8f8a690d991544a

__________________________________________________________________________________________________________

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

_________________

 

FORM 10-Q

_________________

 

 

(Mark One)

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

 

For the quarterly period ended March 31, 2014

 OR

 

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

 

For the transition period from              to              

 

Commission File Number:  1-6028

 

_________________

 

LINCOLN NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

_________________

 

 

 

 

 

                Indiana                

35-1140070

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

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

19087

(Address of principal executive offices)

(Zip Code)

 

 

(484) 583-1400

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

_________________

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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   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 

 

As of April 28, 2014, there were 263,746,176 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

40 

 

 

Forward-Looking Statements – Cautionary Language

40 

 

 

Introduction

41 

 

 

    Executive Summary

41 

 

 

    Critical Accounting Policies and Estimates

42 

 

 

    Acquisitions and Dispositions

44 

 

 

Results of Consolidated Operations

44 

 

 

Results of Annuities

45 

 

 

Results of Retirement Plan Services

50 

 

 

Results of Life Insurance

55 

 

 

Results of Group Protection

61 

 

 

Results of Other Operations

64 

 

 

Realized Gain (Loss) and Benefit Ratio Unlocking

66 

 

 

Consolidated Investments

68 

 

 

Reinsurance

81 

 

 

Review of Consolidated Financial Condition

81 

 

 

   Liquidity and Capital Resources

81 

 

 

Other Matters

85 

 

 

   Other Factors Affecting Our Business

85 

 

 

   Recent Accounting Pronouncements

85 

 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

85 

 

 

 

4.

Controls and Procedures

87 

 

 

 

PART II

 

 

 

 

1.

Legal Proceedings

88 

 

 

 

2.

Unregistered Sales of Equity Securities and Use of Proceeds

88 

 

 

 

6.

Exhibits

88 

 

 

 

 

Signatures

89 

 

 

 

 

Exhibit Index for the Report on Form 10-Q

E-1

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements

0


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

As of

 

 

March 31,

December 31,

 

 

2014

 

 

2013

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value:

 

 

 

 

 

 

 

 

Fixed maturity securities (amortized cost:  2014 – $77,263; 2013 – $76,353)

 

$

82,988 

 

 

$

80,078 

 

Variable interest entities' fixed maturity securities (amortized cost:  2014 – $583; 2013 – $682)

 

 

597 

 

 

 

697 

 

Equity securities (cost:  2014 – $186; 2013 – $182)

 

 

207 

 

 

 

201 

 

Trading securities

 

 

2,316 

 

 

 

2,282 

 

Mortgage loans on real estate

 

 

7,089 

 

 

 

7,210 

 

Real estate

 

 

42 

 

 

 

47 

 

Policy loans

 

 

2,687 

 

 

 

2,677 

 

Derivative investments

 

 

1,044 

 

 

 

881 

 

Other investments

 

 

1,237 

 

 

 

1,218 

 

Total investments

 

 

98,207 

 

 

 

95,291 

 

Cash and invested cash

 

 

1,849 

 

 

 

2,364 

 

Deferred acquisition costs and value of business acquired

 

 

8,454 

 

 

 

8,886 

 

Premiums and fees receivable

 

 

504 

 

 

 

420 

 

Accrued investment income

 

 

1,116 

 

 

 

1,029 

 

Reinsurance recoverables

 

 

5,984 

 

 

 

6,041 

 

Funds withheld reinsurance assets

 

 

772 

 

 

 

776 

 

Goodwill

 

 

2,273 

 

 

 

2,273 

 

Other assets

 

 

3,822 

 

 

 

2,730 

 

Separate account assets

 

 

118,968 

 

 

 

117,135 

 

Total assets

 

$

241,949 

 

 

$

236,945 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Future contract benefits

 

$

18,997 

 

 

$

17,251 

 

Other contract holder funds

 

 

74,507 

 

 

 

74,548 

 

Short-term debt

 

 

 -

 

 

 

501 

 

Long-term debt

 

 

5,380 

 

 

 

5,320 

 

Reinsurance related embedded derivatives

 

 

135 

 

 

 

108 

 

Funds withheld reinsurance liabilities

 

 

843 

 

 

 

867 

 

Deferred gain on business sold through reinsurance

 

 

226 

 

 

 

245 

 

Payables for collateral on investments

 

 

3,519 

 

 

 

3,238 

 

Variable interest entities' liabilities

 

 

22 

 

 

 

27 

 

Other liabilities

 

 

4,866 

 

 

 

4,253 

 

Separate account liabilities

 

 

118,968 

 

 

 

117,135 

 

Total liabilities

 

 

227,463 

 

 

 

223,493 

 

 

 

 

 

 

 

 

 

 

Contingencies and Commitments (See Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Preferred stock – 10,000,000 shares authorized

 

 

 -

 

 

 

 -

 

Common stock – 800,000,000 shares authorized; 263,682,162 and 262,896,701 shares

 

 

 

 

 

 

 

 

issued and outstanding as of March 31, 2014, and December 31, 2013, respectively

 

 

6,805 

 

 

 

6,876 

 

Retained earnings

 

 

5,228 

 

 

 

5,013 

 

Accumulated other comprehensive income (loss)

 

 

2,453 

 

 

 

1,563 

 

Total stockholders' equity

 

 

14,486 

 

 

 

13,452 

 

Total liabilities and stockholders' equity

 

$

241,949 

 

 

$

236,945 

 

 

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

 

 

Months Ended

 

 

March 31,

 

 

2014

 

2013

 

Revenues

 

 

 

 

 

 

Insurance premiums

$

739

 

$

654

 

Fee income

 

1,098

 

 

958

 

Net investment income

 

1,208

 

 

1,150

 

Realized gain (loss):

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

(10

)

 

(20

)

Portion of loss recognized in other comprehensive income

 

7

 

 

6

 

Net other-than-temporary impairment losses on securities recognized in earnings

 

(3

)

 

(14

)

Realized gain (loss), excluding other-than-temporary impairment losses on securities

 

(15

)

 

(45

)

Total realized gain (loss)

 

(18

)

 

(59

)

Amortization of deferred gain on business sold through reinsurance

 

19

 

 

19

 

Other revenues

 

130

 

 

117

 

Total revenues

 

3,176

 

 

2,839

 

Expenses

 

 

 

 

 

 

Interest credited

 

633

 

 

617

 

Benefits

 

1,078

 

 

958

 

Commissions and other expenses

 

971

 

 

895

 

Interest and debt expense

 

67

 

 

64

 

Total expenses

 

2,749

 

 

2,534

 

Income (loss) before taxes

 

427

 

 

305

 

Federal income tax expense (benefit)

 

98

 

 

66

 

Net income (loss)

 

329

 

 

239

 

Other comprehensive income (loss), net of tax

 

890

 

 

(227

)

Comprehensive income (loss)

$

1,219

 

$

12

 

 

 

 

 

 

 

 

Net Income (Loss) Per Common Share

 

 

 

 

 

 

Basic

$

1.25

 

$

0.89

 

Diluted

 

1.21

 

 

0.86

 

 

 

 

 

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 Three

 

 

Months Ended

 

 

March 31,

 

 

2014

 

2013

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Balance as of beginning-of-year

$

6,876

 

$

7,121

 

Stock compensation/issued for benefit plans

 

7

 

 

10

 

Retirement of common stock/cancellation of shares

 

(78

)

 

(88

)

Balance as of end-of-period

 

6,805

 

 

7,043

 

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

Balance as of beginning-of-year

 

5,013

 

 

4,044

 

Net income (loss)

 

329

 

 

239

 

Retirement of common stock

 

(72

)

 

(12

)

Common stock dividends declared (2014 – $0.16; 2013 – $0.12)

 

(42

)

 

(33

)

Balance as of end-of-period

 

5,228

 

 

4,238

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

Balance as of beginning-of-year

 

1,563

 

 

3,808

 

Other comprehensive income (loss), net of tax

 

890

 

 

(227

)

Balance as of end-of-period

 

2,453

 

 

3,581

 

Total stockholders' equity as of end-of-period

$

14,486

 

$

14,862

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements

3


 

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)

 

 

 

 

 

 

 

 

 

 

For the Three

 

 

Months Ended

 

 

March 31,

 

 

2014

 

2013

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

$

329

 

$

239

 

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

 

(95

)

 

(77

)

Trading securities purchases, sales and maturities, net

 

11

 

 

12

 

Change in premiums and fees receivable

 

(84

)

 

(60

)

Change in accrued investment income

 

(87

)

 

(63

)

Change in future contract benefits and other contract holder funds

 

233

 

 

(208

)

Change in reinsurance related assets and liabilities

 

21

 

 

(112

)

Change in federal income tax accruals

 

48

 

 

66

 

Realized (gain) loss

 

18

 

 

59

 

Amortization of deferred gain on business sold through reinsurance

 

(19

)

 

(19

)

Other

 

(112

)

 

(88

)

Net cash provided by (used in) operating activities

 

263

 

 

(251

)

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of available-for-sale securities

 

(2,061

)

 

(3,194

)

Sales of available-for-sale securities

 

160

 

 

189

 

Maturities of available-for-sale securities

 

1,158

 

 

1,882

 

Purchases of other investments

 

(538

)

 

(629

)

Sales or maturities of other investments

 

645

 

 

573

 

Increase (decrease) in payables for collateral on investments

 

281

 

 

(74

)

Other

 

(22

)

 

(36

)

Net cash provided by (used in) investing activities

 

(377

)

 

(1,289

)

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Payment of long-term debt, including current maturities

 

(500

)

 

 -

 

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

 

2,481

 

 

2,517

 

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

 

(1,443

)

 

(1,281

)

Transfers to and from separate accounts, net

 

(743

)

 

(684

)

Common stock issued for benefit plans and excess tax benefits

 

(4

)

 

(2

)

Repurchase of common stock

 

(150

)

 

(100

)

Dividends paid to common and preferred stockholders

 

(42

)

 

(33

)

Net cash provided by (used in) financing activities

 

(401

)

 

417

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and invested cash

 

(515

)

 

(1,123

)

Cash and invested cash as of beginning-of-year

 

2,364

 

 

4,230

 

Cash and invested cash as of end-of-period

$

1,849

 

$

3,107

 

 

 

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, 2013 (“2013 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 2013 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 three month period ended March 31, 2014, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014.  All material inter-company accounts and transactions have been eliminated in consolidation. 

2.  New Accounting Standards

 

Adoption of New Accounting Standards

 

Financial Services – Investment Companies Topic

 

In June 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.  For a more detailed description of ASU 2013-08, see “Future Adoption of New Accounting Standards – Financial Services – Investment Companies Topic” in Note 2 of our 2013 Form 10-K.  We adopted the requirements in ASU 2013-08 effective January 1, 2014, and evaluated all of our entities under the investment company criteria defined in ASU 2013-08.  The adoption of ASU 2013-08 did not have an effect 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.  For a more detailed description of ASU 2013-11, see “Future Adoption of New Accounting Standards – Income Taxes Topic” in Note 2 of our 2013 Form 10-K.  We adopted the requirements of ASU 2013-11 effective January 1, 2014.  The adoption of ASU 2013-11 did not have an effect on the deferred tax asset or liability classification on our balance sheet and did not result in any additional disclosures to our financial statements.

 

Other Expenses Topic

 

In July 2011, the FASB issued ASU No. 2011-06, “Fees Paid to the Federal Government by Health Insurers” (“ASU 2011-06”) in order to address the question of how health insurers should recognize and classify fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act.  For a more detailed description of ASU 2011-06, see “Future Adoption of New Accounting Standards – Other Expenses  Topic” in Note 2 of our 2013 Form 10-K.  We adopted the requirements of ASU 2011-06 effective January 1, 2014.  The adoption of ASU 2011-06 did not have a material effect on our consolidated financial condition and results of operations.

 

5


 

Future Adoption of New Accounting Standards

 

Investments – Equity Method and Joint Ventures Topic

 

In January 2014, the FASB issued ASU No. 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects” (“ASU 2014-01”) in response to stakeholders’ feedback that the presence of certain conditions in order to apply the effective yield method to investments in qualified affordable housing projects may be overly restrictive and could result in certain investments being accounted for under a method of accounting that may not fairly represent the economics of the investments.  For a more detailed description of ASU 2014-01, see “Future Adoption of New Accounting Standards – Investments – Equity Method and Joint Ventures” in Note 2 of our 2013 Form 10-K.    We will adopt the requirements of ASU 2014-01 effective January 1, 2015, and do not expect the adoption will have a material effect on our consolidated financial condition and results of operations.

 

3.  Variable Interest Entities (“VIEs”)

 

Consolidated VIEs

 

See Note 4 in our 2013 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 March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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-B1

 

Aaa-Caa2

 

 

Number of defaults in underlying collateral pool

 

 

 

Number of entities

124 

 

99 

 

 

Number of countries

20 

 

21 

 

 

 

The following summarizes the exposure of the CLN structures’ underlying reference portfolios by industry and rating as of March 31, 2014:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

AA

 

A

 

BBB

 

BB

 

B

 

CCC

 

Total

 

Industry

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial intermediaries

0.0% 

 

2.1% 

 

6.3% 

 

2.1% 

 

0.0% 

 

0.0% 

 

0.0% 

 

10.5% 

 

Telecommunications

0.0% 

 

0.0% 

 

3.5% 

 

5.5% 

 

2.0% 

 

0.0% 

 

0.0% 

 

11.0% 

 

Oil and gas

0.3% 

 

2.1% 

 

1.0% 

 

4.6% 

 

0.0% 

 

0.0% 

 

0.0% 

 

8.0% 

 

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% 

 

0.3% 

 

0.0% 

 

0.0% 

 

3.8% 

 

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% 

 

1.5% 

 

1.0% 

 

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% 

 

0.5% 

 

1.1% 

 

1.4% 

 

0.0% 

 

0.0% 

 

3.0% 

 

Other

0.0% 

 

4.6% 

 

15.0% 

 

17.4% 

 

4.2% 

 

0.7% 

 

0.3% 

 

42.2% 

 

Total

0.6% 

 

14.0% 

 

39.5% 

 

36.5% 

 

8.4% 

 

0.7% 

 

0.3% 

 

100.0% 

 

 

6


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2014

 

 

As of December 31, 2013

 

 

 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

of

 

 

Notional

 

Carrying

 

 

of

 

 

Notional

 

Carrying

 

 

Instruments

 

Amounts

 

Value

 

Instruments

 

Amounts

 

Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed credit card loans

 

 

N/A

 

 

$

 -

 

$

597 

 

 

 

N/A

 

 

$

 -

 

$

595 

 

U.S. government bonds

 

 

N/A

 

 

 

 -

 

 

 -

 

 

 

N/A

 

 

 

 -

 

 

102 

 

Total return swap

 

 

 

 

 

361 

 

 

 -

 

 

 

 

 

 

361 

 

 

 -

 

Total assets (1)

 

 

 

 

$

361 

 

$

597 

 

 

 

 

 

$

361 

 

$

697 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualifying hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps

 

 

 

 

$

600 

 

$

22 

 

 

 

 

 

$

600 

 

$

27 

 

Contingent forwards

 

 

 

 

 

 -

 

 

 -

 

 

 

 

 

 

 -

 

 

 -

 

Total liabilities (2)

 

 

 

 

$

600 

 

$

22 

 

 

 

 

 

$

600 

 

$

27 

 

 

(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 2013 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 March 31, 2014.  

 

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

 

 

 

 

 

 

 

 

 

For the Three

 

 

Months Ended

 

 

March 31,

 

 

2014

 

2013

 

Non-Qualifying Hedges

 

 

 

 

 

 

Credit default swaps

$

 

$

15 

 

Contingent forwards

 

 -

 

 

 -

 

Total non-qualifying hedges (1)

$

 

$

15 

 

 

(1)

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

 

Unconsolidated VIEs

 

See Note 4 in our 2013 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 $77 million as of March 31, 2014, and December 31, 2013, respectively.

 

4.  Investments

 

AFS Securities

 

See Note 1 in our 2013 Form 10-K for information regarding our accounting policy relating to AFS securities, which also includes additional disclosures regarding our fair value measurements.

 

7


 

The amortized cost, gross unrealized gains, losses and OTTI and fair value of AFS securities (in millions) were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2014

 

 

Amortized

 

Gross Unrealized

 

Fair

 

 

Cost

 

Gains

 

Losses

 

OTTI

 

Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

66,853 

 

$

5,516 

 

$

594 

 

$

94 

 

$

71,681 

 

U.S. government bonds

 

363 

 

 

32 

 

 

 

 

 -

 

 

388 

 

Foreign government bonds

 

503 

 

 

56 

 

 

 -

 

 

 -

 

 

559 

 

Residential mortgage-backed securities (“RMBS”)

 

4,003 

 

 

266 

 

 

 

 

27 

 

 

4,241 

 

Commercial mortgage-backed securities (“CMBS”)

 

685 

 

 

36 

 

 

 

 

17 

 

 

703 

 

Collateralized Loan Obligations (“CLOs”)

 

246 

 

 

 

 

 -

 

 

 

 

241 

 

State and municipal bonds

 

3,693 

 

 

523 

 

 

12 

 

 

 -

 

 

4,204 

 

Hybrid and redeemable preferred securities

 

917 

 

 

97 

 

 

43 

 

 

 -

 

 

971 

 

VIEs' fixed maturity securities

 

583 

 

 

14 

 

 

 -

 

 

 -

 

 

597 

 

Total fixed maturity securities

 

77,846 

 

 

6,541 

 

 

658 

 

 

144 

 

 

83,585 

 

Equity securities

 

186 

 

 

21 

 

 

 -

 

 

 -

 

 

207 

 

Total AFS securities

$

78,032 

 

$

6,562 

 

$

658 

 

$

144 

 

$

83,792 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013

 

 

Amortized

 

Gross Unrealized

 

Fair

 

 

Cost

 

Gains

 

Losses

 

OTTI

 

Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

65,808 

 

$

4,374 

 

$

1,157 

 

$

90 

 

$

68,935 

 

U.S. government bonds

 

355 

 

 

26 

 

 

14 

 

 

 -

 

 

367 

 

Foreign government bonds

 

505 

 

 

45 

 

 

 

 

 -

 

 

549 

 

RMBS

 

4,135 

 

 

256 

 

 

10 

 

 

31 

 

 

4,350 

 

CMBS

 

713 

 

 

36 

 

 

 

 

17 

 

 

728 

 

CLOs

 

232 

 

 

 -

 

 

 

 

 

 

225 

 

State and municipal bonds

 

3,638 

 

 

308 

 

 

27 

 

 

 -

 

 

3,919 

 

Hybrid and redeemable preferred securities

 

967 

 

 

89 

 

 

51 

 

 

 -

 

 

1,005 

 

VIEs' fixed maturity securities

 

682 

 

 

15 

 

 

 -

 

 

 -

 

 

697 

 

Total fixed maturity securities

 

77,035 

 

 

5,149 

 

 

1,265 

 

 

144 

 

 

80,775 

 

Equity securities

 

182 

 

 

19 

 

 

 -

 

 

 -

 

 

201 

 

Total AFS securities

$

77,217 

 

$

5,168 

 

$

1,265 

 

$

144 

 

$

80,976 

 

 

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of March 31, 2014, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Fair

 

 

Cost

 

Value

 

Due in one year or less

$

2,539 

 

$

2,597 

 

Due after one year through five years

 

16,026 

 

 

17,422 

 

Due after five years through ten years

 

23,582 

 

 

24,703 

 

Due after ten years

 

30,765 

 

 

33,678 

 

Subtotal

 

72,912 

 

 

78,400 

 

Mortgage-backed securities (“MBS”)

 

4,688 

 

 

4,944 

 

CLOs

 

246 

 

 

241 

 

Total fixed maturity AFS securities

$

77,846 

 

$

83,585 

 

 

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

 

8


 

The fair value and gross unrealized losses, including the portion of OTTI recognized in other comprehensive income (loss) (“OCI”), of AFS securities (dollars in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows: