ac0223a6f22e4ac

 

__________________________________________________________________________________________________________

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 June 30, 2013

 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 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 July 29, 2013, there were 264,492,889 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

41 

 

 

Forward-Looking Statements – Cautionary Language

41 

 

 

Introduction

42 

 

 

    Executive Summary

42 

 

 

    Critical Accounting Policies and Estimates

43 

 

 

    Acquisitions and Dispositions

45 

 

 

Results of Consolidated Operations

45 

 

 

Results of Annuities

46 

 

 

Results of Retirement Plan Services

52 

 

 

Results of Life Insurance

57 

 

 

Results of Group Protection

63 

 

 

Results of Other Operations

65 

 

 

Realized Gain (Loss) and Benefit Ratio Unlocking

67 

 

 

Consolidated Investments

70 

 

 

Review of Consolidated Financial Condition

83 

 

 

   Liquidity and Capital Resources

83 

 

 

Other Matters

87 

 

 

   Other Factors Affecting Our Business

87 

 

 

   Recent Accounting Pronouncements

87 

 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

87 

 

 

 

4.

Controls and Procedures

90 

 

 

 

PART II

 

 

 

 

1.

Legal Proceedings

91 

 

 

 

2.

Unregistered Sales of Equity Securities and Use of Proceeds

91 

 

 

 

6.

Exhibits

91 

 

 

 

 

Signatures

92 

 

 

 

 

Exhibit Index for the Report on Form 10-Q

E-1

 

 

 

 

 

 

 

 

 

 

 

 


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

As of

 

 

June 30,

December 31,

 

 

2013

 

 

2012

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value:

 

 

 

 

 

 

 

 

Fixed maturity securities (amortized cost:  2013 – $75,469; 2012 – $72,718)

 

$

80,235 

 

 

$

82,036 

 

Variable interest entities' fixed maturity securities (amortized cost:  2013 – $680; 2012 – $677)

 

 

698 

 

 

 

708 

 

Equity securities (cost:  2013 – $192; 2012 – $137)

 

 

209 

 

 

 

157 

 

Trading securities

 

 

2,391 

 

 

 

2,554 

 

Mortgage loans on real estate

 

 

7,033 

 

 

 

7,029 

 

Real estate

 

 

60 

 

 

 

65 

 

Policy loans

 

 

2,700 

 

 

 

2,766 

 

Derivative investments

 

 

1,683 

 

 

 

2,652 

 

Other investments

 

 

1,158 

 

 

 

1,098 

 

Total investments

 

 

96,167 

 

 

 

99,065 

 

Cash and invested cash

 

 

2,574 

 

 

 

4,230 

 

Deferred acquisition costs and value of business acquired

 

 

8,214 

 

 

 

6,667 

 

Premiums and fees receivable

 

 

430 

 

 

 

380 

 

Accrued investment income

 

 

1,052 

 

 

 

1,015 

 

Reinsurance recoverables

 

 

6,385 

 

 

 

6,449 

 

Funds withheld reinsurance assets

 

 

788 

 

 

 

837 

 

Goodwill

 

 

2,273 

 

 

 

2,273 

 

Other assets

 

 

2,655 

 

 

 

2,580 

 

Separate account assets

 

 

102,783 

 

 

 

95,373 

 

Total assets

 

$

223,321 

 

 

$

218,869 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Future contract benefits

 

$

18,214 

 

 

$

19,780 

 

Other contract holder funds

 

 

73,830 

 

 

 

72,218 

 

Short-term debt

 

 

506 

 

 

 

200 

 

Long-term debt

 

 

5,050 

 

 

 

5,439 

 

Reinsurance related embedded derivatives

 

 

131 

 

 

 

215 

 

Funds withheld reinsurance liabilities

 

 

926 

 

 

 

940 

 

Deferred gain on business sold through reinsurance

 

 

282 

 

 

 

319 

 

Payables for collateral on investments

 

 

4,252 

 

 

 

4,181 

 

Variable interest entities' liabilities

 

 

101 

 

 

 

128 

 

Other liabilities

 

 

3,929 

 

 

 

5,103 

 

Separate account liabilities

 

 

102,783 

 

 

 

95,373 

 

Total liabilities

 

 

210,004 

 

 

 

203,896 

 

 

 

 

 

 

 

 

 

 

Contingencies and Commitments (See Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Preferred stock – 10,000,000 shares authorized; Series A – 4,164 and 9,532

 

 

 

 

 

 

 

 

shares issued and outstanding as of June 30, 2013, and December 31, 2012, respectively

 

 

 -

 

 

 

 -

 

Common stock – 800,000,000 shares authorized; 264,316,340 and 271,402,586 shares

 

 

 

 

 

 

 

 

issued and outstanding as of June 30, 2013, and December 31, 2012, respectively

 

 

6,937 

 

 

 

7,121 

 

Retained earnings

 

 

4,487 

 

 

 

4,044 

 

Accumulated other comprehensive income (loss)

 

 

1,893 

 

 

 

3,808 

 

Total stockholders' equity

 

 

13,317 

 

 

 

14,973 

 

Total liabilities and stockholders' equity

 

$

223,321 

 

 

$

218,869 

 

 

 

 

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 Six

 

Months Ended

 

Months Ended

 

June 30,

 

June 30,

 

2013

 

2012

 

2013

 

2012

Revenues

 

 

 

 

 

 

 

 

 

 

 

Insurance premiums

$

674 

 

$

630 

 

$

1,328 

 

$

1,219 

Insurance fees

 

983 

 

 

885 

 

 

1,941 

 

 

1,788 

Net investment income

 

1,213 

 

 

1,197 

 

 

2,363 

 

 

2,362 

Realized gain (loss):

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

(20)

 

 

(50)

 

 

(39)

 

 

(147)

Portion of loss recognized in other comprehensive income

 

 

 

17 

 

 

 

 

67 

Net other-than-temporary impairment losses on securities

 

 

 

 

 

 

 

 

 

 

 

recognized in earnings

 

(19)

 

 

(33)

 

 

(33)

 

 

(80)

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

 

 

 

 

 

 

 

 

 

 

 

impairment losses on securities

 

 

 

76 

 

 

(43)

 

 

37 

Total realized gain (loss)

 

(17)

 

 

43 

 

 

(76)

 

 

(43)

Amortization of deferred gain on business sold through reinsurance

 

19 

 

 

19 

 

 

37 

 

 

37 

Other revenues and fees

 

127 

 

 

124 

 

 

245 

 

 

245 

Total revenues

 

2,999 

 

 

2,898 

 

 

5,838 

 

 

5,608 

Expenses

 

 

 

 

 

 

 

 

 

 

 

Interest credited

 

627 

 

 

617 

 

 

1,244 

 

 

1,244 

Benefits

 

991 

 

 

943 

 

 

1,950 

 

 

1,795 

Commissions and other expenses

 

898 

 

 

828 

 

 

1,792 

 

 

1,684 

Interest and debt expense

 

65 

 

 

68 

 

 

129 

 

 

135 

Total expenses

 

2,581 

 

 

2,456 

 

 

5,115 

 

 

4,858 

Income (loss) from continuing operations before taxes

 

418 

 

 

442 

 

 

723 

 

 

750 

Federal income tax expense (benefit)

 

101 

 

 

121 

 

 

167 

 

 

185 

Income (loss) from continuing operations

 

317 

 

 

321 

 

 

556 

 

 

565 

Income (loss) from discontinued operations, net of federal

 

 

 

 

 

 

 

 

 

 

 

income taxes

 

 -

 

 

 -

 

 

 -

 

 

(1)

Net income (loss)

 

317 

 

 

321 

 

 

556 

 

 

564 

Other comprehensive income (loss), net of tax

 

(1,688)

 

 

757 

 

 

(1,915)

 

 

700 

Comprehensive income (loss)

$

(1,371)

 

$

1,078 

 

$

(1,359)

 

$

1,264 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) Per Common Share – Basic

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

1.19 

 

$

1.14 

 

$

2.07 

 

$

1.97 

Income (loss) from discontinued operations

 

 -

 

 

 -

 

 

 -

 

 

 -

Net income (loss)

$

1.19 

 

$

1.14 

 

$

2.07 

 

$

1.97 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) Per Common Share – Diluted

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

1.15 

 

$

1.09 

 

$

2.01 

 

$

1.93 

Income (loss) from discontinued operations

 

 -

 

 

 -

 

 

 -

 

 

 -

Net income (loss)

$

1.15 

 

$

1.09 

 

$

2.01 

 

$

1.93 

 

 

 

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 Six

 

Months Ended

 

June 30,

 

2013

 

2012

 

 

 

 

 

 

Common Stock

 

 

 

 

 

Balance as of beginning-of-year

$

7,121 

 

$

7,590 

Stock compensation/issued for benefit plans

 

18 

 

 

21 

Retirement of common stock/cancellation of shares

 

(202)

 

 

(300)

Balance as of end-of-period

 

6,937 

 

 

7,311 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

Balance as of beginning-of-year

 

4,044 

 

 

2,831 

Net income (loss)

 

556 

 

 

564 

Retirement of common stock

 

(48)

 

 

 -

Dividends declared:  Common (2013 – $0.240; 2012 – $0.160)

 

(65)

 

 

(46)

Balance as of end-of-period

 

4,487 

 

 

3,349 

 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

Balance as of beginning-of-year

 

3,808 

 

 

2,680 

Other comprehensive income (loss), net of tax

 

(1,915)

 

 

700 

Balance as of end-of-period

 

1,893 

 

 

3,380 

Total stockholders' equity as of end-of-period

$

13,317 

 

$

14,040 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements

3


 

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six

 

Months Ended

 

June 30,

 

2013

 

2012

Cash Flows from Operating Activities

 

 

 

 

 

Net income (loss)

$

556 

 

$

564 

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

 

(217)

 

 

(114)

Trading securities purchases, sales and maturities, net

 

63 

 

 

67 

Change in premiums and fees receivable

 

(50)

 

 

20 

Change in accrued investment income

 

(37)

 

 

(40)

Change in future contract benefits and other contract holder funds

 

(293)

 

 

120 

Change in reinsurance related assets and liabilities

 

(59)

 

 

(111)

Change in federal income tax accruals

 

157 

 

 

202 

Realized (gain) loss

 

76 

 

 

43 

(Income) loss attributable to equity method investments

 

(37)

 

 

(82)

Amortization of deferred gain on business sold through reinsurance

 

(37)

 

 

(37)

(Gain) loss on disposal of discontinued operations

 

 -

 

 

Other

 

(67)

 

 

(19)

Net cash provided by (used in) operating activities

 

55 

 

 

614 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Purchases of available-for-sale securities

 

(6,726)

 

 

(5,717)

Sales of available-for-sale securities

 

449 

 

 

369 

Maturities of available-for-sale securities

 

3,387 

 

 

2,983 

Purchases of other investments

 

(1,170)

 

 

(1,398)

Sales or maturities of other investments

 

1,245 

 

 

1,451 

Increase (decrease) in payables for collateral on investments

 

71 

 

 

1,337 

Other

 

(59)

 

 

(47)

Net cash provided by (used in) investing activities

 

(2,803)

 

 

(1,022)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Issuance of long-term debt, net of issuance costs

 

50 

 

 

298 

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

 

5,275 

 

 

4,979 

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

 

(2,513)

 

 

(2,611)

Transfers to and from separate accounts, net

 

(1,405)

 

 

(1,160)

Common stock issued for benefit plans and excess tax benefits

 

 -

 

 

(5)

Repurchase of common stock

 

(250)

 

 

(300)

Dividends paid to common and preferred stockholders

 

(65)

 

 

(46)

Net cash provided by (used in) financing activities

 

1,092 

 

 

1,155 

 

 

 

 

 

 

Net increase (decrease) in cash and invested cash, including discontinued operations

 

(1,656)

 

 

747 

Cash and invested cash, including discontinued operations, as of beginning-of-year

 

4,230 

 

 

4,510 

Cash and invested cash, including discontinued operations, as of end-of-period

$

2,574 

 

$

5,257 

 

 

 

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 13 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 include fixed and indexed annuities, variable annuities, universal life insurance (“UL”), variable universal life insurance (“VUL”), linked-benefit UL,  indexed UL, 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.  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, 2012 (“2012 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 position, results of operations and cash flows, are summarized in our 2012 Form 10-K.

 

In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results.  Operating results for the six month period ended June 30, 2013, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013.  All material inter-company accounts and transactions have been eliminated in consolidation. 

2.  New Accounting Standards

 

Adoption of New Accounting Standards

 

Balance Sheet Topic

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), and in January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”).  For a more detailed description of ASU 2011-11 and ASU 2013-01, see “Future Adoption of New Accounting Standards – Balance Sheet Topic” in Note 2 of our 2012 Form 10-K.  We adopted the disclosure requirements of ASU 2011-11, after considering the scope clarification in ASU 2013-01, as of January 1, 2013, and have included the required disclosures for all comparative periods in Note 5 of this quarterly report on Form 10-Q. 

 

Comprehensive Income Topic

 

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), which requires enhanced reporting of such amounts either on the face of the financial statements or in the notes to the financial statements.  For a more detailed description of ASU 2013-02, see “Future Adoption of New Accounting Standards – Comprehensive Income Topic” in Note 2 of our 2012 Form 10-K.  We adopted the disclosure requirements in ASU 2013-02 as of January 1, 2013, and have elected to provide the required disclosure in the notes to our consolidated financial statements.  We have prospectively included the required disclosures in Note 9 of this quarterly report on Form 10-Q.

 

Future Adoption of New Accounting Standards

 

Derivatives and Hedging Topic

 

In July 2013, the FASB issued ASU No. 2013-10, “Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2013-10”), which permits the Fed Funds Effective Swap Rate to be used as a benchmark interest rate for hedge accounting purposes under the FASB Accounting Standards CodificationTM (“ASC”) in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate swap rate.  The amendments in ASU 2013-10 are effective prospectively for qualifying new or designated hedging relationships entered into, on, or after July 17, 2013.  We are currently evaluating the impacts of ASU 2013-10 on our consolidated financial condition and results of operation.

5


 

 

Financial Services – Investment Companies Topic

 

In June 2013, the FASB issued ASU No. 2013-08, “Amendments to the Scope, Measurement, and Disclosure Requirements” (“ASU 2013-08”), which provides comprehensive accounting guidance for assessing whether an entity is an investment company.  ASU 2013-08 requires an assessment of all the characteristics of an investment company through the use of a new two-tiered approach, which considers the entity’s purpose and design to determine whether it is an investment company.  As a result of applying the new criteria in ASU 2013-08, an entity once considered an investment company may no longer meet the new criteria to be classified as such, and conversely, an entity not classified as an investment company, under current GAAP may satisfy the criteria to be classified as such upon the adoption of ASU 2013-08.  If an entity is no longer classified as an investment company it must discontinue the application of investment company accounting guidance and present the change in status through a cumulative effect adjustment to the beginning balance of retained earnings in the period of adoption.  If an entity becomes classified as an investment company, ASU 2013-08 should be applied prospectively with the effect of adoption recognized as an adjustment to opening net assets for the period of adoption.  The amendments in ASU 2013-08 are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013, with early application prohibited.  We will adopt the requirements in ASU 2013-08 effective January 1, 2014, and are currently evaluating the impact of adoption on our consolidated financial condition and results of operations.       

 

Income Taxes Topic

 

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”) in order to explicitly define the financial statement presentation requirements in GAAP.  ASU 2013-11 provides guidance on the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist.  The amendments in the ASU are effective prospectively for interim and annual reporting periods in fiscal years beginning after December 15, 2013, with early application permitted.  We will adopt the requirements of ASU 2013-11 effective January 1, 2014, and will include the new disclosure requirements in the notes to our consolidated financial statements upon adoption.          

 

3.  Variable Interest Entities (“VIEs”)

 

Consolidated VIEs

 

See Note 4 in our 2012 Form 10-K for a detailed discussion of our consolidated VIEs, which information is incorporated herein by reference.

 

The following summarizes information regarding the credit-linked note (“CLN”) structures (dollars in millions) as of June 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount and Date of Issuance

 

 

 

 

$400

 

$200

 

 

 

 

 

December

 

April

 

 

 

 

 

2006

 

2007

 

 

Original attachment point (subordination)

 

 

5.50% 

 

2.05% 

 

 

Current attachment point (subordination)

 

 

4.17% 

 

1.48% 

 

 

Maturity

 

 

12/20/2016

 

3/20/2017

 

 

Current rating of tranche 

 

 

BB

 

Ba2

 

 

Current rating of underlying collateral pool 

Aa1-B3

 

Aaa-Caa2

 

 

Number of defaults in underlying collateral pool

 

 

 

Number of entities

 

 

123 

 

99 

 

 

Number of countries

 

 

20 

 

21 

 

 

 

6


 

 

The following summarizes the exposure of the CLN structures’ underlying collateral by industry and rating as of June 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

AA

 

A

 

BBB

 

BB

 

B

 

CCC

 

Total

Financial intermediaries

0.0% 

 

2.1% 

 

7.0% 

 

1.4% 

 

0.0% 

 

0.0% 

 

0.0% 

 

10.5% 

Telecommunications

0.0% 

 

0.0% 

 

5.0% 

 

5.0% 

 

0.0% 

 

0.5% 

 

0.0% 

 

10.5% 

Oil and gas

0.4% 

 

2.1% 

 

1.0% 

 

4.6% 

 

0.0% 

 

0.0% 

 

0.0% 

 

8.1% 

Utilities

0.0% 

 

0.0% 

 

2.6% 

 

2.0% 

 

0.0% 

 

0.0% 

 

0.0% 

 

4.6% 

Chemicals and plastics

0.0% 

 

0.0% 

 

2.3% 

 

1.2% 

 

0.4% 

 

0.0% 

 

0.0% 

 

3.9% 

Drugs

0.3% 

 

2.2% 

 

1.2% 

 

0.0% 

 

0.0% 

 

0.0% 

 

0.0% 

 

3.7% 

Retailers (except food

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and drug)

0.0% 

 

0.0% 

 

2.1% 

 

0.9% 

 

0.5% 

 

0.0% 

 

0.0% 

 

3.5% 

Industrial equipment

0.0% 

 

0.0% 

 

2.6% 

 

0.7% 

 

0.0% 

 

0.0% 

 

0.0% 

 

3.3% 

Sovereign

0.0% 

 

0.7% 

 

1.2% 

 

1.3% 

 

0.0% 

 

0.0% 

 

0.0% 

 

3.2% 

Conglomerates

0.0% 

 

2.3% 

 

0.9% 

 

0.0% 

 

0.0% 

 

0.0% 

 

0.0% 

 

3.2% 

Forest products

0.0% 

 

0.0% 

 

0.0% 

 

1.6% 

 

1.4% 

 

0.0% 

 

0.0% 

 

3.0% 

Other

0.0% 

 

4.1% 

 

15.4% 

 

17.8% 

 

4.6% 

 

0.3% 

 

0.3% 

 

42.5% 

Total

0.7% 

 

13.5% 

 

41.3% 

 

36.5% 

 

6.9% 

 

0.8% 

 

0.3% 

 

100.0% 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2013

 

 

As of December 31, 2012

 

 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

of

 

 

Notional

 

Carrying

 

 

of

 

 

Notional

 

Carrying

 

Instruments

 

Amounts

 

Value

 

Instruments

 

Amounts

 

Value

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed credit card loan

 

 

N/A

 

 

$

 -

 

$

593 

 

 

 

N/A

 

 

$

 -

 

$

598 

U.S. government bonds

 

 

N/A

 

 

 

 -

 

 

105 

 

 

 

N/A

 

 

 

 -

 

 

110 

Excess mortality swap

 

 

 

 

 

100 

 

 

 -

 

 

 

 

 

 

100 

 

 

 -

Total assets (1)

 

 

 

 

$

100 

 

$

698 

 

 

 

 

 

$

100 

 

$

708 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualifying hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps

 

 

 

 

$

600 

 

$

101 

 

 

 

 

 

$

600 

 

$

128 

Contingent forwards

 

 

 

 

 

 -

 

 

 -

 

 

 

 

 

 

 -

 

 

 -

Total liabilities (2)

 

 

 

 

$

600 

 

$

101 

 

 

 

 

 

$

600 

 

$

128 

 

(1)

Reported in variable interest entities’ fixed maturity securities on our Consolidated Balance Sheets.

(2)

Reported in variable interest entities’ liabilities on our Consolidated Balance Sheets.

 

For details related to the fixed maturity available-for-sale (“AFS”) securities for these VIEs, see Note 4.

 

As described more fully in Note 1 of our 2012 Form 10-K, we regularly review our investment holdings for other-than-temporary impairment (“OTTI”).  Based upon this review, we believe that the AFS fixed maturity securities were not other-than-temporarily impaired as of June 30, 2013.  

 

The gains (losses) for the consolidated VIEs (in millions) recorded on our Consolidated Statements of Comprehensive Income (Loss) were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three

 

For the Six

 

 

Months Ended

 

Months Ended

 

 

June 30,

 

June 30,

 

 

2013

 

2012

 

2013

 

2012

 

Non-Qualifying Hedges

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps

$

11 

 

$

(10)

 

$

27 

 

$

61 

 

Contingent forwards

 

 -

 

 

 -

 

 

 -

 

 

(2)

 

Total non-qualifying hedges (1)

$

11 

 

$

(10)

 

$

27 

 

$

59 

 

 

(1)

Reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

7


 

 

Unconsolidated VIEs

 

See Note 4 in our 2012 Form 10-K for a detailed discussion of our unconsolidated VIEs, which information is incorporated herein by reference.

 

We invest in certain limited partnerships (“LPs”) that operate qualified affordable housing projects that we have concluded are VIEs.  We receive returns from the LPs in the form of income tax credits that are guaranteed by creditworthy third parties, and our exposure to loss is limited to the capital we invest in the LPs.  We are not the primary beneficiary of these VIEs as we do not have the power to direct the most significant activities of the LPs.  Our maximum exposure to loss was $80 million and $92 million as of June 30, 2013, and December 31, 2012, respectively.

 

4.  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 1 in our 2012 Form 10-K, 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 June 30, 2013

 

Amortized

 

Gross Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

OTTI

 

Value

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

63,980 

 

$

4,978 

 

$

929 

 

$

91 

 

$

67,938 

U.S. government bonds

 

378 

 

 

36 

 

 

 

 

 -

 

 

408 

Foreign government bonds

 

508 

 

 

56 

 

 

 -

 

 

 -

 

 

564 

Residential mortgage-backed securities ("RMBS")

 

4,816 

 

 

312 

 

 

10 

 

 

40 

 

 

5,078 

Commercial mortgage-backed securities ("CMBS")

 

857 

 

 

46 

 

 

 

 

17 

 

 

883 

Collateralized debt obligations ("CDOs")

 

174 

 

 

 -

 

 

 

 

 

 

165 

State and municipal bonds

 

3,622 

 

 

442 

 

 

16 

 

 

 -

 

 

4,048 

Hybrid and redeemable preferred securities

 

1,134 

 

 

90 

 

 

73 

 

 

 -

 

 

1,151 

VIEs' fixed maturity securities

 

680 

 

 

18 

 

 

 -

 

 

 -

 

 

698 

Total fixed maturity securities

 

76,149 

 

 

5,978 

 

 

1,039 

 

 

155 

 

 

80,933 

Equity securities

 

192 

 

 

18 

 

 

 

 

 -

 

 

209 

Total AFS securities

$

76,341 

 

$

5,996 

 

$

1,040 

 

$

155 

 

$

81,142 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2012

 

Amortized

 

Gross Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

OTTI

 

Value

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

60,124 

 

$

8,219 

 

$

219 

 

$

108 

 

$

68,016 

U.S. government bonds

 

383 

 

 

59 

 

 

 -

 

 

 -

 

 

442 

Foreign government bonds

 

562 

 

 

92 

 

 

 -

 

 

 -

 

 

654 

RMBS

 

5,763 

 

 

471 

 

 

 

 

60 

 

 

6,171 

CMBS

 

970 

 

 

68 

 

 

16 

 

 

19 

 

 

1,003 

CDOs

 

189 

 

 

 

 

 

 

 

 

180 

State and municipal bonds

 

3,546 

 

 

814 

 

 

 

 

 -

 

 

4,353 

Hybrid and redeemable preferred securities

 

1,181 

 

 

106 

 

 

70 

 

 

 -

 

 

1,217 

VIEs' fixed maturity securities

 

677