$
|
1,103
|
|
$
|
(24
|
)
|
$
|
(508
|
)
|
$
|
(17
|
)
|
$
|
(144
|
)
|
$
|
410
|
|
The following summarizes changes in unrealized gains (losses) included in net income, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, related to financial instruments carried at fair value classified within Level 3 that we still held (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
GLB
|
$
|
1,015
|
|
$
|
(75
|
)
|
$
|
1,904
|
|
|
Derivative investments
|
|
168
|
|
|
90
|
|
|
(266
|
)
|
|
Embedded derivatives:
|
|
|
|
|
|
|
|
|
|
|
Indexed annuity and IUL contracts
|
|
(97
|
)
|
|
(38
|
)
|
|
(14
|
)
|
|
Total, net (1)
|
$
|
1,086
|
|
$
|
(23
|
)
|
$
|
1,628
|
|
(1)Included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
The following provides the components of the transfers into and out of Level 3 (in millions) as reported above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
|
Transfers
|
|
Transfers
|
|
|
|
|
|
|
Into
|
|
Out of
|
|
|
|
|
|
|
Level 3
|
|
Level 3
|
|
Total
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
173
|
|
$
|
(222
|
)
|
$
|
(49
|
)
|
|
U.S. government bonds
|
|
5
|
|
|
-
|
|
|
5
|
|
|
RMBS
|
|
-
|
|
|
(17
|
)
|
|
(17
|
)
|
|
CMBS
|
|
-
|
|
|
(7
|
)
|
|
(7
|
)
|
|
ABS
|
|
9
|
|
|
(495
|
)
|
|
(486
|
)
|
|
Trading securities
|
|
5
|
|
|
(273
|
)
|
|
(268
|
)
|
|
Total, net
|
$
|
192
|
|
$
|
(1,014
|
)
|
$
|
(822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
Transfers
|
|
Transfers
|
|
|
|
|
|
|
Into
|
|
Out of
|
|
|
|
|
|
|
Level 3
|
|
Level 3
|
|
Total
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
78
|
|
$
|
(140
|
)
|
$
|
(62
|
)
|
|
RMBS
|
|
-
|
|
|
(12
|
)
|
|
(12
|
)
|
|
CMBS
|
|
1
|
|
|
(40
|
)
|
|
(39
|
)
|
|
ABS
|
|
-
|
|
|
(206
|
)
|
|
(206
|
)
|
|
Equity AFS securities
|
|
-
|
|
|
(162
|
)
|
|
(162
|
)
|
|
Trading securities
|
|
-
|
|
|
(7
|
)
|
|
(7
|
)
|
|
Equity securities
|
|
26
|
|
|
-
|
|
|
26
|
|
|
Total, net
|
$
|
105
|
|
$
|
(567
|
)
|
$
|
(462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
|
|
Transfers
|
|
Transfers
|
|
|
|
|
|
|
Into
|
|
Out of
|
|
|
|
|
|
|
Level 3
|
|
Level 3
|
|
Total
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities:
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
458
|
|
$
|
(88
|
)
|
$
|
370
|
|
|
U.S. government bonds
|
|
5
|
|
|
-
|
|
|
5
|
|
|
RMBS
|
|
-
|
|
|
(11
|
)
|
|
(11
|
)
|
|
CMBS
|
|
3
|
|
|
(59
|
)
|
|
(56
|
)
|
|
ABS
|
|
46
|
|
|
(152
|
)
|
|
(106
|
)
|
|
State and municipal bonds
|
|
2
|
|
|
(1
|
)
|
|
1
|
|
|
Hybrid and redeemable preferred securities
|
|
-
|
|
|
(14
|
)
|
|
(14
|
)
|
|
Equity AFS securities
|
|
-
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Trading securities
|
|
4
|
|
|
(5
|
)
|
|
(1
|
)
|
|
Total, net
|
$
|
518
|
|
$
|
(331
|
)
|
$
|
187
|
|
Transfers into and out of Level 3 are generally the result of observable market information on a security no longer being available or becoming available to our pricing vendors. For the years ended December 31, 2019, 2018 and 2017 transfers in and out of Level 3 were attributable primarily to the securities’ observable market information no longer being available or becoming available. In 2018, transfers into or out of Level 3 also included FHLB stock between equity securities and other investments at cost on our Consolidated Balance Sheets.
