Company Quick10K Filing
Quick10K
Lincoln National
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$58.49 214 $12,490
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
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2018-12-31 Earnings, Exhibits
8-K 2018-11-07 Amend Bylaw, Exhibits
8-K 2018-07-13 Officers, Exhibits
8-K 2018-06-30 Earnings, Exhibits
8-K 2018-05-25 Shareholder Vote
8-K 2018-03-31 Earnings, Exhibits
8-K 2018-03-20 Amend Bylaw, Exhibits
8-K 2018-02-12 Other Events, Exhibits
8-K 2018-01-18 Enter Agreement, Exhibits
8-K 2017-12-31 Earnings, Exhibits
LFC China Life Insurance
PRU Prudential Financial
AEG Aegon
ATH Athene Holding
PRI Primerica
GNW Genworth Financial
FG FGL Holdings
CIA Citizens
GWGH GWG Holdings
NSEC National Security Group
LNC 2018-09-30
Part I – Financial Information
Item 1. Financial Statements
Item 2. Management’S Discussion and Analysis of Financial Condition and 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-12 lnc-20180930xex12.htm
EX-31.1 lnc-20180930xex31_1.htm
EX-31.2 lnc-20180930xex31_2.htm
EX-32.1 lnc-20180930xex32_1.htm
EX-32.2 lnc-20180930xex32_2.htm

Lincoln National Earnings 2018-09-30

LNC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 lnc-20180930x10q.htm 10-Q Q3 2018_Taxonomy2017

__________________________________________________________________________________________________________

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 September 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

_________________

 

LINCOLN NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

_________________

 



 



 

                Indiana                

35-1140070

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)



 

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

19087

(Address of principal executive offices)

(Zip Code)

 

(484) 583-1400

(Registrant’s telephone number, including area code)

 

Not Applicable

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

_________________

 

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



Indicate by check mark whether the registrant has submitted electronically 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 Section 13(a) of the Exchange Act.



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

 

As of October 30, 2018, there were 213,604,724 shares of the registrant’s common stock outstanding.

 



_________________________________________________________________________________________________________

 


 

Lincoln National Corporation

 

Table of Contents





 

 

 

 

 

Item

 

 

 

 

Page

PART I

 

1.

Financial Statements



 

 

2.

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

48 

 

 

Forward-Looking Statements – Cautionary Language

48 

 

 

Introduction

49 

 

 

    Executive Summary

49 



 

    Critical Accounting Policies and Estimates

50 

 

 

Results of Consolidated Operations

52 

 

 

Results of Annuities

54 



 

Results of Retirement Plan Services

60 

 

 

Results of Life Insurance

64 

 

 

Results of Group Protection

69 



 

Results of Other Operations 

71 



 

Realized Gain (Loss) and Benefit Ratio Unlocking

74 



 

Consolidated Investments 

76 

 

 

Review of Consolidated Financial Condition

88 

 

 

   Liquidity and Capital Resources

88 



 

3.

Quantitative and Qualitative Disclosures About Market Risk

92 



 

 

4.

Controls and Procedures

92 



 

 

PART II

 



 

 

1.

Legal Proceedings

93 



 

 

2.

Unregistered Sales of Equity Securities and Use of Proceeds

93 



 

 

6.

Exhibits

93 



 

 



Exhibit Index for the Report on Form 10-Q

94 



 

 

 

Signatures

95 



 

 

 

 

 





 

 


 



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)



 

 

 

 

 

 

 

 



 

As of

 

 

As of

 

 

September 30,

December 31,



 

2018

 

 

2017

 



(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value:

 

 

 

 

 

 

 

 

Fixed maturity securities (amortized cost:  2018 – $90,808; 2017 – $86,993)

 

$

93,161 

 

 

$

94,840 

 

Equity securities (cost:  2017 – $247)

 

 

 -

 

 

 

246 

 

Trading securities

 

 

1,440 

 

 

 

1,620 

 

Equity securities

 

 

112 

 

 

 

 -

 

Mortgage loans on real estate

 

 

12,561 

 

 

 

10,762 

 

Real estate

 

 

12 

 

 

 

11 

 

Policy loans

 

 

2,490 

 

 

 

2,399 

 

Derivative investments

 

 

706 

 

 

 

915 

 

Other investments

 

 

2,204 

 

 

 

2,296 

 

Total investments

 

 

112,686 

 

 

 

113,089 

 

Cash and invested cash

 

 

1,460 

 

 

 

1,628 

 

Deferred acquisition costs and value of business acquired

 

 

10,014 

 

 

 

8,403 

 

Premiums and fees receivable

 

 

592 

 

 

 

396 

 

Accrued investment income

 

 

1,168 

 

 

 

1,078 

 

Reinsurance recoverables

 

 

18,271 

 

 

 

4,907 

 

Funds withheld reinsurance assets

 

 

566 

 

 

 

593 

 

Goodwill

 

 

1,757 

 

 

 

1,368 

 

Other assets

 

 

9,644 

 

 

 

6,082 

 

Separate account assets

 

 

147,692 

 

 

 

144,219 

 

Total assets

 

$

303,850 

 

 

$

281,763 

 



 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Future contract benefits

 

$

33,988 

 

 

$

22,887 

 

Other contract holder funds

 

 

89,906 

 

 

 

80,209 

 

Short-term debt

 

 

 -

 

 

 

450 

 

Long-term debt

 

 

5,804 

 

 

 

4,894 

 

Reinsurance related embedded derivatives

 

 

20 

 

 

 

57 

 

Funds withheld reinsurance liabilities

 

 

1,733 

 

 

 

1,761 

 

Deferred gain on business sold through reinsurance

 

 

 

 

 

 

Payables for collateral on investments

 

 

4,212 

 

 

 

4,417 

 

Other liabilities

 

 

5,424 

 

 

 

5,546 

 

Separate account liabilities

 

 

147,692 

 

 

 

144,219 

 

Total liabilities

 

 

288,780 

 

 

 

264,441 

 



 

 

 

 

 

 

 

 

Contingencies and Commitments (See Note 10)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock – 10,000,000 shares authorized

 

 

 -

 

 

 

 -

 

Common stock – 800,000,000 shares authorized; 214,776,806 and 218,090,114 shares

 

 

 

 

 

 

 

 

issued and outstanding as of September 30, 2018, and December 31, 2017, respectively

 

 

5,619 

 

 

 

5,693 

 

Retained earnings

 

 

8,615 

 

 

 

8,399 

 

Accumulated other comprehensive income (loss)

 

 

836 

 

 

 

3,230 

 

Total stockholders’ equity

 

 

15,070 

 

 

 

17,322 

 

Total liabilities and stockholders’ equity

 

$

303,850 

 

 

$

281,763 

 



See accompanying Notes to Consolidated Financial Statements

1


 





LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in millions, except per share data)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



For the Three

 

For the Nine

 



Months Ended

 

Months Ended

 



September 30,

 

September 30,

 

 

2018

 

2017

 

2018

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Insurance premiums

$

1,323

 

$

774

 

$

3,265

 

$

2,382

 

Fee income

 

1,550

 

 

1,401

 

 

4,475

 

 

4,148

 

Net investment income

 

1,271

 

 

1,239

 

 

3,736

 

 

3,738

 

Realized gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

(2

)

 

(9

)

 

(5

)

 

(17

)

Portion of loss recognized in other comprehensive income

 

 -

 

 

1

 

 

 -

 

 

1

 

Net other-than-temporary impairment losses on securities

 

 

 

 

 

 

 

 

 

 

 

 

recognized in earnings

 

(2

)

 

(8

)

 

(5

)

 

(16

)

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

 

 

 

 

 

 

 

 

 

 

 

 

impairment losses on securities

 

(53

)

 

(48

)

 

(46

)

 

(89

)

Total realized gain (loss)

 

(55

)

 

(56

)

 

(51

)

 

(105

)

Amortization of deferred gain on business sold through reinsurance

 

 -

 

 

 -

 

 

1

 

 

22

 

Other revenues

 

175

 

 

153

 

 

467

 

 

403

 

Total revenues

 

4,264

 

 

3,511

 

 

11,893

 

 

10,588

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Interest credited

 

652

 

 

647

 

 

1,952

 

 

1,940

 

Benefits

 

1,626

 

 

1,261

 

 

4,646

 

 

3,839

 

Commissions and other expenses

 

1,367

 

 

1,020

 

 

3,600

 

 

3,068

 

Interest and debt expense

 

69

 

 

63

 

 

228

 

 

190

 

Strategic digitization expense

 

18

 

 

10

 

 

49

 

 

33

 

Total expenses

 

3,732

 

 

3,001

 

 

10,475

 

 

9,070

 

Income (loss) before taxes

 

532

 

 

510

 

 

1,418

 

 

1,518

 

Federal income tax expense (benefit)

 

42

 

 

92

 

 

176

 

 

254

 

Net income (loss)

 

490

 

 

418

 

 

1,242

 

 

1,264

 

Other comprehensive income (loss), net of tax

 

(365

)

 

148

 

 

(3,036

)

 

1,293

 

  Comprehensive income (loss)

$

125

 

$

566

 

$

(1,794

)

$

2,557

 



 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

2.27

 

$

1.89

 

$

5.71

 

$

5.66

 

Diluted

 

2.24

 

 

1.87

 

 

5.59

 

 

5.58

 



 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

$

0.33

 

$

0.29

 

$

0.99

 

$

0.87

 









See accompanying Notes to Consolidated Financial Statements

2


 

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in millions, except per share data)







 

 

 

 

 

 



 

 

 

 

 

 



For the Nine

 



Months Ended

 



September 30,

 



2018

 

2017

 



 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Balance as of beginning-of-year

$

5,693

 

$

5,869

 

Stock compensation/issued for benefit plans

 

33

 

 

75

 

Retirement of common stock/cancellation of shares

 

(107

)

 

(227

)

Balance as of end-of-period

 

5,619

 

 

5,717

 



 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

Balance as of beginning-of-year

 

8,399

 

 

7,043

 

Cumulative effect from adoption of new accounting standards

 

(642

)

 

 -

 

Net income (loss)

 

1,242

 

 

1,264

 

Retirement of common stock

 

(168

)

 

(373

)

Common stock dividends declared

 

(216

)

 

(196

)

Balance as of end-of-period

 

8,615

 

 

7,738

 



 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

Balance as of beginning-of-year

 

3,230

 

 

1,566

 

Cumulative effect from adoption of new accounting standards

 

642

 

 

 -

 

Other comprehensive income (loss), net of tax

 

(3,036

)

 

1,293

 

Balance as of end-of-period

 

836

 

 

2,859

 

Total stockholders’ equity as of end-of-period

$

15,070

 

$

16,314

 











See accompanying Notes to Consolidated Financial Statements

3


 

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)







 

 

 

 

 

 



For the Nine

 



Months Ended

 



September 30,

 



2018

 

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

$

1,242

 

$

1,264

 

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

 

86

 

 

38

 

Trading securities purchases, sales and maturities, net

 

162

 

 

83

 

Change in premiums and fees receivable

 

(109

)

 

60

 

Change in accrued investment income

 

(66

)

 

(75

)

Change in future contract benefits and other contract holder funds

 

(997

)

 

(1,152

)

Change in reinsurance related assets and liabilities

 

426

 

 

80

 

Change in accrued expenses

 

73

 

 

(21

)

Change in federal income tax accruals

 

86

 

 

154

 

Realized (gain) loss

 

51

 

 

105

 

Amortization of deferred gain on business sold through reinsurance

 

(1

)

 

(22

)

Other

 

81

 

 

95

 

Net cash provided by (used in) operating activities

 

1,034

 

 

609

 



 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of available-for-sale securities and equity securities

 

(8,816

)

 

(7,465

)

Sales of available-for-sale securities and equity securities

 

2,678

 

 

1,104

 

Maturities of available-for-sale securities

 

4,714

 

 

4,100

 

Purchase of common stock in acquisition, net of cash acquired

 

(1,410

)

 

 -

 

Sale of business, net

 

(12

)

 

 -

 

Purchases of alternative investments

 

(234

)

 

(228

)

Sales and repayments of alternative investments

 

115

 

 

140

 

Issuance of mortgage loans on real estate

 

(2,035

)

 

(1,342

)

Repayment and maturities of mortgage loans on real estate

 

842

 

 

849

 

Issuance and repayment of policy loans, net

 

40

 

 

34

 

Net change in collateral on investments, derivatives and related settlements

 

22

 

 

90

 

Other

 

(144

)

 

(66

)

Net cash provided by (used in) investing activities

 

(4,240

)

 

(2,784

)



 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Payment of long-term debt, including current maturities

 

(537

)

 

 -

 

Issuance of long-term debt, net of issuance costs

 

1,094

 

 

 -

 

Payment related to early extinguishment of debt

 

(23

)

 

 -

 

Proceeds from sales leaseback transaction

 

51

 

 

45

 

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

 

9,426

 

 

7,625

 

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

 

(4,466

)

 

(4,309

)

Transfers to and from separate accounts, net

 

(2,008

)

 

(1,183

)

Common stock issued for benefit plans

 

(7

)

 

38

 

Repurchase of common stock

 

(275

)

 

(600

)

Dividends paid to common stockholders

 

(217

)

 

(198

)

Net cash provided by (used in) financing activities

 

3,038

 

 

1,418

 



 

 

 

 

 

 

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

 

(168

)

 

(757

)

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

 

1,628

 

 

2,722

 

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

$

1,460

 

$

1,965

 







 

See accompanying Notes to Consolidated Financial Statements

4


 

 

LINCOLN NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  Nature of Operations and Basis of Presentation



Nature of Operations 



Lincoln National Corporation and its majority-owned subsidiaries (“LNC” or the “Company,” which also may be referred to as “we,” “our” or “us”) operate multiple insurance businesses through four business segments.  See Note 15 for additional details.  The collective group of businesses uses “Lincoln Financial Group” as its marketing identity.  Through our business segments, we sell a wide range of wealth protection, accumulation and retirement income products and solutions.  These products 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 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 The Lincoln National Life Insurance Company (“LNL”) completed the acquisition of Liberty Life Assurance Company of Boston (“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, 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 nine months ended September 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, stockholders’ 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 15.



 

 

 



 

 

 



 

 

 



 

 

 

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 was $1 million.

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

These amendments require a reclassification from accumulated other comprehensive income (“AOCI”) 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 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 $641 million of stranded tax effects from AOCI to retained earnings in the period of adoption.



7


 

 

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.

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 do not currently expect the adoption of this guidance to have a material impact on our consolidated financial condition and results of operations.



 

 

 

8


 

 

Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 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



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. 





We recognized $10 million and $60 million of acquisition-related costs, pre-tax, for the three and nine months ended September 30, 2018, respectively.  These costs are included in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).

9


 

 

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 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 the acquisition date:





 

 

 



 

 

 



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

 

120 

 

Separate account liabilities

 

99 

 

Total liabilities assumed

$

3,195 

 



 

 

 

Net identifiable assets acquired

$

1,127 

 

Goodwill

 

390 

 

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.



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.

10


 

 

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 $929 million and $26 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 Nine

 



Months Ended

 

Months Ended

 



September 30,

 

September 30,

 



2018

 

2017

 

2018

 

2017

 

Revenue

$

4,263 

 

$

3,989 

 

$

12,632 

 

$

12,030 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

497 

 

 

396 

 

 

1,287 

 

 

1,201 

 



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.



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 $18.3 billion as of September 30, 2018, from $4.9 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. 



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.

11


 

 

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of September 30, 2018

 

 

As of December 31, 2017

 



 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 



 

of

 

 

Notional

 

Carrying

 

 

of

 

 

Notional

 

Carrying

 



Instruments

 

Amounts

 

Value

 

Instruments

 

Amounts

 

Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total return swap

 

 

 

 

 

587 

 

 

 -

 

 

 

 

 

 

573 

 

 

 -

 

Total assets

 

 

 

 

$

587 

 

$

 -

 

 

 

 

 

$

573 

 

$

 -

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of September 30, 2018, and December 31, 2017, there were no gains or losses for consolidated VIEs recognized on our Consolidated Statements of Comprehensive Income (Loss).



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 $1.7 billion and $1.5 billion as of September 30, 2018, and December 31, 2017, respectively.  Included in these carrying amounts are our investments in qualified affordable housing projects, which were $25 million and $31 million as of September 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 nine months ended September 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 September 30, 2018. 



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 September 30, 2018

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

78,496

 

$

3,299

 

$

1,724

 

$

(9

)

$

80,080

 

Asset-backed securities ("ABS")

 

934

 

 

41

 

 

7

 

 

(17

)

 

985

 

U.S. government bonds

 

392

 

 

23

 

 

6

 

 

 -

 

 

409

 

Foreign government bonds

 

418

 

 

41

 

 

 -

 

 

 -

 

 

459

 

Residential mortgage-backed securities ("RMBS")

 

3,267

 

 

113

 

 

114

 

 

(21

)

 

3,287

 

Commercial mortgage-backed securities ("CMBS")

 

766

 

 

2

 

 

23

 

 

(3

)

 

748

 

Collateralized loan obligations ("CLOs")

 

1,371

 

 

 -

 

 

14

 

 

(5

)

 

1,362

 

State and municipal bonds

 

4,588

 

 

656

 

 

26

 

 

 -

 

 

5,218

 

Hybrid and redeemable preferred securities

 

576

 

 

62

 

 

25

 

 

 -

 

 

613

 

Total AFS securities

$

90,808

 

$

4,237

 

$

1,939

 

$

(55

)

$

93,161

 

12


 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2017

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

75,701

 

$

6,862

 

$

354

 

$

(7

)

$

82,216

 

ABS

 

903

 

 

51

 

 

7

 

 

(27

)

 

974

 

U.S. government bonds

 

527

 

 

41

 

 

1

 

 

 -

 

 

567

 

Foreign government bonds

 

395

 

 

56

 

 

 -

 

 

 -

 

 

451

 

RMBS

 

3,327

 

 

155

 

 

39

 

 

(22

)

 

3,465

 

CMBS

 

590

 

 

10

 

 

2

 

 

(2

)

 

600

 

CLOs

 

803

 

 

2

 

 

2

 

 

(5

)

 

808

 

State and municipal bonds

 

4,172

 

 

953

 

 

6

 

 

 -

 

 

5,119

 

Hybrid and redeemable preferred securities

 

575

 

 

87

 

 

22

 

 

 -

 

 

640

 

Total fixed maturity securities

 

86,993

 

 

8,217

 

 

433

 

 

(63

)

 

94,840

 

Equity AFS securities

 

247

 

 

16

 

 

17

 

 

 -

 

 

246

 

Total AFS securities

$

87,240

 

$

8,233

 

$

450

 

$

(63

)