d10q.htm





  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
_______________________
 
FORM 10-Q
 
_______________________
 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2009
 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, 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 x    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 x No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No  x
 
As of November 2, 2009, there were 302,080,185 shares of the registrant’s common stock outstanding.

 




 
 

 

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,
 
   
2009
   
2008
 
   
(Unaudited)
       
ASSETS
           
Investments:
           
Available-for-sale securities, at fair value:
           
Fixed maturity (amortized cost: 2009 – $60,442; 2008 – $54,381)
  $ 60,666     $ 48,141  
Equity (cost: 2009 – $393; 2008 – $428)
    283       254  
Trading securities
    2,548       2,333  
Mortgage loans on real estate
    7,277       7,715  
Real estate
    154       125  
Policy loans
    2,893       2,921  
Derivative investments
    1,282       3,397  
Other investments
    1,080       1,624  
Total investments
    76,183       66,510  
Cash and invested cash
    3,161       5,589  
Deferred acquisition costs and value of business acquired
    9,182       11,402  
Premiums and fees receivable
    323       449  
Accrued investment income
    943       814  
Reinsurance recoverables
    7,664       8,396  
Reinsurance related embedded derivatives
    -       31  
Goodwill
    3,096       3,696  
Other assets
    10,827       10,594  
Separate account assets
    70,111       55,655  
Total assets
  $ 181,490     $ 163,136  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Liabilities
               
Future contract benefits
  $ 15,970     $ 18,431  
Other contract holder funds
    63,956       60,570  
Short-term debt
    400       815  
Long-term debt
    4,789       4,731  
Reinsurance related embedded derivatives
    39       -  
Funds withheld reinsurance liabilities
    1,220       2,042  
Deferred gain on business sold through reinsurance
    511       619  
Payables for collateral on investments
    2,240       3,706  
Other liabilities
    10,598       8,590  
Separate account liabilities
    70,111       55,655  
Total liabilities
    169,834       155,159  
                 
Contingencies and Commitments (See Note 11)
               
                 
Stockholders' Equity
               
Series A preferred stock – 10,000,000 shares authorized; 11,547 and 11,562 shares
               
issued and outstanding as of September 30, 2009, and December 31, 2008, respectively
    -       -  
Series B preferred stock – 950,000 shares authorized and outstanding
               
as of September 30, 2009
    800       -  
Common stock – 800,000,000 shares authorized; 302,073,869 and 255,869,859 shares
               
issued and outstanding as of September 30, 2009, and December 31, 2008, respectively
    7,842       7,035  
Retained earnings
    3,234       3,745  
Accumulated other comprehensive loss
    (220 )     (2,803 )
Total stockholders' equity
    11,656       7,977  
Total liabilities and stockholders' equity
  $ 181,490     $ 163,136  

See accompanying Notes to Consolidated Financial Statements

 
1

 

LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited, in millions, except per share data)


   
For the Three
   
For the Nine
 
   
Months Ended
   
Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Revenues
                       
Insurance premiums
  $ 491     $ 514     $ 1,541     $ 1,507  
Insurance fees
    766       754       2,158       2,314  
Net investment income
    1,071       1,068       3,055       3,170  
Realized loss:
                               
Total other-than-temporary impairment losses on securities
    (148 )     (237 )     (578 )     (395 )
Portion of loss recognized in other comprehensive income
    68       -       259       -  
Net other-than-temporary impairment losses on securities
                               
recognized in earnings
    (80 )     (237 )     (319 )     (395 )
Realized gain (loss), excluding other-than-temporary
                               
impairment losses on securities
    (288 )     30       (684 )     49  
Total realized loss
    (368 )     (207 )     (1,003 )     (346 )
Amortization of deferred gain on business sold through
                               
reinsurance
    18       19       56       57  
Other revenues and fees
    103       122       293       369  
Total revenues
    2,081       2,270       6,100       7,071  
Benefits and Expenses
                               
Interest credited
    623       625       1,848       1,849  
Benefits
    569       813       2,072       2,118  
Underwriting, acquisition, insurance and other expenses
    760       642       2,103       2,065  
Interest and debt expense
    68       69       130       209  
Impairment of intangibles
    (1 )     -       601       175  
Total benefits and expenses
    2,019       2,149       6,754       6,416  
Income (loss) from continuing operations before taxes
    62       121       (654 )     655  
Federal income tax expense (benefit)
    (19 )     (8 )     (141 )     162  
Income (loss) from continuing operations
    81       129       (513 )     493  
Income (loss) from discontinued operations, net of federal
                               
income taxes
    72       19       (74 )     69  
Net income (loss)
    153       148       (587 )     562  
Preferred stock dividends and accretion of discount
    (16 )     -       (16 )     -  
Net income (loss) available to common stockholders
  $ 137     $ 148     $ (603 )   $ 562  
                                 
Earnings (Loss) Per Common Share – Basic
                               
Income (loss) from continuing operations
  $ 0.21     $ 0.51     $ (1.94 )   $ 1.91  
Income (loss) from discontinued operations
    0.24       0.07       (0.27 )     0.27  
Net income (loss)
  $ 0.45     $ 0.58     $ (2.21 )   $ 2.18  
                                 
Earnings (Loss) Per Common Share – Diluted
                               
Income (loss) from continuing operations
  $ 0.21     $ 0.51     $ (1.94 )   $ 1.90  
Income (loss) from discontinued operations
    0.23       0.07       (0.27 )     0.26  
Net income (loss)
  $ 0.44     $ 0.58     $ (2.21 )   $ 2.16  

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,
 
   
2009
   
2008
 
Preferred Stock
           
Balance as of beginning-of-year
  $ -     $ -  
Issuance of Series B preferred stock
    794       -  
Accretion of discount on Series B preferred stock
    6       -  
Balance as of end-of-period
    800       -  
                 