The following summarizes the fair value (in millions), valuation techniques and significant unobservable inputs of the Level 3 fair value measurements as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
Valuation
|
|
Significant
|
|
Assumption or
|
|
|
|
Value
|
|
Technique
|
|
Unobservable Inputs
|
|
Input Ranges
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS and trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
3,006
|
|
Discounted cash flow
|
|
Liquidity/duration adjustment (1)
|
|
0.1
|
%
|
|
-
|
6.4
|
%
|
|
|
Foreign government bonds
|
|
52
|
|
Discounted cash flow
|
|
Liquidity/duration adjustment (1)
|
|
2.1
|
%
|
|
-
|
2.5
|
%
|
|
|
ABS
|
|
23
|
|
Discounted cash flow
|
|
Liquidity/duration adjustment (1)
|
|
3.0
|
%
|
|
-
|
3.0
|
%
|
|
|
Hybrid and redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred securities
|
|
4
|
|
Discounted cash flow
|
|
Liquidity/duration adjustment (1)
|
|
1.4
|
%
|
|
-
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
21
|
|
Discounted cash flow
|
|
Liquidity/duration adjustment (1)
|
|
4.5
|
%
|
|
-
|
5.2
|
%
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct and ceded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives
|
|
510
|
|
Discounted cash flow
|
|
Long-term lapse rate (2)
|
|
1
|
%
|
|
-
|
30
|
%
|
|
|
|
|
|
|
|
|
Utilization of guaranteed withdrawals (3)
|
85
|
%
|
|
-
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Claims utilization factor (4)
|
|
60
|
%
|
|
-
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Premiums utilization factor (4)
|
|
80
|
%
|
|
-
|
115
|
%
|
|
|
|
|
|
|
|
|
|
NPR (5)
|
|
0.01
|
%
|
|
-
|
0.27
|
%
|
|
|
|
|
|
|
|
|
|
Mortality rate (6)
|
|
|
|
|
|
(8)
|
|
|
|
|
|
|
|
|
|
|
Volatility (7)
|
|
1
|
%
|
|
-
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indexed annuity ceded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives
|
|
927
|
|
Discounted cash flow
|
|
Lapse rate (2)
|
|
1
|
%
|
|
-
|
9
|
%
|
|
|
|
|
|
|
|
|
|
Mortality rate (6)
|
|
|
|
|
|
(8)
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future contract benefits – indexed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity and IUL contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives
|
$
|
(2,585
|
)
|
Discounted cash flow
|
|
Lapse rate (2)
|
|
1
|
%
|
|
-
|
9
|
%
|
|
|
|
|
|
|
|
|
|
Mortality rate (6)
|
|
|
|
|
|
(8)
|
|
|
|
Other liabilities – GLB direct
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives
|
|
(9
|
)
|
Discounted cash flow
|
|
Long-term lapse rate (2)
|
|
1
|
%
|
|
-
|
30
|
%
|
|
|
|
|
|
|
|
|
|
Utilization of guaranteed withdrawals (3)
|
85
|
%
|
|
-
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Claims utilization factor (4)
|
|
60
|
%
|
|
-
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Premiums utilization factor (4)
|
|
80
|
%
|
|
-
|
115
|
%
|
|
|
|
|
|
|
|
|
|
NPR (5)
|
|
0.01
|
%
|
|
-
|
0.27
|
%
|
|
|
|
|
|
|
|
|
|
Mortality rate (6)
|
|
|
|
|
|
(8)
|
|
|
|
|
|
|
|
|
|
|
Volatility (7)
|
|
1
|
%
|
|
-
|
28
|
%
|
|
(1)The liquidity/duration adjustment input represents an estimated market participant composite of adjustments attributable to liquidity premiums, expected durations, structures and credit quality that would be applied to the market observable information of an investment.
(2)The lapse rate input represents the estimated probability of a contract surrendering during a year, and thereby forgoing any future benefits. The range for indexed annuity and IUL contracts represents the lapse rates during the surrender charge period.
(3)The utilization of guaranteed withdrawals input represents the estimated percentage of contract holders that utilize the guaranteed withdrawal feature.
(4)The utilization factors are applied to the present value of claims or premiums, as appropriate, in the GLB reserve calculation to estimate the impact of inefficient withdrawal behavior, including taking less than or more than the maximum guaranteed withdrawal.
(5)The NPR input represents the estimated additional credit spread that market participants would apply to the market observable discount rate when pricing a contract.
(6)The mortality rate input represents the estimated probability of when an individual belonging to a particular group, categorized according to age or some other factor such as gender, will die.
(7)The volatility input represents overall volatilities assumed for the underlying variable annuity funds, which include a mixture of equity and fixed-income assets. Fair value of the variable annuity GLB embedded derivatives would increase if higher volatilities were used for valuation.
(8)The mortality rate is based on a combination of company and industry experience, adjusted for improvement factors.
From the table above, we have excluded Level 3 fair value measurements obtained from independent, third-party pricing sources. We do not develop the significant inputs used to measure the fair value of these assets and liabilities, and the information regarding the significant inputs is not readily available to us. Independent broker-quoted fair values are non-binding quotes developed by market makers or broker-dealers obtained from third-party sources recognized as market participants. The fair value of a broker-quoted asset or liability is based solely on the receipt of an updated quote from a single market maker or a broker-dealer recognized as a market participant as we do not adjust broker quotes when used as the fair value measurement for an asset or liability. Significant increases or decreases in any of the quotes received from a third-party broker-dealer may result in a significantly higher or lower fair value measurement.
Changes in any of the significant inputs presented in the table above may result in a significant change in the fair value measurement of the asset or liability as follows:
Investments – An increase in the liquidity/duration adjustment input would result in a decrease in the fair value measurement.
Indexed annuity and IUL contracts embedded derivatives – For direct embedded derivatives, an increase in the lapse rate or mortality rate inputs would result in a decrease in the fair value measurement.
GLB embedded derivatives – Assuming our GLB direct embedded derivatives are in a liability position: an increase in our lapse rate, NPR or mortality rate inputs would result in a decrease in the fair value measurement; and an increase in the utilization of guaranteed withdrawal or volatility inputs would result in an increase in the fair value measurement.
For each category discussed above, the unobservable inputs are not inter-related; therefore, a directional change in one input will not affect the other inputs.
As part of our ongoing valuation process, we assess the reasonableness of our valuation techniques or models and make adjustments as necessary. For more information, see “Summary of Significant Accounting Policies” above.
21. Segment Information
We provide products and services and report results through our Annuities, Retirement Plan Services, Life Insurance and Group Protection segments. As discussed in Note 3, we completed the acquisition of Liberty Life during the second quarter of 2018. Related results are included within the Group Protection segment. We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments. Our reporting segments reflect the manner by which our chief operating decision makers view and manage the business. The following is a brief description of these segments and Other Operations.
The Annuities segment provides tax-deferred investment growth and lifetime income opportunities for its clients by offering fixed (including indexed) and variable annuities.
The Retirement Plan Services segment provides employer-sponsored defined benefit and individual retirement accounts, as well as individual and group variable annuities, group fixed annuities and mutual-fund based programs in the retirement plan marketplace.
The Life Insurance segment focuses in the creation and protection of wealth through life insurance products, including term insurance, a linked-benefit product (which is a UL policy linked with riders that provide for long-term care costs), IUL and both single and survivorship versions of UL and VUL, including corporate-owned UL and VUL insurance and bank-owned UL and VUL insurance products.
The Group Protection segment offers group non-medical insurance products, including short and long-disability, absence management services, term life, dental, vision and accident and critical illness benefits and services to the employer marketplace through various forms of employee-paid and employer-paid plans.
Other Operations includes investments related to the excess capital in our insurance subsidiaries; benefit plan net liability; the unamortized deferred gain on indemnity reinsurance related to the sale of reinsurance; the results of certain disability income business; our run-off institutional pension business, the majority of which was sold on a group annuity basis; debt costs; strategic digitization expense; and other corporate investments.
Segment operating revenues and income (loss) from operations are internal measures used by our management and Board of Directors to evaluate and assess the results of our segments. Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable:
Realized gains and losses associated with the following (“excluded realized gain (loss)”):
Sales or disposals and impairments of securities;
Changes in the fair value of derivatives, embedded derivatives within certain reinsurance arrangements and trading securities (“gain (loss) on the mark-to-market on certain instruments”);
Changes in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities;
Changes in the fair value of the embedded derivatives of our GLB riders reflected within variable annuity net derivative results accounted for at fair value;
Changes in the fair value of the derivatives we own to hedge our GLB riders reflected within variable annuity net derivative results;
Changes in the fair value of the embedded derivative liabilities related to index options we may purchase or sell in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for at fair value (“indexed annuity forward-starting option”); and
Changes in the fair value of equity securities;
Changes in reserves resulting from benefit ratio unlocking on our GDB and GLB riders (“benefit ratio unlocking”);
Income (loss) from reserve changes, net of related amortization, on business sold through reinsurance;
Gains (losses) on early extinguishment of debt;
Losses from the impairment of intangible assets;
Income (loss) from discontinued operations;
Acquisition and integration costs related to mergers and acquisitions; and
Income (loss) from the initial adoption of new accounting standards, regulations, and policy changes including the net impact from the Tax Cuts and Jobs Act.
Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable:
Excluded realized gain (loss);
Revenue adjustments from the initial adoption of new accounting standards;
Amortization of DFEL arising from changes in GDB and GLB benefit ratio unlocking; and
Amortization of deferred gains arising from reserve changes on business sold through reinsurance.
We use our prevailing corporate federal income tax rates of 21% and 35%, where applicable, while taking into account any permanent differences for events recognized differently in our financial statements and federal income tax returns when reconciling our segment measures of performance to the GAAP measures presented in our consolidated results of operations. Operating revenues and income (loss) from operations do not replace revenues and net income as the GAAP measures of our consolidated results of operations.
The tables below reconcile our segment measures of performance to the GAAP measures presented in our Consolidated Statements of Comprehensive Income (Loss) (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
Annuities
|
$
|
4,600
|
|
$
|
4,383
|
|
$
|
4,378
|
|
|
Retirement Plan Services
|
|
1,200
|
|
|
1,178
|
|
|
1,165
|
|
|
Life Insurance
|
|
7,438
|
|
|
6,922
|
|
|
6,558
|
|
|
Group Protection
|
|
4,588
|
|
|
3,757
|
|
|
2,201
|
|
|
Other Operations
|
|
220
|
|
|
235
|
|
|
287
|
|
|
Excluded realized gain (loss), pre-tax
|
|
(794
|
)
|
|
(46
|
)
|
|
(336
|
)
|
|
Amortization of deferred gain arising from reserve changes
|
|
|
|
|
|
|
|
|
|
|
on business sold through reinsurance, pre-tax
|
|
-
|
|
|
-
|
|
|
1
|
|
|
Amortization of DFEL associated with benefit ratio unlocking, pre-tax
|
|
6
|
|
|
(5
|
)
|
|
3
|
|
|
Total revenues
|
$
|
17,258
|
|
$
|
16,424
|
|
$
|
14,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
Annuities
|
$
|
954
|
|
$
|
1,102
|
|
$
|
1,074
|
|
|
Retirement Plan Services
|
|
172
|
|
|
171
|
|
|
149
|
|
|
Life Insurance
|
|
259
|
|
|
645
|
|
|
536
|
|
|
Group Protection
|
|
238
|
|
|
187
|
|
|
103
|
|
|
Other Operations
|
|
(268
|
)
|
|
(225
|
)
|
|
(108
|
)
|
|
Excluded realized gain (loss), after-tax
|
|
(627
|
)
|
|
(37
|
)
|
|
(218
|
)
|
|
Gain (loss) on early extinguishment of debt, after-tax
|
|
(33
|
)
|
|
(18
|
)
|
|
(3
|
)
|
|
Benefit ratio unlocking, after-tax
|
|
277
|
|
|
(136
|
)
|
|
129
|
|
|
Net impact from the Tax Cuts and Jobs Act
|
|
17
|
|
|
19
|
|
|
1,322
|
|
|
Impairment of intangibles, after-tax
|
|
-
|
|
|
-
|
|
|
(905
|
)
|
|
Acquisition and integration costs related to mergers and acquisitions, after-tax
|
|
(103
|
)
|
|
(67
|
)
|
|
-
|
|
|
Net income (loss)
|
$
|
886
|
|
$
|
1,641
|
|
$
|
2,079
|
|
Other segment information (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Net Investment Income
|
|
|
|
|
|
|
|
|
|
|
Annuities
|
$
|
1,140
|
|
$
|
1,005
|
|
$
|
1,038
|
|
|
Retirement Plan Services
|
|
924
|
|
|
899
|
|
|
899
|
|
|
Life Insurance
|
|
2,658
|
|
|
2,697
|
|
|
2,643
|
|
|
Group Protection
|
|
307
|
|
|
260
|
|
|
168
|
|
|
Other Operations
|
|
194
|
|
|
224
|
|
|
242
|
|
|
Total net investment income
|
$
|
5,223
|
|
$
|
5,085
|
|
$
|
4,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Amortization of DAC and VOBA, Net of Interest
|
|
|
|
|
|
|
|
|
|
|
Annuities
|
$
|
408
|
|
$
|
410
|
|
$
|
401
|
|
|
Retirement Plan Services
