Lincoln National Earnings 2018-09-30





                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)



Item

Page

PART I

1.

Financial Statements



2.

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

Forward-Looking Statements – Cautionary Language

Introduction

    Executive Summary



    Critical Accounting Policies and Estimates

Results of Consolidated Operations

Results of Annuities



Results of Retirement Plan Services

Results of Life Insurance

Results of Group Protection



Results of Other Operations 



Realized Gain (Loss) and Benefit Ratio Unlocking



Consolidated Investments 

Review of Consolidated Financial Condition

   Liquidity and Capital Resources



3.

Quantitative and Qualitative Disclosures About Market Risk



4.

Controls and Procedures



PART II



1.

Legal Proceedings



2.

Unregistered Sales of Equity Securities and Use of Proceeds



6.

Exhibits





Exhibit Index for the Report on Form 10-Q



Signatures







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)

$

$

Equity securities (cost:  2017 – $247)

 -

Trading securities

Equity securities

 -

Mortgage loans on real estate

Real estate

Policy loans

Derivative investments

Other investments

Total investments

Cash and invested cash

Deferred acquisition costs and value of business acquired

Premiums and fees receivable

Accrued investment income

Reinsurance recoverables

Funds withheld reinsurance assets

Goodwill

Other assets

Separate account assets

Total assets

$

$



LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities

Future contract benefits

$

$

Other contract holder funds

Short-term debt

 -

Long-term debt

Reinsurance related embedded derivatives

Funds withheld reinsurance liabilities

Deferred gain on business sold through reinsurance

Payables for collateral on investments

Other liabilities

Separate account liabilities

Total liabilities



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

Retained earnings

Accumulated other comprehensive income (loss)

Total stockholders’ equity

Total liabilities and stockholders’ equity

$

$







For the Three

For the Nine



Months Ended

Months Ended



September 30,

September 30,

2018

2017

2018

2017

Revenues

Insurance premiums

$

$

$

$

Fee income

Net investment income

Realized gain (loss):

Total other-than-temporary impairment losses on securities

)

)

)

)

Portion of loss recognized in other comprehensive income

 -

 -

Net other-than-temporary impairment losses on securities

recognized in earnings

)

)

)

)

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

impairment losses on securities

)

)

)

)

Total realized gain (loss)

)

)

)

)

Amortization of deferred gain on business sold through reinsurance

 -

 -

Other revenues

Total revenues

Expenses

Interest credited

Benefits

Commissions and other expenses

Interest and debt expense

Strategic digitization expense

Total expenses

Income (loss) before taxes

Federal income tax expense (benefit)

Net income (loss)

Other comprehensive income (loss), net of tax

)

)

  Comprehensive income (loss)

$

$

$

)

$



Net Income (Loss) Per Common Share

Basic

$

$

$

$

Diluted



Cash Dividends Declared Per Common Share

$

$

$

$







For the Nine



Months Ended



September 30,



2018

2017



Common Stock

Balance as of beginning-of-year

$

$

Stock compensation/issued for benefit plans

Retirement of common stock/cancellation of shares

)

)

Balance as of end-of-period



Retained Earnings

Balance as of beginning-of-year

Cumulative effect from adoption of new accounting standards

)

 -

Net income (loss)

Retirement of common stock

)

)

Common stock dividends declared

)

)

Balance as of end-of-period



Accumulated Other Comprehensive Income (Loss)

Balance as of beginning-of-year

Cumulative effect from adoption of new accounting standards

 -

Other comprehensive income (loss), net of tax

)

Balance as of end-of-period

Total stockholders’ equity as of end-of-period

$

$





For the Nine



Months Ended



September 30,



2018

2017

Cash Flows from Operating Activities

Net income (loss)

$

$

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

Trading securities purchases, sales and maturities, net

Change in premiums and fees receivable

)

Change in accrued investment income

)

)

Change in future contract benefits and other contract holder funds

)

)

Change in reinsurance related assets and liabilities

Change in accrued expenses

)

Change in federal income tax accruals

Realized (gain) loss

Amortization of deferred gain on business sold through reinsurance

)

)

Other

Net cash provided by (used in) operating activities



Cash Flows from Investing Activities

Purchases of available-for-sale securities and equity securities

)

)

Sales of available-for-sale securities and equity securities

Maturities of available-for-sale securities

Purchase of common stock in acquisition, net of cash acquired

)

 -

Sale of business, net

)

 -

Purchases of alternative investments

)

)

Sales and repayments of alternative investments

Issuance of mortgage loans on real estate

)

)

Repayment and maturities of mortgage loans on real estate

Issuance and repayment of policy loans, net

Net change in collateral on investments, derivatives and related settlements

Other

)

)

Net cash provided by (used in) investing activities

)

)



Cash Flows from Financing Activities

Payment of long-term debt, including current maturities

)

 -

Issuance of long-term debt, net of issuance costs

 -

Payment related to early extinguishment of debt

)

 -

Proceeds from sales leaseback transaction

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

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

)

)

Transfers to and from separate accounts, net

)

)

Common stock issued for benefit plans

)

Repurchase of common stock

)

)

Dividends paid to common stockholders

)

)

Net cash provided by (used in) financing activities



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

)

)

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

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

$

$



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.









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.



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.









Preliminary



Fair Value

Assets

Investments

$

Mortgage loans on real estate

Cash and invested cash

Reinsurance recoverables

Premiums and fees receivable

Accrued investment income

Other intangible assets acquired

Other assets acquired

Separate account assets

Total assets acquired

$



Liabilities

Future contract benefits

$

Other contract holder funds

Other liabilities acquired

Separate account liabilities

Total liabilities assumed

$



Net identifiable assets acquired

$

Goodwill

Net assets acquired

$







For the Three

For the Nine



Months Ended

Months Ended



September 30,

September 30,



2018

2017

2018

2017

Revenue

$

$

$

$



Net income







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

 -

 -

Total assets

$

$

 -

$

$

 -









As of September 30, 2018



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

OTTI (1)

Value

Fixed maturity AFS securities:

Corporate bonds

$

$

$

$

)

$

Asset-backed securities ("ABS")

)

U.S. government bonds

 -

Foreign government bonds

 -

 -

Residential mortgage-backed securities ("RMBS")

)

Commercial mortgage-backed securities ("CMBS")

)

Collateralized loan obligations ("CLOs")

 -

)

State and municipal bonds

 -

Hybrid and redeemable preferred securities

 -

Total AFS securities

$

$

$

$

)

$







As of December 31, 2017



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

OTTI (1)

Value

Fixed maturity AFS securities:

Corporate bonds

$

$

$

$

)

$

ABS

)

U.S. government bonds

 -

Foreign government bonds

 -

 -

RMBS

)

CMBS

)

CLOs

)

State and municipal bonds

 -

Hybrid and redeemable preferred securities

 -

Total fixed maturity securities

)

Equity AFS securities

 -

Total AFS securities

$

$

$

$

)