Common Stock
               
Balance as of beginning-of-year
    7,035       7,200  
Issuance of common stock
    652       -  
Issuance of common stock warrant
    156       -  
Stock compensation/issued for benefit plans
    (6 )     51  
Deferred compensation payable in stock
    5       4  
Retirement of common stock/cancellation of shares
    -       (249 )
Balance as of end-of-period
    7,842       7,006  
                 
Retained Earnings
               
Balance as of beginning-of-year
    3,745       4,293  
Cumulative effect from adoption of new accounting standards
    102       (4 )
Comprehensive income (loss)
    2,098       (1,473 )
Other comprehensive income (loss), net of tax
    (2,685 )     2,035  
Net income (loss)
    (587 )     562  
Retirement of common stock
    -       (227 )
Dividends declared: Common (2009 - $0.03; 2008 - $1.245)
    (10 )     (320 )
Dividends on preferred stock
    (10 )     -  
Accretion of discount on Series B preferred stock
    (6 )     -  
Balance as of end-of-period
    3,234       4,304  
                 
Accumulated Other Comprehensive Income (Loss)
               
Balance as of beginning-of-year
    (2,803 )     225  
Cumulative effect from adoption of new accounting standards
    (102 )     -  
Other comprehensive income (loss), net of tax
    2,685       (2,035 )
Balance as of end-of-period
    (220 )     (1,810 )
Total stockholders' equity as of end-of-period
  $ 11,656     $ 9,500  


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,
 
   
2009
   
2008
 
Cash Flows from Operating Activities
     
Net income (loss)
  $ (587 )   $ 562  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Deferred acquisition costs, value of business acquired, deferred sales inducements
               
and deferred front end loads deferrals and interest, net of amortization
    (217 )     (492 )
Trading securities purchases, sales and maturities, net
    (36 )     141  
Change in premiums and fees receivable
    244       47  
Change in accrued investment income
    (129 )     (78 )
Change in future contract benefits
    (694 )     159  
Change in other contract holder funds
    205       202  
Change in funds withheld reinsurance liabilities and reinsurance recoverables
    167       (57 )
Change in federal income tax accruals
    (27 )     (228 )
Realized loss
    1,003       346  
Loss on disposal of discontinued operations
    220       13  
Gain on early extinguishment of debt
    (64 )     -  
Impairment of intangibles
    601       175  
Amortization of deferred gain on business sold through reinsurance
    (56 )     (57 )
Other
    (78 )     78  
Net cash provided by operating activities
    552       811  
                 
Cash Flows from Investing Activities
               
Purchases of available-for-sale securities
    (11,468 )     (5,578 )
Sales of available-for-sale securities
    2,850       1,803  
Maturities of available-for-sale securities
    2,533       2,978  
Purchases of other investments
    (3,232 )     (1,848 )
Sales or maturities of other investments
    3,521       1,383  
Increase (decrease) in payables for collateral on investments
    (1,466 )     533  
Proceeds from sale of subsidiaries/businesses and from disposal of discontinued operations
    13       645  
Other
    (51 )     (90 )
Net cash used in investing activities
    (7,300 )     (174 )
                 
Cash Flows from Financing Activities
               
Payment of long-term debt, including current maturities
    (522 )     (285 )
Issuance of long-term debt, net of issuance costs
    491       450  
Decrease in commercial paper, net
    (166 )     (145 )
Deposits of fixed account values, including the fixed portion of variable
    8,805       7,366  
Withdrawals of fixed account values, including the fixed portion of variable
    (4,282 )     (4,373 )
Transfers to and from separate accounts, net
    (1,566 )     (1,838 )
Payment of funding agreements
    -       (550 )
Common stock issued for benefit plans and excess tax benefits
    -       32  
Issuance of Series B preferred stock and associated common stock warrant
    950       -  
Issuance of common stock
    652       -  
Repurchase of common stock
    -       (476 )
Dividends paid to common and preferred stockholders
    (64 )     (323 )
Net cash provided by (used in) financing activities
    4,298       (142 )
Net increase (decrease) in cash and invested cash, including discontinued operations
    (2,450 )     495  
Cash and invested cash, including discontinued operations, as of beginning-of-year
    5,926       1,665  
Cash and invested cash, including discontinued operations, as of end-of-period
  $ 3,476     $ 2,160  

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 17 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.  These products include institutional and/or retail fixed and indexed annuities, variable annuities, universal life (“UL”) insurance, variable universal life (“VUL”) insurance, term life insurance and mutual funds.

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.  Therefore, 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, 2008 (“2008 Form 10-K”) should be read in connection with the reading of these interim unaudited consolidated financial statements.

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 month period ended September 30, 2009, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2009. All material intercompany accounts and transactions have been eliminated in consolidation.

We have evaluated our subsequent events through the time of filing this Form 10-Q with the SEC, on November 6, 2009.  
 
Certain amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the presentation adopted in the current year.  These reclassifications have no effect on net income or stockholders’ equity of the prior periods.

2.   New Accounting Standards

Adoption of New Accounting Standards

Statement of Financial Accounting Standards No. 168 – The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Standard No. 162

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Standard No. 162” (“SFAS 168”).  The FASB Accounting Standards CodificationTM (“ASC”) is now the single source of authoritative GAAP recognized by the FASB.  Although the FASB ASC does not change current GAAP, it supersedes all existing non-SEC accounting and reporting standards as of the effective date.  The accounting guidance in the FASB ASC is organized by topical reference, with all the contents having the same level of authority.  In accordance with Accounting Standards Update (“ASU”) No.  2009-01, “Topic 105 – Generally Accepted Accounting Principles – amendments based on – Statement of Financial Accounting Standards No. 168 – The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles” (“ASU 2009-01”) the guidance in SFAS 168 will remain authoritative until it has been integrated into the FASB ASC.  We adopted SFAS 168 as of September 30, 2009, and have revised all of the referencing of GAAP accounting standards in this filing to reflect the appropriate references in the new FASB ASC.


 
5

 

Business Combinations Topic

In December 2007, the FASB revised the accounting guidance related to the Business Combinations Topic of the FASB ASC.  This revised accounting guidance retains the fundamental requirements of the business combination accounting standard, but establishes revised principles and requirements for the acquirer in a business combination to recognize and measure the identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree and the goodwill acquired or the gain from a bargain purchase.  For a more detailed description of this accounting guidance see “SFAS No. 141(R) – Business Combinations” in Note 2 of our 2008 Form 10-K.  We adopted these revisions for acquisitions occurring after January 1, 2009.  The adoption did not have a material impact on our consolidated financial condition or results of operations.

In April 2009, the FASB further amended the guidance in the Business Combinations Topic related to the recognition and measurement of contingencies acquired in a business combination.  Contingent assets acquired and liabilities assumed (jointly referred to as “pre-acquisition contingencies”) in a business combination are measured as of the acquisition-date fair value only if fair value can be determined during the measurement period.  If the fair value cannot be determined during the measurement period, but information is available as of the end of the measurement period indicating the pre-acquisition contingency is both probable and can be reasonably estimated, then the pre-acquisition contingency is recognized as of the acquisition date based on the estimated amount.  Subsequent to the acquisition date, the measurement of pre-acquisition contingencies is dependent on the nature of the contingency.  We adopted these amendments for acquisitions occurring after January 1, 2009.  The adoption did not have a material impact on our consolidated financial condition or results of operations.

Consolidations Topic

In December 2007, the FASB amended the Consolidations Topic of the FASB ASC in order to establish accounting and reporting standards surrounding noncontrolling interests, or minority interests, which are the portions of equity in a subsidiary not attributable, directly or indirectly, to a parent.  For a more detailed description of these amendments see “SFAS No. 160 – Noncontrolling Interests in Consolidated Financial Statements – an Amendment of Accounting Research Bulletin No. 51” in Note 2 of our 2008 Form 10-K.  We adopted these amendments effective January 1, 2009.  The adoption did not have a material impact on our consolidated financial condition and results of operations.

Derivatives and Hedging Topic

In March 2008, the FASB amended the Derivatives and Hedging Topic of the FASB ASC to expand the qualitative and quantitative disclosure requirements for derivative instruments and hedging activities.  For a more detailed description of the new disclosure requirements, see “SFAS No. 161 – Disclosures about Derivative Instruments and Hedging Activities an Amendment of FASB Statement No. 133” in Note 2 of our 2008 Form 10-K.  The amended and expanded disclosure requirements apply to all derivative instruments within the scope of the Derivatives and Hedging Topic, nonderivative hedging instruments and all hedged items designated and qualifying as hedges.  We adopted these amendments effective January 1, 2009, and have prospectively included the enhanced disclosures related to derivative instruments and hedging activities in Note 6.

In addition, in June 2008, the FASB amended the Derivatives and Hedging Topic regarding the evaluation of an instrument (or embedded feature) indexed to an entity’s own stock.  The amendments to the accounting guidance require a two-step process to determine whether an equity-linked instrument (or embedded feature) is indexed to an entity’s own stock first by evaluating the instrument’s contingent exercise provisions, if any, and second, by evaluating the instrument’s settlement provisions.  We adopted this updated accounting guidance on January 1, 2009, for all outstanding instruments as of that date.  The adoption did not have a material impact on our consolidated financial condition and results of operations.

Fair Value Measurements and Disclosures Topic

In February 2008, the FASB amended the Fair Value Measurements and Disclosures Topic of the FASB ASC in order to delay the effective date of fair value measurement for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  We applied fair value measurement to nonfinancial assets and nonfinancial liabilities beginning on January 1, 2009.  The application did not have a material impact on our consolidated financial condition and results of operations.


 
6

 

In addition, in April 2009, the FASB amended the Fair Value Measurements and Disclosures Topic to provide additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability and additional guidance on circumstances that may indicate a transaction is not orderly.  The FASB provided illustrative examples of key considerations when applying fair value measurement principles to estimate fair value in nonactive markets when there has been a significant decrease in the volume and level of activity for the asset.  Additional financial statement disclosures are also required about an entity’s fair value measurements in annual and interim reporting periods.  Any changes in valuation techniques resulting from the adoption of this amended guidance are accounted for as a change in accounting estimate in accordance with the FASB ASC guidance related to accounting changes and error corrections.  As permitted under the transition guidance, we elected to early adopt these amendments to the Fair Value Measurements and Disclosures Topic effective January 1, 2009.  The adoption did not have a material impact on our consolidated financial condition or results of operations.

Financial Instruments Topic

In April 2009, the FASB extended the financial statement disclosures under the Financial Instruments Topic of the FASB ASC to require that the fair value of financial instrument disclosures be included in the notes to the interim financial statements.  In addition, entities must disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments in the financial statements on an interim basis and to highlight any change in the method(s) and significant assumptions used from prior periods.  We included the disclosures related to the fair value of financial instruments as of June 30, 2009, and have included these enhanced disclosures in Note 16.

Financial Services – Insurance Industry Topic

In May 2008, the FASB updated the Financial Services – Insurance Industry Topic of the FASB ASC with accounting guidance applicable to financial guarantee insurance and reinsurance contracts not accounted for as derivative instruments.  For a more detailed description of these amendments, see “SFAS No. 163 – Accounting for Financial Guarantee Insurance Contracts – an Interpretation of FASB Statement No. 60” in Note 2 of our 2008 Form 10-K.  We do not hold a significant amount of financial guarantee insurance and reinsurance contracts, and as such, the adoption on January 1, 2009, did not have a material impact on our consolidated financial condition and results of operations.

Intangibles – Goodwill and Other Topic

In April 2008, the FASB amended the Intangibles – Goodwill and Other Topic of the FASB ASC related to the determination of the useful life of intangible assets.  For a more detailed description of these amendments, see “FSP FAS No. 142-3 Determination of the Useful Life of Intangible Assets” in Note 2 of our 2008 Form 10-K.  We adopted these amendments effective January 1, 2009, and applied the guidance prospectively to recognized intangible assets acquired after the effective date and applied the disclosure requirements to all intangible assets recognized as of, and subsequent to, the effective date.  The adoption did not have a material impact on our consolidated financial condition and results of operations.

Investments – Debt and Equity Securities Topic

In April 2009, the FASB replaced the guidance in the Investments – Debt and Equity Securities Topic of the FASB ASC related to other-than-temporary impairments (“OTTI”).  Under this new accounting guidance, management’s assertion that it has the intent and ability to hold an impaired debt security until recovery is replaced by the requirement for management to assert if it either has the intent to sell the debt security or if it is more likely than not the entity will be required to sell the debt security before recovery of its amortized cost basis.  If management intends to sell the debt security or it is more likely than not the entity will be required to sell the debt security before recovery of its amortized cost basis, an OTTI shall be recognized in earnings equal to the entire difference between the debt security’s amortized cost basis and its fair value as of the balance sheet date.  After the recognition of an OTTI, the debt security is accounted for as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings.

If management does not intend to sell the debt security and it is not more likely than not the entity will be required to sell the debt security before recovery of its amortized cost basis, but the present value of the cash flows expected to be collected is less than the amortized cost basis of the debt security (referred to as the credit loss), an OTTI is considered to have occurred.  In this instance, the total OTTI must be bifurcated into the amount related to the credit loss, which is recognized in earnings, with the remaining amount of the total OTTI attributed to other factors (referred to as the noncredit portion) recognized as a separate component in other comprehensive income (loss) (“OCI”).  After the recognition of an OTTI, the debt security is accounted for as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings.  In addition, the amendments to this topic expand and increase the frequency of existing disclosures about OTTIs for debt and equity securities regarding expected cash flows, credit losses and the aging of securities with unrealized losses.


 
7

 

As permitted by the transition guidance, we elected to early adopt the amendments to the Investments – Debt and Equity Securities Topic effective January 1, 2009, by recording an increase of $102 million to the opening balance of retained earnings with a corresponding decrease to accumulated OCI on our Consolidated Statements of Stockholders’ Equity to reclassify the noncredit portion of previously other-than-temporarily impaired debt securities held as of January 1, 2009.  The following summarizes the components (in millions) for this cumulative effect adjustment:
 
   
Unrealized
   
Net
       
   
OTTI
   
Unrealized
       
   
on
   
Loss
       
   
AFS
   
on AFS
       
   
Securities
   
Securities
   
Total
 
Increase in amortized cost of fixed maturity available-for-sale ("AFS") securities
  $ 34     $ 165     $ 199  
Change in DAC, VOBA, DSI and DFEL
    (7 )     (35 )     (42 )
Income tax
    (9 )     (46 )     (55 )
Net cumulative effect adjustment
  $ 18     $ 84     $ 102  

The cumulative effect adjustment was calculated for all debt securities held as of January 1, 2009, for which an OTTI was previously recognized, but as of January 1, 2009, we did not intend to sell the security and it was not more likely than not that we would be required to sell the security before recovery of its amortized cost, by comparing the present value of cash flows expected to be received as of January 1, 2009, to the amortized cost basis of the debt securities.  The discount rate used to calculate the present value of the cash flows expected to be collected was the rate for each respective debt security in effect before recognizing any OTTI.  In addition, because the carrying amounts of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) are adjusted for the effects of realized and unrealized gains and losses on fixed maturity AFS securities, we recognized a true-up to our DAC, VOBA, DSI and DFEL balances for this cumulative effect adjustment.

The following summarizes the increase to the amortized cost of our fixed maturity AFS securities (in millions) as of January 1, 2009, resulting from the recognition of the cumulative effect adjustment:
 
Corporate bonds
  $ 131  
Residential collateralized mortgage obligations ("CMOs")
    65  
Collateralized debt obligations ("CDOs")
    3  
Total fixed maturity AFS securities
  $ 199  

The impact of this adoption to basic and diluted per share amounts for the three months ended September 30, 2009, was an increase of $0.23 and $0.22 per share, respectively.  The impact of this adoption to both basic and diluted per share amounts for the nine months ended September 30, 2009, was an increase of $0.95 per share.

In addition, we have enhanced our financial statement presentation to present the total OTTI recognized in realized loss, with an offset for the amount of noncredit impairments recognized in accumulated OCI, on the face of our Consolidated Statements of Income (Loss).  We disclose the amount of OTTI recognized in accumulated OCI in Note 12, and the enhanced disclosures related to OTTI are included in Note 5.

Investments – Equity Method and Joint Ventures Topic

In November 2008, the FASB amended the guidance in the Investments – Equity Method and Joint Ventures Topic of the FASB ASC to addresses the impact of recent amendments to the Business Combinations and Consolidations Topics on the accounting for equity method investments.  For a more detailed description of these amendments, see “EITF No. 07-5 – Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” in Note 2 of our 2008 Form 10-K.  We adopted these amendments on January 1, 2009, prospectively for all investments accounted for under the equity method.  The adoption did not have a material impact on our consolidated financial condition and results of operations.


 
8

 

Subsequent Events Topic

In May 2009, the FASB updated the Subsequent Events Topic of the FASB ASC in order to establish standards of accounting for the disclosure of events that take place after the balance sheet date, but before the financial statements are issued.  The effect of all subsequent events must be recognized in the financial statements that provide information about conditions that existed as of the balance sheet date.  For those events that did not exist as of the balance sheet date, but arose after the balance sheet date and before the financial statements are issued, recognition is not required, but depending on the nature of the unrecognized subsequent event, disclosure of the event may be required in order to keep the financial statements from being misleading.  In addition, entities must disclose in the financial statements the date through which subsequent events have been evaluated.  We adopted these provisions, prospectively, as of the interim reporting period ended June 30, 2009, and have include the enhanced disclosures in Note 1.  The adoption of these amendments to the Subsequent Event Topic did not have a material impact on our consolidated financial condition or results of operations.

Transfers and Servicing Topic

In February 2008, the FASB updated the Transfers and Servicing Topic of the FASB ASC regarding transfers of financial assets and the guidance for when a repurchase financing should be considered a linked transaction.  For a more detailed description of these amendments see “FSP FAS No. 140-3 – Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” in Note 2 of our 2008 Form 10-K.  We adopted this update effective January 1, 2009, and applied the guidance prospectively to initial transfers and repurchase financings executed after that date.  The adoption did not have a material impact on our consolidated financial condition and results of operations.

Future Adoption of New Accounting Standards

Compensation – Retirement Benefits Topic

In December 2008, the FASB amended the disclosure requirements for the Compensation – Retirement Benefits Topic of the FASB ASC, which will require enhanced disclosures regarding the plan assets of an employer’s defined benefit pension or other postretirement benefit plans.  The new disclosures will include information regarding the investment allocation decisions made for plan assets, the fair value of each major category of plan assets disclosed separately for pension plans and other postretirement benefit plans and the inputs and valuation techniques used to measure the fair value of plan assets, including the level within the fair value hierarchy as defined by the Fair Value Measurements and Disclosures Topic of the FASB ASC.  In addition, disclosures will now be required for fair value measurements of plan assets using Level 3 inputs.  These new disclosures are effective for fiscal years ending after December 15, 2009, and are not required for earlier periods presented for comparative purposes.  We will include the disclosures required by the Compensation – Retirement Benefits Topic in the notes to our consolidated financial statements for the year ending December 31, 2009.

Fair Value Measurements and Disclosures Topic

In August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU 2009-05”) which amends the Fair Value Measurements and Disclosures Topic of the FASB ASC to provide further guidance on the application of fair value measurements, due to the general lack of observable market information available for liabilities.  These amendments to the Fair Value Measurements and Disclosures Topic identify valuation techniques which can be used to measure the fair value of a liability when a quoted price in an active market is not available.  In addition, the amendments clarify that an entity is not required to include a separate input or adjustment to other inputs related to a restriction that prevents the transfer of the liability and clarifies when a quoted price for a liability would be considered a Level 1 input.  ASU 2009-05 is effective for the reporting period ending December 31, 2009.  Any revisions resulting from a change in a valuation technique, or its application, must be accounted for as a change in accounting estimate and the specified disclosure for a change in accounting estimate must be included in the notes to the financial statements.  We will adopt these amendments to the Fair Value Measurements and Disclosures Topic in the fourth quarter of 2009, and are currently evaluating the impact of the adoption on our consolidated financial condition and results of operations.


 
9

 

In September 2009, the FASB issued ASU No. 2009-12, “Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (“ASU 2009-12”), which amends the Fair Value Measurements and Disclosures Topic of the FASB ASC to permit the use of net asset value per share, without further adjustment, to estimate the fair value of investments in investment companies that do not have readily determinable fair values.  The net asset value per share must be calculated in a manner consistent with the measurement principles of the Financial Services – Investment Companies Topic of the FASB ASC and can be used by investors in investments such as hedge funds, private equity funds, venture capital funds and real estate funds.  If it is probable the investment will be sold for an amount other than net asset value, the investor would be required to estimate the fair value of the investment considering all of the rights and obligations of the investment and any other market available data.  In addition, the amendments will require enhanced disclosure for the investments within the scope of this accounting update.  The accounting guidance in ASU 2009-12 is effective for periods ending after December 15, 2009, and entities will be permitted to early adopt this accounting guidance without providing the enhanced disclosures.  Upon the effective date of ASU 2009-12, the enhanced disclosures must be provided in the notes to the financial statements.  We will adopt these amendments in the fourth quarter of 2009, and are currently evaluating the impact of the adoption on our consolidated financial condition and results of operations.

SFAS No. 166 – Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS 166”).  In accordance with ASU 2009-01, the guidance in SFAS 166 will remain authoritative until it has been integrated into the FASB ASC.  SFAS 166 will, among other things, eliminate the concept of a qualifying special-purpose entity (“SPE”) and remove the scope exception for a qualifying SPE from the Consolidations Topic of the FASB ASC.  As a result, previously unconsolidated qualifying SPEs must be re-evaluated for consolidation by the sponsor or transferor.  In addition, this standard amends the accounting guidance related to transfers of financial assets in order to address practice issues that have been highlighted by the events of the recent economic decline.  SFAS 166 is effective as of the beginning of the annual reporting period that begins after November 15, 2009.  The recognition and measurement provisions will be applied to transfers that occur on or after the effective date and all qualifying SPEs that exist on and after the effective date must be evaluated for consolidation.  We will adopt the provisions of SFAS 166 effective January 1, 2010, and are currently evaluating the impact of the adoption on our consolidated financial condition and results of operations.

SFAS No. 167 – Amendments to FASB Interpretation No. 46(R)

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”).  In accordance with ASU 2009-01, the guidance in SFAS 167 will remain authoritative until it has been integrated into the FASB ASC.  SFAS 167 amends the consolidation guidance related to variable interest entities (“VIEs”) to require entities to perform an analysis of their respective variable interests to determine if a controlling financial interest exists in the VIE.  The current quantitative analysis used under the Consolidations Topic of the FASB ASC will be eliminated and replaced with a qualitative approach that is focused on identifying the variable interest that has the power to direct the activities that most significantly impact the performance of the VIE and absorb losses or receive returns that could potentially be significant to the VIE.  In addition, this new accounting standard will require an ongoing reassessment of the primary beneficiary of the VIE, rather than reassessing the primary beneficiary only upon the occurrence of certain events defined in the FASB ASC.  SFAS 167 will be effective as of the beginning of the annual reporting period that begins after November 15, 2009, and requires that on the effective date all VIEs in which an entity has a variable interest be reconsidered for consolidation based on this amended accounting guidance.  The investments we hold that we are evaluating are certain of our partnership investments in our alternative investment portfolio and the credit linked notes (“CLNs”).  See Notes 4 and 5 for details on the CLNs.  If we were required to consolidate our CLNs, it would also result in requiring us to record changes in fair value through the income statement with the initial mark-to-market recorded as a cumulative effect adjustment to retained earnings.  We will adopt the provisions of SFAS 167 effective January 1, 2010, and are currently evaluating the impact of the adoption on our consolidated financial condition and results of operations.

3.  Acquisitions and Dispositions

Acquisitions

Newton County Loan & Savings, FSB (“NCLS”)

On January 8, 2009, the Office of Thrift Supervision approved our application to become a savings and loan holding company and our acquisition of NCLS, a federally regulated savings bank located in Indiana.  We contributed $10 million to the capital of NCLS.  We closed on our purchase of NCLS on January 15, 2009, which did not have a material impact on our consolidated financial condition or results of operations.


 
10

 

Dispositions

Discontinued Investment Management Operations

On August 18, 2009, we entered into a purchase and sale agreement with Macquarie Bank Limited (“MBL”), pursuant to which we agreed to sell to MBL all of the outstanding capital stock of Delaware Management Holdings, Inc. (“Delaware”), our subsidiary, which provides investment products and services to individuals and institutions.

In addition, certain of our subsidiaries, including The Lincoln National Life Insurance Company (“LNL”), our primary insurance subsidiary, will enter into investment advisory agreements with Delaware, pursuant to which Delaware will continue to manage the majority of the general account insurance assets of the subsidiaries.  The investment advisory agreements will have ten-year terms, and we may terminate them without cause by paying an aggregate termination fee of up to $84 million in the event that all of the agreements with our subsidiaries are terminated that will decline on a pro rata basis over the ten-year term of the advisory agreements.

Accordingly, the assets and liabilities of this business have been reclassified as held-for-sale for all periods presented and are reported within other assets and other liabilities on our Consolidated Balance Sheets.  The major classes of assets and liabilities held-for-sale (in millions) were as follows:
 
   
As of
   
As of
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
Assets
           
Cash and invested cash
  $ 152     $ 165  
Premiums and fees receivable
    34       32  
Goodwill
    248       248  
Other assets
    84       77  
Total assets held-for-sale
  $ 518     $ 522  
                 
Liabilities
               
Other liabilities
  $ 162     $ 166  
Total liabilities held-for-sale
  $ 162     $ 166  

We have reclassified the results of operations of Delaware into income (loss) from discontinued operations for all periods presented on our Consolidated Statements of Income (Loss), and selected amounts (in millions) were as follows:
 
   
For the Three
   
For the Nine
 
   
Months Ended
   
Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Discontinued Operations Before Disposal
                       
Revenues:
                       
Investment advisory fees – external
  $ 55     $ 67     $ 146     $ 220  
Investment advisory fees – internal
    22       21       62       61  
Other revenues and fees
    23       22       66       75  
Gain on sale of business
    2       2       6       6  
Total revenues
  $ 102     $ 112     $ 280     $ 362  
                                 
Income from discontinued operations before disposal,
                               
before federal income tax expense
  $ 12     $ 10     $ 29     $ 57  
Federal income tax expense
    5       3       13       21  
Income from discontinued operations before disposal
  $ 7     $ 7     $ 16     $ 36  



 
11

 

We expect this transaction to close on or around December 31, 2009.  The completion of the transaction contemplated by the purchase and sale agreement is subject to regulatory approvals and the satisfaction of other customary conditions, some of which are beyond our control, and no assurance can be given that such completion will occur.  The transaction is expected to be neutral to earnings per share assuming reinvestment of net proceeds back into core insurance businesses.  We expect a modest gain on disposal, which will be recorded as of the close of the transaction; however, the actual gain (loss) may differ from our expected result depending upon, among other things, the actual purchase price after closing adjustments.

Discontinued U.K. Operations

On June 15, 2009, we entered into a share purchase agreement with SLF of Canada UK Limited (“SLF”) and Sun Life Assurance Company of Canada, as the guarantor, pursuant to which we agreed to sell to SLF all of the outstanding capital stock of Lincoln National (UK) plc (“Lincoln UK”), our subsidiary, which is focused primarily on providing life and retirement income products in the United Kingdom.  This transaction closed on October 1, 2009, and we retained Lincoln UK’s pension plan assets and liabilities.

Accordingly, the assets and liabilities of this business have been reclassified as held-for-sale for all periods presented and are reported within other assets and other liabilities on our Consolidated Balance Sheets.  The major classes of assets and liabilities held-for-sale (in millions) were as follows:
 
   
As of
   
As of
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
Assets
           
Investments
  $ 998     $ 831  
Cash and invested cash
    163       172  
DAC and VOBA
    562       534  
Accrued investment income
    21       18  
Reinsurance recoverables
    60       54  
Other assets
    45       44  
Separate account assets
    6,193       4,978  
Total assets held-for-sale
  $ 8,042     $ 6,631  
                 
Liabilities
               
Future contract benefits
  $ 896     $ 829  
Other contract holder funds
    287       277  
Other liabilities
    159       129  
Separate account liabilities
    6,193       4,978  
Total liabilities held-for-sale
  $ 7,535     $ 6,213  


 
12

 

We have reclassified the results of operations of Lincoln UK into income (loss) from discontinued operations for all periods presented on our Consolidated Statements of Income (Loss), and selected amounts (in millions) were as follows:
 
   
For the Three
   
For the Nine
 
   
Months Ended
   
Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Discontinued Operations Before Disposal
                       
Revenues:
                       
Insurance premiums
  $ 17     $ 19     $ 41     $ 64  
Insurance fees
    42       40       99       138  
Net investment income
    15       21       43       61  
Realized gain (loss)
    -       1       (1 )     (7 )
Total revenues
  $ 74     $ 81     $ 182     $ 256  
                                 
Income from discontinued operations before disposal,
                               
before federal income tax expense
  $ 16     $ 20     $ 38     $ 58  
Federal income tax expense
    6       7       13       20  
Income from discontinued operations before disposal
    10       13       25       38  
                                 
Disposal
                               
Gain (loss) on disposal, before federal income tax benefit
    17       -       (220 )     -  
Federal income tax benefit
    38       -       105       -  
Gain (loss) on disposal
    55       -       (115 )     -  
Income (loss) from discontinued operations
  $ 65     $ 13     $ (90 )   $ 38  

There will be a post-closing adjustment of the purchase price based upon a final actuarial appraisal of the value of the business as set forth in the share purchase agreement.

Discontinued Media Operations

During the fourth quarter of 2007, we entered into definitive agreements to sell our television broadcasting, Charlotte radio and sports programming businesses.  These businesses were acquired as part of the Jefferson-Pilot merger on April 3, 2006.  The sports programming sale closed on November 30, 2007, the Charlotte radio broadcasting sale closed on January 31, 2008, and the television broadcasting sale closed on March 31, 2008.


 
13

 

The results of operations of these businesses were reclassified into income (loss) from discontinued operations on our Consolidated Statements of Income (Loss), and selected amounts (in millions) were as follows:
 
   
For the
   
For the
 
   
Three
   
Nine
 
   
Months
   
Months
 
   
Ended
   
Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2008
 
Discontinued Operations Before Disposal
           
Media revenues, net of agency commissions
  $ -     $ 22  
                 
Income from discontinued operations before disposal, before federal income expense
  $ -     $ 8  
Federal income tax expense
    -       3  
Income from discontinued operations before disposal
    -       5  
                 
Disposal
               
Loss on disposal, before federal income tax expense (benefit)
    -       (13 )
Federal income tax expense (benefit)
    1       (3 )
Loss on disposal
    (1 )     (10 )
Loss from discontinued operations
  $ (1 )   $ (5 )

4.  Variable Interest Entities

Our involvement with VIEs is primarily to obtain financing and to invest in assets that allow us to gain exposure to a broadly diversified portfolio of asset classes.  We have carefully analyzed each VIE to determine whether we are the primary beneficiary.  Based on our analysis of the expected losses and residual returns of the VIEs in which we have a variable interest, we have concluded that there are no VIEs for which we are the primary beneficiary, and, as such, we have not consolidated the VIEs in our consolidated financial statements.  However, for those VIEs in which we are not the primary beneficiary, but hold a variable interest, we recognize the fair value of our variable interest on our consolidated financial statements.

Information (in millions) included on our Consolidated Balance Sheets for those VIEs where we had significant variable interest and where we were a sponsor was as follows:

   
As of September 30, 2009
   
As of December 31, 2008
 
               
Maximum
               
Maximum
 
   
Total
   
Total
   
Loss
   
Total
   
Total
   
Loss
 
   
Assets
   
Liabilities
   
Exposure
   
Assets
   
Liabilities
   
Exposure
 
Affiliated trust
  $ 5     $ -     $ -     $ 5     $ -     $ -  
Credit-linked notes
    318       -       600       50       -       600  
 
Affiliated Trust

We are the sponsor of an affiliated trust, Lincoln National Capital Trust VI, which was formed solely for the purpose of issuing trust preferred securities and lending the proceeds to us.  We own the common securities of this trust, approximately a 3% ownership, and the only assets of the trust are the junior subordinated debentures issued by us. Our common stock investment in this trust was financed by the trust and is reported in other investments on our Consolidated Balance Sheets.  Distributions are paid by the trust to the preferred security holders on a quarterly basis and the principal obligations of the trust are irrevocably guaranteed by us.  Upon liquidation of the trust, the holders of the preferred securities are entitled to a fixed amount per share plus accumulated and unpaid distributions. We reserve the right to redeem the preferred securities at a fixed price plus accumulated and unpaid distributions and defer the interest payments due on the subordinated debentures for up to 20 consecutive quarters, but not beyond the maturity date of the subordinated debenture.

Our common stock investment does not represent a significant variable interest in the trust, as we do not receive any distributions or absorb any losses from the trust.  In addition, our guarantee of the principal obligations of the trust does not represent a variable interest, as we are guaranteeing our own performance.  Therefore, we are not the primary beneficiary and do not consolidate the trust.  Since our investment in the common stock of the trust was financed directly by the trust, we do not have any equity investment at risk, and, therefore, do not have exposure to loss from the trust.

 
14

 

Credit-Linked Notes

We invested in two CLNs where the note holders do not have voting rights or decision-making capabilities.  The entities that issued the CLNs are financed by the note holders, and, as such, the note holders participate in the expected losses and residual returns of the entities.  Because the note holders’ investment does not permit them to make decisions about the entities’ activities that would have a significant effect on the success of the entities, we have determined that these entities are VIEs.  We are not the primary beneficiary of the VIEs as the multi-tiered class structure of the CLNs requires the subordinated classes of the investment pool to absorb credit losses prior to our class of notes.  As a result, we will not absorb the majority of the expected losses and the coupon we receive on the CLNs limits our participation in the residual returns.  For information regarding our exposure to loss in our CLNs, see “Credit-Linked Notes” in Note 5.

5.  Investments

AFS Securities

Pursuant to the Fair Value Measurements and Disclosures Topic of the FASB ASC, we have categorized AFS securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique.  The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described in Note 16, which also includes additional disclosures regarding our fair value measurements.

The amortized cost, gross unrealized gains, losses and OTTI and fair value of AFS securities (in millions) were as follows:
 
   
As of September 30, 2009
 
   
Amortized
   
Gross Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
OTTI (1)
   
Value
 
Fixed Maturity Securities
                             
Corporate bonds
  $ 44,579     $ 2,612     $ 1,265     $ 78     $ 45,848  
U.S. Government bonds
    203       20       2       -       221  
Foreign government bonds
    473       31       11       -       493  
Mortgage-backed securities ("MBS"):
                                       
CMOs
    6,237       306       342       172       6,029  
Residential mortgage pass-through
                                       
securities ("MPTS")
    2,594       85       14       -       2,665  
Commercial MBS ("CMBS")
    2,592       52       391       -       2,253  
Asset-backed securities ("ABS"):
                                       
CDOs
    191       5       47       9       140  
CLNs
    600       -       282       -       318  
State and municipal bonds
    1,425       54       15       -       1,464  
Hybrid and redeemable preferred securities
    1,548       21       334       -       1,235  
Total fixed maturity securities
    60,442       3,186       2,703       259       60,666  
Equity Securities
                                       
Banking securities
    274       -       118       -       156  
Insurance securities
    43       1       -       -       44  
Other financial services securities
    23       11       7       -       27  
Other securities
    53       4       1       -       56  
Total equity securities
    393       16       126       -       283  
Total AFS securities
  $ 60,835     $ 3,202     $ 2,829     $ 259     $ 60,949  
 
(1)
This amount is comprised of the gross unrealized OTTI cumulative effect adjustment as discussed in Note 2 and the amount reflected on our Consolidated Statements of Income (Loss) during the first nine months of 2009 adjusted for other changes, including but not limited to, sales of fixed maturity AFS securities.

 
15

 
 
   
As of December 31, 2008
 
   
Amortized
   
Gross Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
OTTI
   
Value
 
Fixed Maturity Securities
                             
Corporate bonds
  $ 39,773     $ 638     $ 4,463     $ -     $ 35,948  
U.S. Government bonds
    204       42       -       -       246  
Foreign government bonds
    532       37       49       -       520  
MBS:
                                       
CMOs
    6,918       174       780       -       6,312  
MPTS
    1,875       62       38       -       1,899  
CMBS
    2,535       9       625       -       1,919  
ABS:
                                       
CDOs
    256       7       103       -       160  
CLNs
    600       -       550       -       50  
State and municipal bonds
    125       2       2       -       125  
Hybrid and redeemable preferred securities
    1,563       6       607       -       962  
Total fixed maturity securities
    54,381       977       7,217       -       48,141  
Equity Securities
                                       
Banking securities
    274       -       146       -       128  
Insurance securities
    71       1       19       -       53  
Other financial services securities
    29       4       8       -       25  
Other securities
    54       4       10       -       48  
Total equity securities
    428       9       183       -       254  
Total AFS securities
  $ 54,809     $ 986     $ 7,400     $ -     $ 48,395  
 
The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) were as follows:
 
   
As of September 30, 2009
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
Due in one year or less
  $ 1,717     $ 1,734  
Due after one year through five years
    13,444       13,930  
Due after five years through ten years
    16,609       17,327  
Due after ten years
    16,458       16,270  
Subtotal
    48,228       49,261  
MBS
    11,423       10,947  
CDOs
    191       140  
CLNs
    600       318  
Total fixed maturity AFS securities
  $ 60,442     $ 60,666  

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


 
16

 

The fair value and gross unrealized losses, including the portion of OTTI recognized in OCI, of AFS securities (in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
 
   
As of September 30, 2009
 
   
Less Than or Equal
   
Greater Than
             
   
to Twelve Months
   
Twelve Months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
   
Fair
   
Losses and
   
Fair
   
Losses and
   
Fair
   
Losses and
 
   
Value
   
OTTI
   
Value
   
OTTI
   
Value
   
OTTI
 
Fixed Maturity Securities
                                   
Corporate bonds
  $ 1,905     $ 190     $ 7,399     $ 1,153     $ 9,304     $ 1,343  
U.S. Government bonds
    41       2       -       -       41       2  
Foreign government bonds
    24       -       50       11       74       11  
MBS:
                                               
CMOs
    261       172       1,018       342       1,279       514  
MPTS
    223       2       103       12       326       14  
CMBS
    103       17       782       374       885       391  
ABS:
                                               
CDOs
    9       7       117       49       126       56  
CLNs
    -       -       318       282       318       282  
State and municipal bonds
    285       7       60       8       345       15  
Hybrid and redeemable
                                               
preferred securities
    128       45       912       289       1,040       334  
Total fixed maturity securities
    2,979       442       10,759       2,520       13,738       2,962  
Equity Securities
                                               
Banking securities
    138       103       18       15       156       118  
Insurance securities
    6       -       -       -       6       -  
Other financial services securities
    8       7       -       -       8       7  
Other securities
    2       1       -       -       2       1  
Total equity securities
    154       111       18       15       172       126  
Total AFS securities
  $ 3,133     $ 553     $ 10,777     $ 2,535     $ 13,910     $ 3,088  
                                                 
Total number of securities in an unrealized loss position
                              1,680  


 
17

 

 
 
   
As of December 31, 2008
 
   
Less Than or Equal
   
Greater Than
             
   
to Twelve Months
   
Twelve Months
   
Total
 
         
Gross
         
Gross
         
Gross
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
Fixed Maturity Securities