|
|
26
|
|
|
28
|
|
|
27
|
|
|
Life Insurance
|
|
779
|
|
|
711
|
|
|
469
|
|
|
Group Protection
|
|
111
|
|
|
92
|
|
|
79
|
|
|
Total amortization of DAC and VOBA, net of interest
|
$
|
1,324
|
|
$
|
1,241
|
|
$
|
976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Federal Income Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
|
|
Annuities
|
$
|
139
|
|
$
|
183
|
|
$
|
199
|
|
|
Retirement Plan Services
|
|
23
|
|
|
29
|
|
|
55
|
|
|
Life Insurance
|
|
47
|
|
|
147
|
|
|
244
|
|
|
Group Protection
|
|
63
|
|
|
50
|
|
|
55
|
|
|
Other Operations
|
|
(92
|
)
|
|
(77
|
)
|
|
(130
|
)
|
|
Excluded realized gain (loss)
|
|
(167
|
)
|
|
(9
|
)
|
|
(118
|
)
|
|
Gain (loss) on early extinguishment of debt
|
|
(9
|
)
|
|
(5
|
)
|
|
(2
|
)
|
|
Benefit ratio unlocking
|
|
74
|
|
|
(36
|
)
|
|
70
|
|
|
Net impact from the Tax Cuts and Jobs Act
|
|
(17
|
)
|
|
(19
|
)
|
|
(1,322
|
)
|
|
Acquisition and integration costs related to
|
|
|
|
|
|
|
|
|
|
|
mergers and acquisitions
|
|
(28
|
)
|
|
(19
|
)
|
|
-
|
|
|
Total federal income tax expense (benefit)
|
$
|
33
|
|
$
|
244
|
|
$
|
(949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2019
|
|
2018
|
|
|
Assets
|
|
|
|
|
|
|
|
Annuities
|
$
|
167,443
|
|
$
|
145,458
|
|
|
Retirement Plan Services
|
|
40,184
|
|
|
35,736
|
|
|
Life Insurance
|
|
92,561
|
|
|
81,533
|
|
|
Group Protection
|
|
9,467
|
|
|
8,495
|
|
|
Other Operations
|
|
25,106
|
|
|
26,925
|
|
|
Total assets
|
$
|
334,761
|
|
$
|
298,147
|
|
22. Supplemental Disclosures of Cash Flow Data
The following summarizes our supplemental cash flow data (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Interest paid
|
$
|
281
|
|
$
|
281
|
|
$
|
248
|
|
|
Income taxes paid (received)
|
|
260
|
|
|
90
|
|
|
170
|
|
|
Significant non-cash investing and financing transactions:
|
|
|
|
|
|
|
|
|
|
|
Reduction of other investments in connection with
|
|
|
|
|
|
|
|
|
|
|
the expiration of a repurchase agreement
|
|
(150
|
)
|
|
-
|
|
|
-
|
|
|
Investments received in financing transactions
|
|
-
|
|
|
263
|
|
|
-
|
|
23. Quarterly Results of Operations (Unaudited)
The unaudited quarterly results of operations (in millions, except per share data) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
March 31,
|
|
June 30,
|
September 30,
|
December 31,
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
3,965
|
|
$
|
4,310
|
|
$
|
4,638
|
|
$
|
4,344
|
|
|
|
Total expenses
|
|
3,697
|
|
|
3,889
|
|
|
4,888
|
|
|
3,863
|
|
|
|
Net income (loss)
|
|
252
|
|
|
363
|
|
|
(161
|
)
|
|
431
|
|
|
|
Earnings (loss) per common share – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
1.23
|
|
|
1.80
|
|
|
(0.81
|
)
|
|
2.18
|
|
|
|
Earnings (loss) per common share – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
1.22
|
|
|
1.79
|
|
|
(0.83
|
)
|
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
3,609
|
|
$
|
4,020
|
|
$
|
4,264
|
|
$
|
4,531
|
|
|
|
Total expenses
|
|
3,174
|
|
|
3,569
|
|
|
3,732
|
|
|
4,064
|
|
|
|
Net income (loss)
|
|
367
|
|
|
385
|
|
|
490
|
|
|
399
|
|
|
|
Earnings (loss) per common share – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
1.68
|
|
|
1.76
|
|
|
2.27
|
|
|
1.89
|
|
|
|
Earnings (loss) per common share – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
1.64
|
|
|
1.70
|
|
|
2.24
|
|
|
1.80
|
|
|
