Company Quick10K Filing
Lincoln National Life Insurance
Price-0.00 EPS52
Shares10 P/E-0
MCap-0 P/FCF0
Net Debt-2,238 EBIT429
TEV-2,238 TEV/EBIT-5
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-09
10-Q 2020-06-30 Filed 2020-08-10
10-Q 2020-03-31 Filed 2020-05-12
10-K 2019-12-31 Filed 2020-03-13
10-Q 2019-09-30 Filed 2019-11-04
10-Q 2019-06-30 Filed 2019-08-05
10-Q 2019-03-31 Filed 2019-05-06
10-K 2018-12-31 Filed 2019-03-13
10-Q 2018-09-30 Filed 2018-11-06
10-Q 2018-06-30 Filed 2018-08-07
10-Q 2018-03-31 Filed 2018-05-09
10-K 2017-12-31 Filed 2018-03-13
8-K 2018-01-19

C865 10Q Quarterly Report

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 c865-20180630xex31_1.htm
EX-31.2 c865-20180630xex31_2.htm
EX-32.1 c865-20180630xex32_1.htm
EX-32.2 c865-20180630xex32_2.htm

Lincoln National Life Insurance Earnings 2018-06-30

Balance SheetIncome StatementCash Flow
3302641981326602016201720182020
Assets, Equity
4.33.42.51.50.6-0.32016201720182020
Rev, G Profit, Net Income
2.21.40.5-0.3-1.2-2.02016201720182020
Ops, Inv, Fin

10-Q 1 c865-20180630x10q.htm 10-Q 2Q LNL 2018





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 June 30, 2018  

OR









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

For the transition period from                      to                     

 

Commission File Number 1-6028  

_________________

 

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)

 

Registrant’s telephone number, including area code:  (260) 455-2000

_________________



  

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



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



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



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

Smaller reporting company   Emerging growth company  



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



As of August 3, 2018,  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

48 



    Forward-Looking Statements – Cautionary Language

48 



    Critical Accounting Policies and Estimates

49 



    Results of Consolidated Operations

50 



    Results of Annuities

51 



    Results of Retirement Plan Services

53 



    Results of Life Insurance

54 



    Results of Group Protection

55 



    Results of Other Operations

56 



    Realized Gain (Loss)

57 



    Review of Consolidated Financial Condition

58 



         Liquidity and Capital Resources

58 



 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

60 



 

 

4.

Controls and Procedures

60 



 

 

PART II



 

 

1.

Legal Proceedings

61 



 

 

1A.

Risk Factors

61 



 

 

2.

Unregistered Sales of Equity Securities and Use of Proceeds

61 



 

 

6.

Exhibits

61 



 

 

 

Exhibit Index for the Report on Form 10-Q

62 



 

 



Signatures

63 



 

 



 

 





 

 

 


 

 

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

 

 

June 30,

December 31,



 

2018

 

 

2017

 



(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value:

 

 

 

 

 

 

 

 

Fixed maturity securities (amortized cost:  2018 – $88,911; 2017 – $85,802)

 

$

91,804 

 

 

$

93,340 

 

Equity securities (cost:  2017 – $247)

 

 

 -

 

 

 

246 

 

Trading securities

 

 

1,367 

 

 

 

1,533 

 

Equity securities

 

 

112 

 

 

 

 -

 

Mortgage loans on real estate

 

 

12,135 

 

 

 

10,662 

 

Real estate

 

 

11 

 

 

 

11 

 

Policy loans

 

 

2,488 

 

 

 

2,379 

 

Derivative investments

 

 

554 

 

 

 

845 

 

Other investments

 

 

1,774 

 

 

 

2,006 

 

Total investments

 

 

110,245 

 

 

 

111,022 

 

Cash and invested cash

 

 

1,418 

 

 

 

947 

 

Deferred acquisition costs and value of business acquired

 

 

9,924 

 

 

 

8,408 

 

Premiums and fees receivable

 

 

572 

 

 

 

394 

 

Accrued investment income

 

 

1,089 

 

 

 

1,052 

 

Reinsurance recoverables

 

 

19,740 

 

 

 

6,515 

 

Reinsurance related embedded derivatives

 

 

135 

 

 

 

 -

 

Funds withheld reinsurance assets

 

 

578 

 

 

 

598 

 

Goodwill

 

 

1,750 

 

 

 

1,368 

 

Other assets

 

 

10,103 

 

 

 

7,349 

 

Separate account assets

 

 

144,231 

 

 

 

144,219 

 

Total assets

 

$

299,785 

 

 

$

281,872 

 



 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Future contract benefits

 

$

32,921 

 

 

$

22,063 

 

Other contract holder funds

 

 

88,004 

 

 

 

79,481 

 

Short-term debt

 

 

 

 

 

10 

 

Long-term debt

 

 

2,374 

 

 

 

2,374 

 

Reinsurance related embedded derivatives

 

 

 -

 

 

 

51 

 

Funds withheld reinsurance liabilities

 

 

4,329 

 

 

 

4,348 

 

Deferred gain on business sold through reinsurance

 

 

38 

 

 

 

41 

 

Payables for collateral on investments

 

 

4,679 

 

 

 

4,354 

 

Other liabilities

 

 

6,026 

 

 

 

6,486 

 

Separate account liabilities

 

 

144,231 

 

 

 

144,219 

 

Total liabilities

 

 

282,611 

 

 

 

263,427 

 



 

 

 

 

 

 

 

 

Contingencies and Commitments (See Note 10)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Stockholder’s Equity

 

 

 

 

 

 

 

 

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

 

 

11,219 

 

 

 

10,713 

 

Retained earnings

 

 

4,588 

 

 

 

4,405 

 

Accumulated other comprehensive income (loss)

 

 

1,367 

 

 

 

3,327 

 

Total stockholder’s equity

 

 

17,174 

 

 

 

18,445 

 

 Total liabilities and stockholder’s equity

 

$

299,785 

 

 

$

281,872 

 



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

 

For the Six

 



Months Ended

 

Months Ended

 



June 30,

 

June 30,

 

 

2018

 

2017

 

2018

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Insurance premiums

$

1,101

 

$

735

 

$

1,811

 

$

1,470

 

Fee income

 

1,405

 

 

1,331

 

 

2,796

 

 

2,622

 

Net investment income

 

1,177

 

 

1,207

 

 

2,354

 

 

2,383

 

Realized gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

(1

)

 

(4

)

 

(3

)

 

(8

)

Portion of loss recognized in other comprehensive income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Net other-than-temporary impairment losses on securities

 

 

 

 

 

 

 

 

 

 

 

 

recognized in earnings

 

(1

)

 

(4

)

 

(3

)

 

(8

)

Realized gain (loss), excluding other-than-temporary

 

 

 

 

 

 

 

 

 

 

 

 

impairment losses on securities

 

34

 

 

(137

)

 

58

 

 

(222

)

Total realized gain (loss)

 

33

 

 

(141

)

 

55

 

 

(230

)

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

 

(1

)

 

3

 

 

(2

)

 

20

 

Other revenues

 

137

 

 

102

 

 

241

 

 

200

 

Total revenues

 

3,852

 

 

3,237

 

 

7,255

 

 

6,465

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Interest credited

 

640

 

 

638

 

 

1,286

 

 

1,277

 

Benefits

 

1,548

 

 

1,180

 

 

2,767

 

 

2,417

 

Commissions and other expenses

 

1,119

 

 

977

 

 

2,127

 

 

1,941

 

Interest and debt expense

 

34

 

 

31

 

 

66

 

 

63

 

Strategic digitization expense

 

16

 

 

14

 

 

31

 

 

23

 

Total expenses

 

3,357

 

 

2,840

 

 

6,277

 

 

5,721

 

Income (loss) before taxes

 

495

 

 

397

 

 

978

 

 

744

 

Federal income tax expense (benefit)

 

75

 

 

76

 

 

151

 

 

74

 

Net income (loss)

 

420

 

 

321

 

 

827

 

 

670

 

Other comprehensive income (loss), net of tax:

 

(990

)

 

835

 

 

(2,604

)

 

1,087

 

Comprehensive income (loss)

$

(570

)

$

1,156

 

$

(1,777

)

$

1,757

 



 

 

 

 

 

 

 

 

 

 

 

 











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 Six

 



Months Ended

 



June 30,

 



2018

 

2017

 

Common Stock

 

 

 

 

 

 

Balance as of beginning-of-year

$

10,713

 

$

10,696

 

Capital contributions from Lincoln National Corporation

 

500

 

 

 -

 

Stock compensation/issued for benefit plans

 

6

 

 

4

 

Balance as of end-of-period

 

11,219

 

 

10,700

 



 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

Balance as of beginning-of-year

 

4,405

 

 

3,342

 

Cumulative effect from adoption of new accounting standards

 

(644

)

 

 -

 

Net income (loss)

 

827

 

 

670

 

Dividends declared

 

 -

 

 

(454

)

Balance as of end-of-period

 

4,588

 

 

3,558

 



 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

Balance as of beginning-of-year

 

3,327

 

 

1,782

 

Cumulative effect from adoption of new accounting standards

 

644

 

 

 -

 

Other comprehensive income (loss), net of tax

 

(2,604

)

 

1,087

 

Balance as of end-of-period

 

1,367

 

 

2,869

 

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

$

17,174

 

$

17,127

 





See accompanying Notes to Consolidated Financial Statements

3


 

 

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)







 

 

 

 

 

 



For the Six

 



Months Ended

 



June 30,

 



2018

 

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

$

827

 

$

670

 

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

 

(30

)

 

11

 

Trading securities purchases, sales and maturities, net

 

130

 

 

60

 

Change in premiums and fees receivable

 

(91

)

 

64

 

Change in accrued investment income

 

14

 

 

(17

)

Change in future contract benefits and other contract holder funds

 

(692

)

 

(982

)

Change in reinsurance related assets and liabilities

 

612

 

 

634

 

Change in federal income tax accruals

 

72

 

 

32

 

Realized (gain) loss

 

(55

)

 

230

 

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

 

2

 

 

(20

)

Change in cash management agreement

 

63

 

 

(429

)

Other

 

(39

)

 

18

 

Net cash provided by (used in) operating activities

 

813

 

 

271

 



 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of available-for-sale securities and equity securities

 

(4,386

)

 

(5,286

)

Sales of available-for-sale securities and equity securities

 

525

 

 

779

 

Maturities of available-for-sale securities

 

3,285

 

 

2,797

 

Purchase of common stock in acquisition, net of cash acquired

 

(1,404

)

 

 -

 

Sale of business, net

 

(12

)

 

 -

 

Purchases of alternative investments

 

(146

)

 

(124

)

Sales and repayments of alternative investments

 

69

 

 

100

 

Proceeds from affiliate transfer of alternative investments

 

 -

 

 

66

 

Issuance of mortgage loans on real estate

 

(1,308

)

 

(695

)

Repayment and maturities of mortgage loans on real estate

 

493

 

 

557

 

Issuance and repayment of policy loans, net

 

23

 

 

34

 

Net change in collateral on investments, derivatives and related settlements

 

502

 

 

67

 

Other

 

(84

)

 

(55

)

Net cash provided by (used in) investing activities

 

(2,443

)

 

(1,760

)



 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Capital contribution from parent company

 

500

 

 

 -

 

Issuance (payment) of short-term debt

 

 -

 

 

(277

)

Proceeds from sales leaseback transaction

 

51

 

 

45

 

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

 

5,904

 

 

5,205

 

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

 

(2,981

)

 

(2,884

)

Transfers to and from separate accounts, net

 

(1,353

)

 

(770

)

Common stock issued for benefit plans

 

(20

)

 

(20

)

Dividends paid

 

 -

 

 

(454

)

Net cash provided by (used in) financing activities

 

2,101

 

 

845

 



 

 

 

 

 

 

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

 

471

 

 

(644

)

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

 

947

 

 

2,057

 

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

$

1,418

 

$

1,413

 



 

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 Lincoln Life & Annuity Company of New York (“LLANY”) and Liberty Life Assurance Company of Boston (“Liberty Life”), our insurance company subsidiaries.  See Note 3 for information on the acquisition of Liberty Life.  We also own several non-insurance companies, including Lincoln Financial Distributors and Lincoln Financial Advisors, LNC’s wholesaling and retailing business units, respectively.  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 Form 10-K for the year ended December 31, 2017 (“2017 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 2017 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 six months ended June 30, 2018, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018.  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 and the impact of the adoption on our financial statements.  ASUs not listed below were assessed and determined to be either not applicable or not material in presentation or amount.







 

 

 

Standard

Description

Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2014-09, Revenue from Contracts with Customers and all related amendments

This standard establishes the core principle of recognizing revenue to depict the transfer of promised goods and services and defines a five-step process that systematically identifies the various components of the revenue recognition process, culminating with the recognition of revenue upon satisfaction of an entity’s performance obligation.  Although the standard and all related amendments supersede nearly all existing revenue recognition guidance under GAAP, the guidance does not amend the accounting for insurance and investment contracts recognized in accordance with Accounting Standards Codification (“ASC”) Topic 944, Financial Services – Insurance, leases, financial instruments and guarantees. 

January 1, 2018

We adopted the standard and all related amendments using the modified retrospective method.  Our primary sources of revenue are recognized in accordance with ASC Topic 944, Financial Services – Insurance; as such, revenue within the scope of the new standard primarily includes commissions and advisory fees earned by our broker dealer operation.  The adoption did not have a material impact on our consolidated financial condition, results of operations, stockholder's equity or cash flows.  There were no material changes in the timing or measurement of revenues based upon the guidance.  As a result, there is no cumulative effect on retained earnings.  For more information, see Note 14.



 

 

 

6


 

 

Standard

Description

Date of Adoption

Effect on Financial Statements or Other Significant Matters

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

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

January 1, 2018

At the time of adoption, we had equity securities classified as available-for-sale (“AFS”) with a total carrying value of $246 million.  We classified, prospectively, $110 million of equity securities within the scope of this ASU in a separate line on our Consolidated Balance Sheets.  The remaining securities, consisting of $136 million of FHLB stock, are classified in other investments on our Consolidated Balance Sheets and carried at cost. The cumulative-effect adjustment of adopting this ASU did not have a material impact on our consolidated financial condition or results of operations.

ASU 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income

These amendments require a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects associated with the change in the federal corporate income tax rate in the Tax Cuts and Jobs Act (“Tax Act”) of 2017.  The amount of the reclassification is equal to the impact of the change in deferred taxes related to amounts recorded in accumulated other comprehensive income (loss) (“AOCI”) resulting from the change in the statutory corporate tax rate from 35% to 21%.  Early adoption is permitted and retrospective application is required. 

January 1, 2018

We retrospectively reclassified $644 million of stranded tax effects from AOCI to retained earnings in the period of adoption.



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 2016-02, Leases

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

January 1, 2019

We continue to gather information to determine our leases that are within the scope of this standard.  We do not expect there to be a significant difference in our pattern of lease expense recognition under this ASU.

7


 

 

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 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 2017-08, Premium Amortization on Purchased Callable Debt Securities

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

January 1, 2019

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

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

 

3. Acquisition



As previously announced, 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 enables us to increase our market share within the group protection marketplace.



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.



Liberty Life’s excess capital of $1.8 billion was paid to Liberty Mutual Insurance Company through an extraordinary dividend at the acquisition date.  We paid $1.5 billion of cash to Liberty Mutual Insurance Company to acquire the Liberty Group Business.



8


 

 

We recognized $44 million and $50 million of acquisition-related costs, pre-tax, for the three and six months ended June 30, 2018, respectively.  These costs are included in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).



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.  Under the terms of the MTA, a final balance sheet will be agreed upon during the third quarter of 2018.  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 the acquisition date:





 

 

 



 

 

 



Preliminary

 



Fair Value

 

Assets

 

 

 

Investments

$

2,493 

 

Mortgage loans on real estate

 

658 

 

Cash and invested cash

 

113 

 

Reinsurance recoverables

 

76 

 

Premiums and fees receivable

 

83 

 

Accrued investment income

 

24 

 

Other intangible assets acquired

 

640 

 

Other assets acquired

 

141 

 

Separate account assets

 

99 

 

Total assets acquired

$

4,327 

 



 

 

 

Liabilities

 

 

 

Future contract benefits

$

2,930 

 

Other contract holder funds

 

43 

 

Other liabilities acquired

 

120 

 

Separate account liabilities

 

99 

 

Total liabilities assumed

$

3,192 

 



 

 

 

Net identifiable assets acquired

$

1,135 

 

Goodwill

 

382 

 

Net assets acquired

$

1,517 

 



Identifiable Intangible Assets



The following table presents the fair value of identifiable intangible assets acquired (dollars in millions):





 

 

 

 

 



 

 

 

 

 



 

 

 

Weighted-

 



 

 

 

Average

 



 

 

 

Amortization

 



Fair Value

 

Period

 

Value of customer relationships acquired

$

576 

 

20 

 

Value of distribution agreements

 

31 

 

13 

 

Value of business acquired

 

30 

 

 

Insurance licenses

 

 

N/A

 

Total identifiable intangible assets

$

640 

 

 

 



The value of customer relationships acquired (“VOCRA”) and value of distribution agreements (“VODA”), included in other assets on our Consolidated Balance Sheets, reflects the estimated fair value of the customer relationships acquired and distribution agreements of the Liberty Group Business as of May 1, 2018.  The value of the identifiable intangible assets was estimated using a discounted cash flow method.  Significant inputs to the valuation models include estimates of expected premiums, persistency rates, investment returns, claim costs, expenses and discount rates based on a weighted average cost of capital.  Similar to other specifically identifiable intangible assets, the carrying values of VOCRA and VODA will be amortized using a straight-line method and reviewed at least annually for indicators of impairment in value that are other-than-temporary. 



For information on value of business acquired (“VOBA”), see Notes 1 and 8 in our 2017 Form 10-K.



9


 

 

The value of insurance licenses was estimated using the comparable transaction method under the market approach based on arms-length transactions in which certificate authority companies with life and health insurance licenses were purchased.  The value of insurance licenses has an indefinite useful life.



Goodwill



Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from assets acquired and liabilities assumed that could not be individually identified.  The goodwill recorded as part of the acquisition includes the expected synergies and other benefits that management believes will result from the acquisition, including an increase in distribution strength.  The goodwill resulting from the acquisition was allocated to the Group Protection segment.  The goodwill is not expected to be deductible for income tax purposes.  For more information on goodwill, see Notes 1 and 10 in our 2017 Form 10-K.



Future Contract Benefits



Unpaid claims acquired reflected within future contract benefits were recorded at estimated fair value.  The reserve discount rate was based on the investment yield of the assets acquired with adjustments for risk margin.  The actuarial classifications and methodologies were adjusted to be consistent with our accounting policies and reserve methodologies.



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 $373 million and $12 million, respectively. 



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

 

For the Six

 



Months Ended

 

Months Ended

 



June 30,

 

June 30,

 



2018

 

2017

 

2018

 

2017

 

Revenue

$

4,049 

 

$

3,718 

 

$

8,008 

 

$

7,429 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

457 

 

 

296 

 

 

879 

 

 

644 

 



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.



Reinsurance



Pursuant to the reinsurance agreements, we sold the Liberty Life Business to Protective for a ceding commission of $423 million.   Our amounts recoverable from reinsurers increased significantly to $19.7 billion as of June 30, 2018, from $6.5 billion as of December 31, 2017, primarily as a result of this reinsurance transaction.  As such, Protective now represents our largest reinsurance exposure.  As we are not relieved of our liability, the liabilities and obligations associated with the reinsured policies remain on our Consolidated Balance Sheets with a corresponding reinsurance recoverable from Protective.  To support its obligations under the reinsurance agreements, Protective has established trust accounts for our benefit that fully collateralize the related reinsurance recoverable.  We recorded a deferred tax asset attributed to a tax loss carryforward arising from the reinsurance transaction with Protective.







10


 

 

4.  Variable Interest Entities



Consolidated VIEs



See Note 4 in our 2017 Form 10-K for a detailed discussion of our consolidated variable interest entities (“VIEs”), which information is incorporated herein by reference.



Unconsolidated VIEs



See Note 4 in our 2017 Form 10-K for a detailed discussion of our unconsolidated VIEs, which information is incorporated herein by reference.



Limited Partnerships and Limited Liability Companies



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



The carrying amounts of our investments in the LPs and LLCs are recognized in other investments on our Consolidated Balance Sheets and were $1.5 billion and $1.4 billion as of June 30, 2018 and December 31, 2017, respectively.  Included in these carrying amounts are our investments in qualified affordable housing projects, which were $26 million and $31 million as of June 30, 2018, and December 31, 2017, 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 that were $1 million and $2 million for the six months ended June 30, 2018 and 2017, respectively, 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 June 30, 2018.





11


 

 

5.  Investments



AFS Securities



See Note 1 in our 2017 Form 10-K for information regarding our accounting policy relating to AFS securities, which also includes additional disclosures regarding our fair value measurements.  In addition, we adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, in 2018 that resulted in a new classification and measurement of our equity securities.  See Note 2 for additional information.



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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of June 30, 2018

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

77,241

 

$

3,474

 

$

1,519

 

$

(9

)

$

79,205

 

Asset-backed securities ("ABS")

 

944

 

 

44

 

 

6

 

 

(17

)

 

999

 

U.S. government bonds

 

366

 

 

27

 

 

3

 

 

 -

 

 

390

 

Foreign government bonds

 

427

 

 

40

 

 

 -

 

 

 -

 

 

467

 

Residential mortgage-backed securities ("RMBS")

 

3,119

 

 

114

 

 

75

 

 

(21

)

 

3,179

 

Commercial mortgage-backed securities ("CMBS")

 

759

 

 

4

 

 

20

 

 

(3

)

 

746

 

Collateralized loan obligations ("CLOs")

 

1,121

 

 

 -

 

 

7

 

 

(5

)

 

1,119

 

State and municipal bonds

 

4,370

 

 

738

 

 

13

 

 

 -

 

 

5,095

 

Hybrid and redeemable preferred securities

 

564

 

 

63

 

 

23

 

 

 -

 

 

604

 

Total AFS securities

$

88,911

 

$

4,504

 

$

1,666

 

$

(55

)

$

91,804

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2017

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

74,921

 

$

6,573

 

$

341

 

$

(7

)

$

81,160

 

ABS

 

882

 

 

51

 

 

6

 

 

(26

)

 

953

 

U.S. government bonds

 

497

 

 

37

 

 

1

 

 

 -

 

 

533

 

Foreign government bonds

 

391

 

 

55

 

 

 -

 

 

 -

 

 

446

 

RMBS

 

3,125

 

 

148

 

 

36

 

 

(21

)

 

3,258

 

CMBS

 

589

 

 

10

 

 

2

 

 

(2

)

 

599

 

CLOs

 

803

 

 

2

 

 

2

 

 

(5

)

 

808

 

State and municipal bonds

 

4,033

 

 

932

 

 

6

 

 

 -

 

 

4,959

 

Hybrid and redeemable preferred securities

 

561

 

 

85

 

 

22

 

 

 -

 

 

624

 

Total fixed maturity securities

 

85,802

 

 

7,893

 

 

416

 

 

(61

)

 

93,340

 

Equity AFS securities

 

247

 

 

16

 

 

17

 

 

 -

 

 

246

 

Total AFS securities

$

86,049

 

$

7,909

 

$

433

 

$

(61

)

$

93,586

 



(1)

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







12


 

 

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of June 30, 2018, were as follows:





 

 

 

 

 

 



 

 

 

 

 

 



Amortized

 

Fair

 



Cost

 

Value

 

Due in one year or less

$

3,547 

 

$