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Lincoln National Life Insurance
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
8-K 2018-01-19 Enter Agreement, Exhibits
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C865 2019-03-31
Part I – Financial Information
Item 1. Financial Statements
Item 2. Management’S Narrative Analysis of The Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II – Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 c865-20190331xex31_1.htm
EX-31.2 c865-20190331xex31_2.htm
EX-32.1 c865-20190331xex32_1.htm
EX-32.2 c865-20190331xex32_2.htm

Lincoln National Life Insurance Earnings 2019-03-31

C865 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 c865-20190331x10q.htm 10-Q 1Q LNL 2019_Taxonomy2018





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

 

FORM 10-Q

_________________

 (Mark One)

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

For the quarterly period ended March 31, 2019  

OR









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

For the transition period from                      to                     

 

Commission File Number: 000-55871  

_________________

 

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY 

(Exact name of registrant as specified in its charter)

_________________

 



 



 

                Indiana                

35-0472300

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)



 

1300 South Clinton Street, Fort Wayne, Indiana

46802

(Address of principal executive offices)

(Zip Code)

 

(260) 455-2000

(Registrant’s telephone number, including area code)

_________________



  

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



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



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



Large accelerated filer   Accelerated filer  

Non-accelerated filer Smaller reporting company  

Emerging growth company  



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. 



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



Securities registered pursuant to Section 12(b) of the Act: None



As of May 1, 2019,  10,000,000 shares of common stock of the registrant ($2.50 par value) were outstanding, all of which were directly owned by Lincoln National Corporation.



THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF

FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.





 

 

 


 





The Lincoln National Life Insurance Company

 

Table of Contents





 

 

 

 

 

Item

 

 

 

 

Page

PART I



 

 

1.

Financial Statements



 

 

2.

Management’s Narrative Analysis of the Results of Operations

46 



    Forward-Looking Statements – Cautionary Language

46 



    Critical Accounting Policies and Estimates

47 



    Results of Consolidated Operations

48 



    Results of Annuities

49 



    Results of Retirement Plan Services

51 



    Results of Life Insurance

52 



    Results of Group Protection

53 



    Results of Other Operations

54 



    Realized Gain (Loss)

55 



    Review of Consolidated Financial Condition

56 



         Liquidity and Capital Resources

56 



 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

58 



 

 

4.

Controls and Procedures

58 



 

 

PART II



 

 

1.

Legal Proceedings

59 



 

 

1A.

Risk Factors

59 



 

 

2.

Unregistered Sales of Equity Securities and Use of Proceeds

59 



 

 

6.

Exhibits

59 



 

 

 

Exhibit Index for the Report on Form 10-Q

60 



 

 



Signatures

61 



 

 



 

 





 

 

 


 

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)



 

 

 

 

 

 

 

 



 

As of

 

 

As of

 

 

March 31,

December 31,



 

2019

 

 

2018

 



(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturity available-for-sale securities, at fair value

 

 

 

 

 

 

 

 

(amortized cost:  2019 – $91,669; 2018 – $91,219)

 

$

96,648 

 

 

$

92,787 

 

Trading securities

 

 

3,231 

 

 

 

1,869 

 

Equity securities

 

 

153 

 

 

 

99 

 

Mortgage loans on real estate

 

 

13,925 

 

 

 

13,190 

 

Policy loans

 

 

2,481 

 

 

 

2,491 

 

Derivative investments

 

 

974 

 

 

 

1,081 

 

Other investments

 

 

2,372 

 

 

 

1,962 

 

Total investments

 

 

119,784 

 

 

 

113,479 

 

Cash and invested cash

 

 

1,320 

 

 

 

1,848 

 

Deferred acquisition costs and value of business acquired

 

 

9,456 

 

 

 

10,308 

 

Premiums and fees receivable

 

 

606 

 

 

 

568 

 

Accrued investment income

 

 

1,158 

 

 

 

1,087 

 

Reinsurance recoverables

 

 

19,628 

 

 

 

19,826 

 

Reinsurance related embedded derivatives

 

 

 -

 

 

 

188 

 

Funds withheld reinsurance assets

 

 

555 

 

 

 

563 

 

Goodwill

 

 

1,778 

 

 

 

1,782 

 

Other assets

 

 

17,273 

 

 

 

16,663 

 

Separate account assets

 

 

143,369 

 

 

 

132,833 

 

Total assets

 

$

314,927 

 

 

$

299,145 

 



 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Future contract benefits

 

$

33,268 

 

 

$

33,884 

 

Other contract holder funds

 

 

93,311 

 

 

 

90,573 

 

Short-term debt

 

 

686 

 

 

 

288 

 

Long-term debt

 

 

2,387 

 

 

 

2,401 

 

Reinsurance related embedded derivatives

 

 

80 

 

 

 

 -

 

Funds withheld reinsurance liabilities

 

 

4,677 

 

 

 

4,860 

 

Payables for collateral on investments

 

 

5,361 

 

 

 

4,786 

 

Other liabilities

 

 

13,538 

 

 

 

13,201 

 

Separate account liabilities

 

 

143,369 

 

 

 

132,833 

 

Total liabilities

 

 

296,677 

 

 

 

282,826 

 



 

 

 

 

 

 

 

 

Contingencies and Commitments (See Note 11)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Stockholder’s Equity

 

 

 

 

 

 

 

 

Common stock – 10,000,000 shares authorized, issued and outstanding

 

 

11,240 

 

 

 

11,237 

 

Retained earnings

 

 

4,356 

 

 

 

4,423 

 

Accumulated other comprehensive income (loss)

 

 

2,654 

 

 

 

659 

 

Total stockholder’s equity

 

 

18,250 

 

 

 

16,319 

 

Total liabilities and stockholder’s equity

 

$

314,927 

 

 

$

299,145 

 



See accompanying Notes to Consolidated Financial Statements

1


 

 



THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in millions)



 

 

 

 

 

 



 

 

 

 

 

 



For the Three

 



Months Ended

 



March 31,

 

 

2019

 

2018

 

Revenues

 

 

 

 

 

 

Insurance premiums

$

1,378

 

$

709

 

Fee income

 

1,413

 

 

1,391

 

Net investment income

 

1,191

 

 

1,176

 

Realized gain (loss):

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

(21

)

 

(2

)

Portion of loss recognized in other comprehensive income

 

13

 

 

 -

 

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

 

(8

)

 

(2

)

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

 

(343

)

 

24

 

Total realized gain (loss)

 

(351

)

 

22

 

Amortization of deferred gain on business sold through reinsurance

 

7

 

 

(1

)

Other revenues

 

126

 

 

107

 

Total revenues

 

3,764

 

 

3,404

 

Expenses

 

 

 

 

 

 

Interest credited

 

671

 

 

645

 

Benefits

 

1,798

 

 

1,219

 

Commissions and other expenses

 

1,124

 

 

1,010

 

Interest and debt expense

 

38

 

 

32

 

Strategic digitization expense

 

15

 

 

15

 

Total expenses

 

3,646

 

 

2,921

 

Income (loss) before taxes

 

118

 

 

483

 

Federal income tax expense (benefit)

 

(15

)

 

76

 

Net income (loss)

 

133

 

 

407

 

Other comprehensive income (loss), net of tax:

 

1,995

 

 

(1,614

)

Comprehensive income (loss)

$

2,128

 

$

(1,207

)



 

 

 

 

 

 











See accompanying Notes to Consolidated Financial Statements

2


 

 

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(Unaudited, in millions)







 

 

 

 

 

 



 

 

 

 

 

 



For the Three

 



Months Ended

 



March 31,

 



2019

 

2018

 

Common Stock

 

 

 

 

 

 

Balance as of beginning-of-year

$

11,237

 

$

10,713

 

Stock compensation/issued for benefit plans

 

3

 

 

(1

)

Balance as of end-of-period

 

11,240

 

 

10,712

 



 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

Balance as of beginning-of-year

 

4,423

 

 

4,405

 

Cumulative effect from adoption of new accounting standards

 

 -

 

 

(644

)

Net income (loss)

 

133

 

 

407

 

Dividends declared

 

(200

)

 

 -

 

Balance as of end-of-period

 

4,356

 

 

4,168

 



 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

Balance as of beginning-of-year

 

659

 

 

3,327

 

Cumulative effect from adoption of new accounting standards

 

 -

 

 

644

 

Other comprehensive income (loss), net of tax

 

1,995

 

 

(1,614

)

Balance as of end-of-period

 

2,654

 

 

2,357

 

Total stockholder’s equity as of end-of-period

$

18,250

 

$

17,237

 





See accompanying Notes to Consolidated Financial Statements

3


 

 

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)







 

 

 

 

 

 



For the Three



Months Ended

 



March 31,



2019

 

2018

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

$

133

 

$

407

 

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

 

 

 

 

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

 

 

 

 

 

 

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

 

(78

)

 

(5

)

Trading securities purchases, sales and maturities, net

 

(1,210

)

 

38

 

Change in premiums and fees receivable

 

(38

)

 

(85

)

Change in accrued investment income

 

(54

)

 

(43

)

Change in future contract benefits and other contract holder funds

 

(397

)

 

365

 

Change in reinsurance related assets and liabilities

 

(330

)

 

(520

)

Change in accrued expenses

 

(71

)

 

(111

)

Change in federal income tax accruals

 

(15

)

 

76

 

Realized (gain) loss

 

351

 

 

(22

)

Amortization of deferred (gain) loss on business sold through reinsurance

 

(7

)

 

1

 

Change in cash management agreement

 

(12

)

 

128

 

Other

 

91

 

 

141

 

Net cash provided by (used in) operating activities

 

(1,637

)

 

370

 



 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of available-for-sale securities and equity securities

 

(4,353

)

 

(2,005

)

Sales of available-for-sale securities and equity securities

 

2,371

 

 

430

 

Maturities of available-for-sale securities

 

1,427

 

 

1,353

 

Purchases of alternative investments

 

(174

)

 

(63

)

Sales and repayments of alternative investments

 

32

 

 

31

 

Issuance of mortgage loans on real estate

 

(1,099

)

 

(546

)

Repayment and maturities of mortgage loans on real estate

 

240

 

 

253

 

Issuance and repayment of policy loans, net

 

10

 

 

11

 

Net change in collateral on investments, derivatives and related settlements

 

567

 

 

(108

)

Other

 

(64

)

 

(33

)

Net cash provided by (used in) investing activities

 

(1,043

)

 

(677

)



 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Issuance (payment) of short-term debt

 

398

 

 

29

 

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

 

4,037

 

 

2,759

 

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

 

(1,559

)

 

(1,486

)

Transfers to and from separate accounts, net

 

(507

)

 

(686

)

Common stock issued for benefit plans

 

(17

)

 

(17

)

Dividends paid

 

(200

)

 

 -

 

Net cash provided by (used in) financing activities

 

2,152

 

 

599

 



 

 

 

 

 

 

Net increase (decrease) in cash, invested cash and restricted cash

 

(528

)

 

292

 

Cash, invested cash and restricted cash as of beginning-of-year

 

1,848

 

 

947

 

Cash, invested cash and restricted cash as of end-of-period

$

1,320

 

$

1,239

 



 

See accompanying Notes to Consolidated Financial Statements

4


 

 



THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1.  Nature of Operations and Basis of Presentation



Nature of Operations 



The Lincoln National Life Insurance Company (“LNL” or the “Company,” which also may be referred to as “we,” “our” or “us”), a wholly-owned subsidiary of Lincoln National Corporation (“LNC” or the “Parent Company”), is domiciled in the state of Indiana.  We own 100% of the outstanding common stock of two insurance company subsidiaries, Lincoln Life & Annuity Company of New York (“LLANY”) and Liberty Life Assurance Company of Boston (“Liberty Life”).  We also own several non-insurance companies, including Lincoln Financial Distributors, our wholesale distributors, and Lincoln Financial Advisors Corporation, part of LNC’s retail distributor, Lincoln Financial Network.  Through our business segments, we sell a wide range of wealth protection, accumulation and retirement income 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.  LNL is licensed and sells its products throughout the U.S. and several U.S. territories.  See Note 14 for additional information.



Basis of Presentation



The accompanying unaudited consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for the Securities and Exchange Commission (“SEC”) Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  As discussed in Note 3, on May 1, 2018, LNC and LNL completed the acquisition of Liberty Life.  The information contained in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”), should be read in connection with the reading of these interim unaudited consolidated financial statements.



Certain GAAP policies, which significantly affect the determination of financial condition, results of operations and cash flows, are summarized in our 2018 Form 10-K.



In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results.  Operating results for the three months ended March 31, 2019, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019.  All material inter-company accounts and transactions have been eliminated in consolidation.









5


 

 

2.  New Accounting Standards



Adoption of New Accounting Standards



The following table provides a description of our adoption of new Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“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.







 

 

 

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 right-of-use (“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 $171 million in ROU assets and $176 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 11.

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

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

January 1, 2019

We 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.  

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.

6


 

 

Future Adoption of New Accounting Standards



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





 

 

 

Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

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

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

January 1, 2020

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations, with a primary focus on our fixed maturity securities, mortgage loans and reinsurance recoverables.

ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts

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 deferred acquisition costs (“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.  Early adoption is permitted.   

January 1, 2021

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

 

3. Acquisition



On May 1, 2018, we completed the acquisition of 100% of the capital stock of Liberty Life, which operates a group benefits business (“Liberty Group Business”) and individual life and individual and group annuity business (the “Liberty Life Business”), from Liberty Mutual Insurance Company in a transaction accounted for under the acquisition method of accounting pursuant to Business Combinations Topic 805 (“Topic 805”).  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 was attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 22, 2018, 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.



The acquisition date fair values of certain assets and liabilities, including future contract benefits, intangible assets and related weighted average expected lives, commercial mortgage loans, reinsurance recoverables and deferred income taxes, are provisional and subject to revision within one year of the acquisition date.  Since the May 1, 2018 acquisition date, we have adjusted provisional assets acquired by

7


 

 

$(5) million and provisional liabilities acquired by $23 million for an increase in provisional goodwill of $28 million.  Under the terms of the MTA, a final balance sheet will be agreed upon at a later date.  As such, our estimates of fair values are pending finalization, which may result in adjustments to goodwill.  The following table presents the preliminary fair values (in millions) of the net assets acquired related to the Liberty Group Business as of March 31, 2019:





 

 

 



 

 

 



Preliminary

 



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



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):





 

 

 

 

 



 

 

 

 

 



For the Three

 



Months Ended

 



March 31,

 



 

2018

 

 

Revenue

 

$

3,959 

 

 

Net income

 

 

422 

 

 



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 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.





8


 

 

4.  Variable Interest Entities



Unconsolidated VIEs



Structured Securities



Through our investment activities, we make passive investments in structured securities issued by variable interest entities (“VIEs”) for which we are not the manager.  These structured securities include our asset-backed securities (“ABS”), residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and collateralized loan obligations (“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 limited partnerships (“LPs”) and limited liability companies (“LLCs”), including qualified affordable housing projects, that we have concluded are VIEs.  We do not hold any substantive kick-out or participation rights in the LPs and LLCs, and we do not receive any performance fees or decision maker fees from the LPs and LLCs.  Based on our analysis of the LPs and LLCs, we are not the primary beneficiary of the VIEs as we do not have the power to direct the most significant activities of the LPs and LLCs. 



The carrying amounts of our investments in the LPs and LLCs are recognized in other investments on our Consolidated Balance Sheets and were $1.7 billion as of March 31, 2019, and December 31, 2018.  Included in these carrying amounts are our investments in qualified affordable housing projects, which were $18 million and $20 million as of March 31, 2019, and December 31, 2018, respectively.  We do not have any contingent commitments to provide additional capital funding to these qualified affordable housing projects.  We received returns from these qualified affordable housing projects in the form of income tax credits and other tax benefits of less than $1 million for the three months ended March 31, 2019 and 2018, which were recognized in federal income tax expense (benefit) on our Consolidated Statements of Comprehensive Income (Loss).



Our exposure to loss is limited to the capital we invest in the LPs and LLCs, and there have been no indicators of impairment that would require us to recognize an impairment loss related to the LPs and LLCs as of March 31, 2019.





9


 

 

5.  Investments



Fixed Maturity AFS Securities



The amortized cost, gross unrealized gains, losses and other-than-temporary impairment (“OTTI”) and fair value of fixed maturity AFS securities (in millions) were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of March 31, 2019

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

78,450

 

$

4,625

 

$

802

 

$

9

 

$

82,264

 

ABS

 

973

 

 

45

 

 

5

 

 

(17

)

 

1,030

 

U.S. government bonds

 

358

 

 

34

 

 

1

 

 

 -

 

 

391

 

Foreign government bonds

 

399

 

 

50

 

 

 -

 

 

 -

 

 

449

 

RMBS

 

3,078

 

 

135

 

 

38

 

 

(17

)

 

3,192

 

CMBS

 

867

 

 

16

 

 

3

 

 

(4

)

 

884

 

CLOs

 

2,439

 

 

4

 

 

11

 

 

(5

)

 

2,437

 

State and municipal bonds

 

4,538

 

 

871

 

 

7

 

 

 -

 

 

5,402

 

Hybrid and redeemable preferred securities

 

567

 

 

55

 

 

23

 

 

 -

 

 

599

 

Total fixed maturity AFS securities

$

91,669

 

$

5,835

 

$

890

 

$

(34

)

$

96,648

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2018

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

78,837

 

$

2,871

 

$

2,167

 

$

(8

)

$

79,549

 

ABS

 

898

 

 

42

 

 

6

 

 

(14

)

 

948

 

U.S. government bonds

 

361

 

 

27

 

 

2

 

 

 -

 

 

386

 

Foreign government bonds

 

402

 

 

42

 

 

 -

 

 

 -

 

 

444

 

RMBS

 

3,099

 

 

113

 

 

61

 

 

(13

)

 

3,164

 

CMBS

 

810

 

 

6

 

 

16

 

 

(3

)

 

803

 

CLOs

 

1,746

 

 

3

 

 

24

 

 

(5

)

 

1,730

 

State and municipal bonds

 

4,498

 

 

703

 

 

17

 

 

 -

 

 

5,184

 

Hybrid and redeemable preferred securities

 

568

 

 

44

 

 

33

 

 

 -

 

 

579

 

Total fixed maturity AFS securities

$

91,219

 

$

3,851

 

$

2,326

 

$

(43

)

$

92,787

 



(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 March 31, 2019, were as follows:





 

 

 

 

 

 



 

 

 

 

 

 



Amortized

 

Fair

 



Cost

 

Value

 

Due in one year or less

$

3,497 

 

$

3,500 

 

Due after one year through five years

 

15,647 

 

 

15,945 

 

Due after five years through ten years

 

18,848 

 

 

19,428 

 

Due after ten years

 

46,320 

 

 

50,232 

 

Subtotal

 

84,312 

 

 

89,105 

 

Structured securities (ABS, MBS, CLOs)

 

7,357 

 

 

7,543 

 

Total fixed maturity AFS securities

$

91,669 

 

$

96,648 

 



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



10


 

 

The fair value and gross unrealized losses, including the portion of OTTI recognized in other comprehensive income (loss) (“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 March 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

$

4,619 

 

$

158 

 

$

14,037 

 

$

661 

 

$

18,656 

 

 

$

819 

 

ABS

 

73 

 

 

 

 

165 

 

 

12 

 

 

238 

 

 

 

13 

 

U.S. government bonds

 

 

 

 -

 

 

28 

 

 

 

 

34 

 

 

 

 

RMBS

 

52 

 

 

 

 

847 

 

 

38 

 

 

899 

 

 

 

39 

 

CMBS

 

 

 

 -

 

 

297 

 

 

 

 

306 

 

 

 

 

CLOs

 

771 

 

 

 

 

281 

 

 

 

 

1,052 

 

 

 

11 

 

State and municipal bonds

 

153 

 

 

 

 

125 

 

 

 

 

278 

 

 

 

 

Hybrid and redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

preferred securities

 

10 

 

 

 

 

149 

 

 

21 

 

 

159 

 

 

 

23 

 

Total fixed maturity AFS securities

$

5,693 

 

$

168 

 

$

15,929 

 

$

748 

 

$

21,622 

 

 

$

916 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total number of fixed maturity AFS securities in an unrealized loss position

 

 

 

 

 

 

1,847 

 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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

$

30,947 

 

$

1,464 

 

$

7,023 

 

$

704 

 

$

37,970 

 

 

$

2,168 

 

ABS

 

113 

 

 

 

 

136 

 

 

13 

 

 

249 

 

 

 

15 

 

U.S. government bonds

 

70 

 

 

 

 

23 

 

 

 

 

93 

 

 

 

 

RMBS

 

436 

 

 

 

 

796 

 

 

55 

 

 

1,232 

 

 

 

64 

 

CMBS

 

470 

 

 

11 

 

 

82 

 

 

 

 

552 

 

 

 

16 

 

CLOs

 

1,124 

 

 

21 

 

 

103 

 

 

 

 

1,227 

 

 

 

24 

 

State and municipal bonds

 

376 

 

 

 

 

92 

 

 

10 

 

 

468 

 

 

 

17 

 

Hybrid and redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

preferred securities

 

94 

 

 

 

 

131 

 

 

27 

 

 

225 

 

 

 

33 

 

Total fixed maturity AFS securities

$

33,630 

 

$

1,521 

 

$

8,386 

 

$

818 

 

$

42,016 

 

 

$

2,339 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total number of fixed maturity AFS securities in an unrealized loss position

 

 

 

 

 

 

3,360 

 





11


 

 

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: