Q3 20140930

__________________________________________________________________________________________________________

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

_________________

 

FORM 10-Q

_________________

 

 

(Mark One)

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

 

For the quarterly period ended September 30, 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 October 27, 2014, there were 259,789,727 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

44 

 

 

Forward-Looking Statements – Cautionary Language

44 

 

 

Introduction

45 

 

 

    Executive Summary

45 

 

 

    Critical Accounting Policies and Estimates

46 

 

 

    Acquisitions and Dispositions

48 

 

 

Results of Consolidated Operations

48 

 

 

Results of Annuities

49 

 

 

Results of Retirement Plan Services

55 

 

 

Results of Life Insurance

61 

 

 

Results of Group Protection

67 

 

 

Results of Other Operations

70 

 

 

Realized Gain (Loss) and Benefit Ratio Unlocking

72 

 

 

Consolidated Investments

74 

 

 

Reinsurance

86 

 

 

Review of Consolidated Financial Condition

86 

 

 

   Liquidity and Capital Resources

86 

 

 

Other Matters

90 

 

 

   Other Factors Affecting Our Business

90 

 

 

   Recent Accounting Pronouncements

90 

 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

90 

 

 

 

4.

Controls and Procedures

92 

 

 

 

PART II

 

 

 

 

1.

Legal Proceedings

93 

 

 

 

2.

Unregistered Sales of Equity Securities and Use of Proceeds

93 

 

 

 

6.

Exhibits

93 

 

 

 

 

Signatures

94 

 

 

 

 

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

 

 

September 30,

December 31,

 

 

2014

 

 

2013

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value:

 

 

 

 

 

 

 

 

Fixed maturity securities (amortized cost:  2014 – $78,484; 2013 – $76,353)

 

$

85,348 

 

 

$

80,078 

 

Variable interest entities’ fixed maturity securities (amortized cost:  2014 – $586; 2013 – $682)

 

 

598 

 

 

 

697 

 

Equity securities (cost:  2014 – $217; 2013 – $182)

 

 

234 

 

 

 

201 

 

Trading securities

 

 

2,134 

 

 

 

2,282 

 

Mortgage loans on real estate

 

 

7,466 

 

 

 

7,210 

 

Real estate

 

 

20 

 

 

 

47 

 

Policy loans

 

 

2,677 

 

 

 

2,677 

 

Derivative investments

 

 

1,439 

 

 

 

881 

 

Other investments

 

 

1,469 

 

 

 

1,218 

 

Total investments

 

 

101,385 

 

 

 

95,291 

 

Cash and invested cash

 

 

1,821 

 

 

 

2,364 

 

Deferred acquisition costs and value of business acquired

 

 

8,372 

 

 

 

8,886 

 

Premiums and fees receivable

 

 

448 

 

 

 

420 

 

Accrued investment income

 

 

1,129 

 

 

 

1,029 

 

Reinsurance recoverables

 

 

5,906 

 

 

 

6,041 

 

Funds withheld reinsurance assets

 

 

761 

 

 

 

776 

 

Goodwill

 

 

2,273 

 

 

 

2,273 

 

Other assets

 

 

3,414 

 

 

 

2,730 

 

Separate account assets

 

 

122,937 

 

 

 

117,135 

 

Total assets

 

$

248,446 

 

 

$

236,945 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Future contract benefits

 

$

19,553 

 

 

$

17,251 

 

Other contract holder funds

 

 

74,893 

 

 

 

74,548 

 

Short-term debt

 

 

250 

 

 

 

501 

 

Long-term debt

 

 

5,186 

 

 

 

5,320 

 

Reinsurance related embedded derivatives

 

 

141 

 

 

 

108 

 

Funds withheld reinsurance liabilities

 

 

806 

 

 

 

867 

 

Deferred gain on business sold through reinsurance

 

 

190 

 

 

 

245 

 

Payables for collateral on investments

 

 

3,853 

 

 

 

3,238 

 

Variable interest entities’ liabilities

 

 

17 

 

 

 

27 

 

Other liabilities

 

 

5,168 

 

 

 

4,253 

 

Separate account liabilities

 

 

122,937 

 

 

 

117,135 

 

Total liabilities

 

 

232,994 

 

 

 

223,493 

 

 

 

 

 

 

 

 

 

 

Contingencies and Commitments (See Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock – 10,000,000 shares authorized

 

 

 -

 

 

 

 -

 

Common stock – 800,000,000 shares authorized; 259,786,446 and 262,896,701 shares

 

 

 

 

 

 

 

 

issued and outstanding as of September 30, 2014, and December 31, 2013, respectively

 

 

6,696 

 

 

 

6,876 

 

Retained earnings

 

 

5,834 

 

 

 

5,013 

 

Accumulated other comprehensive income (loss)

 

 

2,922 

 

 

 

1,563 

 

Total stockholders’ equity

 

 

15,452 

 

 

 

13,452 

 

Total liabilities and stockholders’ equity

 

$

248,446 

 

 

$

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

 

For the Nine

 

 

Months Ended

 

Months Ended

 

 

September 30,

 

September 30,

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Insurance premiums

$

741

 

$

672

 

$

2,236

 

$

2,000

 

Fee income

 

1,216

 

 

1,032

 

 

3,448

 

 

2,973

 

Net investment income

 

1,212

 

 

1,180

 

 

3,627

 

 

3,543

 

Realized gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

(6

)

 

(22

)

 

(21

)

 

(61

)

Portion of loss recognized in other comprehensive income

 

2

 

 

3

 

 

10

 

 

9

 

Net other-than-temporary impairment losses on securities

 

 

 

 

 

 

 

 

 

 

 

 

  recognized in earnings

 

(4

)

 

(19

)

 

(11

)

 

(52

)

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

 

 

 

 

 

 

 

 

 

 

 

 

  impairment losses on securities

 

93

 

 

(9

)

 

117

 

 

(53

)

Total realized gain (loss)

 

89

 

 

(28

)

 

106

 

 

(105

)

Amortization of deferred gain on business sold through reinsurance

 

18

 

 

19

 

 

55

 

 

56

 

Other revenues

 

135

 

 

134

 

 

397

 

 

380

 

Total revenues

 

3,411

 

 

3,009

 

 

9,869

 

 

8,847

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Interest credited

 

631

 

 

627

 

 

1,900

 

 

1,871

 

Benefits

 

1,117

 

 

945

 

 

3,275

 

 

2,894

 

Commissions and other expenses

 

995

 

 

928

 

 

2,929

 

 

2,721

 

Interest and debt expense

 

67

 

 

67

 

 

201

 

 

196

 

Total expenses

 

2,810

 

 

2,567

 

 

8,305

 

 

7,682

 

Income (loss) before taxes

 

601

 

 

442

 

 

1,564

 

 

1,165

 

Federal income tax expense (benefit)

 

162

 

 

105

 

 

398

 

 

272

 

Net income (loss)

 

439

 

 

337

 

 

1,166

 

 

893

 

Other comprehensive income (loss), net of tax

 

(277

)

 

(143

)

 

1,359

 

 

(2,058

)

Comprehensive income (loss)

$

162

 

$

194

 

$

2,525

 

$

(1,165

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.69

 

$

1.28

 

$

4.45

 

$

3.35

 

Diluted

 

1.65

 

 

1.23

 

 

4.34

 

 

3.24

 

 

 

 

 

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,

 

 

2014

 

2013

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Balance as of beginning-of-year

$

6,876

 

$

7,121

 

Stock compensation/issued for benefit plans

 

51

 

 

27

 

Retirement of common stock/cancellation of shares

 

(231

)

 

(262

)

Balance as of end-of-period

 

6,696

 

 

6,886

 

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

Balance as of beginning-of-year

 

5,013

 

 

4,044

 

Net income (loss)

 

1,166

 

 

893

 

Retirement of common stock

 

(219

)

 

(88

)

Common stock dividends declared (2014 – $0.48; 2013 – $0.36)

 

(126

)

 

(96

)

Balance as of end-of-period

 

5,834

 

 

4,753

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

Balance as of beginning-of-year

 

1,563

 

 

3,808

 

Other comprehensive income (loss), net of tax

 

1,359

 

 

(2,058

)

Balance as of end-of-period

 

2,922

 

 

1,750

 

Total stockholders’ equity as of end-of-period

$

15,452

 

$

13,389

 

 

 

 

 

 

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,

 

 

2014

 

2013

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

$

1,166

 

$

893

 

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

 

(346

)

 

(355

)

Trading securities purchases, sales and maturities, net

 

223

 

 

90

 

Change in premiums and fees receivable

 

(28

)

 

(47

)

Change in accrued investment income

 

(100

)

 

(96

)

Change in future contract benefits and other contract holder funds

 

224

 

 

18

 

Change in reinsurance related assets and liabilities

 

10

 

 

(207

)

Change in federal income tax accruals

 

198

 

 

262

 

Realized (gain) loss

 

(106

)

 

105

 

Amortization of deferred gain on business sold through reinsurance

 

(55

)

 

(56

)

Other

 

(91

)

 

(103

)

Net cash provided by (used in) operating activities

 

1,095

 

 

504

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of available-for-sale securities

 

(6,127

)

 

(8,719

)

Sales of available-for-sale securities

 

498

 

 

800

 

Maturities of available-for-sale securities

 

3,607

 

 

4,772

 

Purchases of other investments

 

(2,843

)

 

(1,867

)

Sales or maturities of other investments

 

2,597

 

 

1,901

 

Increase (decrease) in payables for collateral on investments

 

615

 

 

(628

)

Other

 

(69

)

 

(73

)

Net cash provided by (used in) investing activities

 

(1,722

)

 

(3,814

)

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Payment of long-term debt, including current maturities

 

(500

)

 

 -

 

Issuance of long-term debt, net of issuance costs

 

 -

 

 

397

 

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

 

7,213

 

 

7,847

 

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

 

(4,162

)

 

(3,910

)

Transfers to and from separate accounts, net

 

(1,914

)

 

(2,158

)

Common stock issued for benefit plans and excess tax benefits

 

23

 

 

1

 

Repurchase of common stock

 

(450

)

 

(350

)

Dividends paid to common and preferred stockholders

 

(126

)

 

(97

)

Net cash provided by (used in) financing activities

 

84

 

 

1,730

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and invested cash

 

(543

)

 

(1,580

)

Cash and invested cash as of beginning-of-year

 

2,364

 

 

4,230

 

Cash and invested cash as of end-of-period

$

1,821

 

$

2,650

 

 

 

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 nine month period ended September 30, 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.

 

Revenue from Contracts with Customers Topic

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”) in order to clarify the principles of recognizing revenue.  ASU 2014-09 establishes the core principle of recognizing revenue to depict the transfer of promised goods or services in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services.  The FASB defines a five-step process that systematically identifies the various components of the revenue recognition process, culminating with the recognition of revenue upon satisfaction of an entity’s performance obligation.  By completing all five steps of the process, the core principles of revenue recognition will be achieved.  The amendments in ASU 2014-09 are effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption prohibited.  We will adopt the requirements of ASU 2014-09 effective January 1, 2017, and are currently evaluating the impact of the adoption on our consolidated financial condition and results of operations.

 

Transfers and Servicing Topic

 

In June 2014, the FASB issued ASU No. 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures” (“ASU 2014-11”) in order to eliminate a distinction in current accounting guidance related to certain repurchase agreements.  The FASB noted that the distinction in the accounting guidance was not warranted because in all types of repurchase transactions the transferor retains exposure to the transferred financial assets and obtains important benefits from those assets through the term of the transaction.  ASU 2014-11 amends current accounting guidance to require repurchase-to-maturity transactions and linked repurchase financings to be accounted for as secured borrowings, which is consistent with the accounting for other repurchase agreements.  In addition, ASU 2014-11 includes new disclosure requirements related to transfers accounted for as sales that are economically similar to repurchase agreements, and information about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings.  The amendments in ASU 2014-11 are effective for annual and interim reporting periods beginning after December 15, 2014, with early adoption prohibited.  Changes in accounting for transactions outstanding on the effective date are reported as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.  The disclosures are not required to be presented for comparative periods before the effective date.  We will adopt the requirements of ASU 2014-11 effective January 1, 2015, and are currently evaluating the impact of the adoption 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 September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount and Date of Issuance

 

 

 

 

$400

 

$200

 

 

 

 

 

December

 

April

 

 

 

 

 

2006

 

2007

 

 

Original attachment point (subordination)

5.50% 

 

2.05% 

 

 

Current attachment point (subordination)

4.21% 

 

1.48% 

 

 

Maturity

12/20/2016

 

3/20/2017

 

 

Current rating of tranche 

BBB-

 

Ba2

 

 

Current rating of underlying reference obligations 

AA - BB

 

AAA - CCC

 

 

Number of defaults in underlying reference obligations

 

 

 

Number of entities

123 

 

99 

 

 

Number of countries

20 

 

21 

 

 

 

6


 

 

The following summarizes the exposure of the CLN structures’ underlying reference obligations by industry and rating as of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

AA

 

A

 

BBB

 

BB

 

B

 

CCC

 

Total

 

Industry

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial intermediaries

0.0% 

 

2.1% 

 

6.7% 

 

1.7% 

 

0.0% 

 

0.0% 

 

0.0% 

 

10.5% 

 

Telecommunications

0.0% 

 

0.0% 

 

4.0% 

 

5.5% 

 

1.4% 

 

0.0% 

 

0.0% 

 

10.9% 

 

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% 

 

1.9% 

 

0.0% 

 

0.0% 

 

0.0% 

 

4.5% 

 

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% 

 

1.2% 

 

1.4% 

 

0.0% 

 

0.0% 

 

0.0% 

 

3.3% 

 

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% 

 

15.5% 

 

17.1% 

 

4.6% 

 

0.7% 

 

0.3% 

 

42.3% 

 

Total

0.6% 

 

13.5% 

 

40.1% 

 

36.6% 

 

8.2% 

 

0.7% 

 

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 September 30, 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

 

 

$

 -

 

$

598 

 

 

 

N/A

 

 

$

 -

 

$

595 

 

U.S. government bonds

 

 

N/A

 

 

 

 -

 

 

 -

 

 

 

N/A

 

 

 

 -

 

 

102 

 

Total return swap

 

 

 

 

 

402 

 

 

 -

 

 

 

 

 

 

361 

 

 

 -

 

Total assets (1)

 

 

 

 

$

402 

 

$

598 

 

 

 

 

 

$

361 

 

$

697 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualifying hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps

 

 

 

 

$

600 

 

$

17 

 

 

 

 

 

$

600 

 

$

27 

 

Contingent forwards

 

 

 

 

 

 -

 

 

 -

 

 

 

 

 

 

 -

 

 

 -

 

Total liabilities (2)

 

 

 

 

$

600 

 

$

17 

 

 

 

 

 

$

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 September 30, 2014.  

 

7


 

 

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 Nine

 

 

Months Ended

 

Months Ended

 

 

September 30,

 

September 30,

 

 

2014

 

2013

 

2014

 

2013

 

Non-Qualifying Hedges

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps

$

(7

)

$

35

 

$

10

 

$

61

 

Contingent forwards

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Total non-qualifying hedges (1)

$

(7

)

$

35

 

$

10

 

$

61

 

 

(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.

 

Effective December 31, 2010, we issued a $500 million long-term senior note in exchange for a corporate bond AFS security of like principal and duration from a non-affiliated VIE.  For a more detailed description of this transaction, see “Unconsolidated VIEs” in Note 4 of our 2013 Form 10-K.  Effective September 30, 2014, we terminated our $500 million long-term senior note financing arrangement and entered into a new transaction with the same non-affiliated VIE whose primary activities are to acquire, hold and issue notes and loans, pay and collect interest on the notes and loans, and enter into derivative instruments.  Under this new transaction, we issued a $697 million long-term senior note to the non-affiliated VIE in exchange for a corporate bond AFS security of like principal and duration that was assigned to one of our subsidiaries.  The outstanding principal balance of this new long-term senior note is variable in nature, moving concurrently with any variability in the face amount of the corporate bond AFS security up to a maximum amount of $1.1 billion.  We have concluded that we are not the primary beneficiary of the non-affiliated VIE because we do not have power over the activities that most significantly affect its economic performance.  In addition, the terms of the senior note provide us with a set-off right with the corporate bond AFS security we purchased from the VIE; therefore, neither appears on our Consolidated Balance Sheets.  The VIE has entered into a total return swap with an unaffiliated third party that supports any necessary principal funding of the corporate bond AFS security required by our subsidiaries while the security is outstanding.   

 

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 $70 million and $77 million as of September 30, 2014, and December 31, 2013, respectively.

 

8


 

 

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.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2014

 

 

Amortized

 

Gross Unrealized

 

Fair

 

 

Cost

 

Gains

 

Losses

 

OTTI

 

Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

68,077 

 

$

6,175 

 

$

369 

 

$

85 

 

$

73,798 

 

U.S. government bonds

 

365 

 

 

38 

 

 

 

 

 -

 

 

402 

 

Foreign government bonds

 

489 

 

 

62 

 

 

 -

 

 

 -

 

 

551 

 

Residential mortgage-backed securities (“RMBS”)

 

4,063 

 

 

267 

 

 

 -

 

 

21 

 

 

4,309 

 

Commercial mortgage-backed securities (“CMBS”)

 

607 

 

 

29 

 

 

 -

 

 

14 

 

 

622 

 

Collateralized loan obligations (“CLOs”)

 

287 

 

 

 -

 

 

 

 

 -

 

 

286 

 

State and municipal bonds

 

3,709 

 

 

716 

 

 

 

 

 -

 

 

4,420 

 

Hybrid and redeemable preferred securities

 

887 

 

 

110 

 

 

37 

 

 

 -

 

 

960 

 

VIEs' fixed maturity securities

 

586 

 

 

12 

 

 

 -

 

 

 -

 

 

598 

 

Total fixed maturity securities

 

79,070 

 

 

7,409 

 

 

413 

 

 

120 

 

 

85,946 

 

Equity securities

 

217 

 

 

17 

 

 

 -

 

 

 -

 

 

234 

 

Total AFS securities

$

79,287 

 

$

7,426 

 

$

413 

 

$

120 

 

$

86,180 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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