Q2 20150331

__________________________________________________________________________________________________________

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 June 30, 2015

 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 July 27, 2015, there were 250,951,872 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

46 

 

 

Forward-Looking Statements – Cautionary Language

46 

 

 

Introduction

47 

 

 

    Executive Summary

47 

 

 

    Critical Accounting Policies and Estimates

48 

 

 

    Acquisitions and Dispositions

50 

 

 

Results of Consolidated Operations

50 

 

 

Results of Annuities

52 

 

 

Results of Retirement Plan Services

57 

 

 

Results of Life Insurance

63 

 

 

Results of Group Protection

69 

 

 

Results of Other Operations

72 

 

 

Realized Gain (Loss) and Benefit Ratio Unlocking

74 

 

 

Consolidated Investments

76 

 

 

Reinsurance

88 

 

 

Review of Consolidated Financial Condition

88 

 

 

   Liquidity and Capital Resources

88 

 

 

Other Matters

91 

 

 

   Other Factors Affecting Our Business

91 

 

 

   Recent Accounting Pronouncements

91 

 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

92 

 

 

 

4.

Controls and Procedures

94 

 

 

 

PART II

 

 

 

 

1.

Legal Proceedings

95 

 

 

 

2.

Unregistered Sales of Equity Securities and Use of Proceeds

95 

 

 

 

6.

Exhibits

95 

 

 

 

 

Signatures

96 

 

 

 

 

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,

 

 

2015

 

 

2014

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value:

 

 

 

 

 

 

 

 

Fixed maturity securities (amortized cost:  2015 – $80,456; 2014 – $78,609)

 

$

85,422 

 

 

$

86,240 

 

Variable interest entities’ fixed maturity securities (amortized cost:  2015 – $593; 2014 – $587)

 

 

598 

 

 

 

598 

 

Equity securities (cost:  2015 – $213; 2014 – $216)

 

 

227 

 

 

 

231 

 

Trading securities

 

 

1,949 

 

 

 

2,065 

 

Mortgage loans on real estate

 

 

8,171 

 

 

 

7,574 

 

Real estate

 

 

24 

 

 

 

20 

 

Policy loans

 

 

2,654 

 

 

 

2,670 

 

Derivative investments

 

 

1,340 

 

 

 

1,860 

 

Other investments

 

 

1,624 

 

 

 

1,709 

 

Total investments

 

 

102,009 

 

 

 

102,967 

 

Cash and invested cash

 

 

2,327 

 

 

 

3,919 

 

Deferred acquisition costs and value of business acquired

 

 

9,150 

 

 

 

8,207 

 

Premiums and fees receivable

 

 

415 

 

 

 

473 

 

Accrued investment income

 

 

1,064 

 

 

 

1,049 

 

Reinsurance recoverables

 

 

5,608 

 

 

 

5,730 

 

Funds withheld reinsurance assets

 

 

642 

 

 

 

649 

 

Goodwill

 

 

2,273 

 

 

 

2,273 

 

Other assets

 

 

3,647 

 

 

 

2,845 

 

Separate account assets

 

 

128,079 

 

 

 

125,265 

 

Total assets

 

$

255,214 

 

 

$

253,377 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Future contract benefits

 

$

20,166 

 

 

$

20,057 

 

Other contract holder funds

 

 

76,243 

 

 

 

75,512 

 

Short-term debt

 

 

 -

 

 

 

250 

 

Long-term debt

 

 

5,529 

 

 

 

5,270 

 

Reinsurance related embedded derivatives

 

 

120 

 

 

 

150 

 

Funds withheld reinsurance liabilities

 

 

718 

 

 

 

764 

 

Deferred gain on business sold through reinsurance

 

 

134 

 

 

 

171 

 

Payables for collateral on investments

 

 

4,587 

 

 

 

4,409 

 

Variable interest entities’ liabilities

 

 

 

 

 

13 

 

Other liabilities

 

 

4,936 

 

 

 

5,776 

 

Separate account liabilities

 

 

128,079 

 

 

 

125,265 

 

Total liabilities

 

 

240,515 

 

 

 

237,637 

 

 

 

 

 

 

 

 

 

 

Contingencies and Commitments (See Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock – 10,000,000 shares authorized

 

 

 -

 

 

 

 -

 

Common stock – 800,000,000 shares authorized; 250,918,893 and 256,551,440 shares

 

 

 

 

 

 

 

 

issued and outstanding as of June 30, 2015, and December 31, 2014, respectively

 

 

6,469 

 

 

 

6,622 

 

Retained earnings

 

 

6,286 

 

 

 

6,022 

 

Accumulated other comprehensive income (loss)

 

 

1,944 

 

 

 

3,096 

 

Total stockholders’ equity

 

 

14,699 

 

 

 

15,740 

 

 Total liabilities and stockholders’ equity

 

$

255,214 

 

 

$

253,377 

 

 

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,

 

 

2015

 

2014

 

2015

 

2014

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Insurance premiums

$

782

 

$

755

 

$

1,572

 

$

1,494

 

Fee income

 

1,239

 

 

1,134

 

 

2,460

 

 

2,232

 

Net investment income

 

1,187

 

 

1,207

 

 

2,374

 

 

2,415

 

Realized gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

(14

)

 

(5

)

 

(35

)

 

(15

)

Portion of loss recognized in other comprehensive income

 

7

 

 

2

 

 

15

 

 

8

 

Net other-than-temporary impairment losses on securities

 

 

 

 

 

 

 

 

 

 

 

 

recognized in earnings

 

(7

)

 

(3

)

 

(20

)

 

(7

)

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

 

 

 

 

 

 

 

 

 

 

 

 

impairment losses on securities

 

17

 

 

38

 

 

(18

)

 

23

 

Total realized gain (loss)

 

10

 

 

35

 

 

(38

)

 

16

 

Amortization of deferred gain on business sold through reinsurance

 

18

 

 

18

 

 

37

 

 

37

 

Other revenues

 

145

 

 

133

 

 

280

 

 

263

 

 Total revenues

 

3,381

 

 

3,282

 

 

6,685

 

 

6,457

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Interest credited

 

629

 

 

636

 

 

1,254

 

 

1,269

 

Benefits

 

1,220

 

 

1,079

 

 

2,456

 

 

2,157

 

Commissions and other expenses

 

1,014

 

 

963

 

 

2,027

 

 

1,934

 

Interest and debt expense

 

69

 

 

67

 

 

137

 

 

134

 

Total expenses

 

2,932

 

 

2,745

 

 

5,874

 

 

5,494

 

Income (loss) before taxes

 

449

 

 

537

 

 

811

 

 

963

 

Federal income tax expense (benefit)

 

105

 

 

139

 

 

167

 

 

236

 

Net income (loss)

 

344

 

 

398

 

 

644

 

 

727

 

Other comprehensive income (loss), net of tax

 

(1,709

)

 

746

 

 

(1,152

)

 

1,636

 

Comprehensive income (loss)

$

(1,365

)

$

1,144

 

$

(508

)

$

2,363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.37

 

$

1.52

 

$

2.54

 

$

2.77

 

Diluted

 

1.35

 

 

1.48

 

 

2.50

 

 

2.69

 

 

 

 

 

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,

 

 

2015

 

2014

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Balance as of beginning-of-year

$

6,622

 

$

6,876

 

Stock compensation/issued for benefit plans

 

68

 

 

20

 

Retirement of common stock/cancellation of shares

 

(221

)

 

(157

)

Balance as of end-of-period

 

6,469

 

 

6,739

 

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

Balance as of beginning-of-year

 

6,022

 

 

5,013

 

Net income (loss)

 

644

 

 

727

 

Retirement of common stock

 

(279

)

 

(143

)

Common stock dividends declared (2015 – $0.40; 2014 – $0.32)

 

(101

)

 

(84

)

Balance as of end-of-period

 

6,286

 

 

5,513

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

Balance as of beginning-of-year

 

3,096

 

 

1,563

 

Other comprehensive income (loss), net of tax

 

(1,152

)

 

1,636

 

Balance as of end-of-period

 

1,944

 

 

3,199

 

Total stockholders’ equity as of end-of-period

$

14,699

 

$

15,451

 

 

 

 

 

 

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,

 

 

2015

 

2014

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

$

644

 

$

727

 

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

 

(176

)

 

(213

)

Trading securities purchases, sales and maturities, net

 

86

 

 

25

 

Change in premiums and fees receivable

 

58

 

 

(45

)

Change in accrued investment income

 

(15

)

 

(52

)

Change in future contract benefits and other contract holder funds

 

17

 

 

188

 

Change in reinsurance related assets and liabilities

 

(14

)

 

(33

)

Change in accrued expenses

 

(118

)

 

(158

)

Change in federal income tax accruals

 

(54

)

 

86

 

Realized (gain) loss

 

38

 

 

(16

)

Amortization of deferred gain on business sold through reinsurance

 

(37

)

 

(37

)

Other

 

153

 

 

(101

)

Net cash provided by (used in) operating activities

 

582

 

 

371

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of available-for-sale securities

 

(4,451

)

 

(4,186

)

Sales of available-for-sale securities

 

414

 

 

173

 

Maturities of available-for-sale securities

 

2,085

 

 

2,476

 

Purchases of other investments

 

(7,415

)

 

(1,322

)

Sales or maturities of other investments

 

7,109

 

 

1,452

 

Increase (decrease) in payables for collateral on investments

 

176

 

 

333

 

Other

 

(52

)

 

(31

)

Net cash provided by (used in) investing activities

 

(2,134

)

 

(1,105

)

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Payment of long-term debt, including current maturities

 

(250

)

 

(500

)

Issuance of long-term debt, net of issuance costs

 

298

 

 

 -

 

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

 

4,966

 

 

4,884

 

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

 

(3,135

)

 

(2,765

)

Transfers to and from separate accounts, net

 

(1,361

)

 

(1,356

)

Common stock issued for benefit plans and excess tax benefits

 

44

 

 

 -

 

Repurchase of common stock

 

(500

)

 

(300

)

Dividends paid to common stockholders

 

(102

)

 

(84

)

Net cash provided by (used in) financing activities

 

(40

)

 

(121

)

 

 

 

 

 

 

 

Net increase (decrease) in cash and invested cash

 

(1,592

)

 

(855

)

Cash and invested cash as of beginning-of-year

 

3,919

 

 

2,364

 

Cash and invested cash as of end-of-period

$

2,327

 

$

1,509

 

 

 

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 universal life insurance (“IUL”), 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 accounting principles generally accepted in the United States of America (“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, 2014 (“2014 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 2014 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, 2015, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015.  All material inter-company accounts and transactions have been eliminated in consolidation. 

 

 

5


 

 

2.  New Accounting Standards

 

Adoption of New Accounting Standards

 

The following table provides a description of our adoption of new Accounting Standard Updates (“ASU”) issued by the Financial Accounting Standards Board and the impact of the adoption on our financial statements:

 

 

 

Standard

Description

Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects

This standard permits an entity to make an accounting policy to use the proportional amortization method of accounting to recognize investments in qualified affordable housing projects, if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Entities that previously applied the effective yield method to investments in qualified affordable housing prior to the adoption of this standard may continue to apply the effective yield method to those pre-existing investments.

January 1, 2015

The adoption of this ASU did not have an effect on our consolidated financial condition and results of operations.

ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures

This standard eliminates a distinction in current GAAP related to certain repurchase agreements, and amends current GAAP to require repurchase-to-maturity transactions and linked repurchase financings to be accounted for as secured borrowings; consistent with the accounting for other repurchase agreements.  The standard also 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 new disclosures are not required for comparative periods before the effective date.

January 1, 2015, except for disclosures related to collateral pledged that were adopted for the interim period ended June 30, 2015.

The adoption of this ASU did not have an effect on our consolidated financial condition and results of operations. 

 

6


 

 

Future Adoption of New Accounting Standards

 

The following table provides a description of future adoptions of new accounting standards that may have an impact on our financial statements when adopted:

 

Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2014-09, Revenue from Contracts with Customers

This standard establishes the core principle of recognizing revenue to depict the transfer of promised goods and services.  The amendments define 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.  Retrospective application is required, and early adoption is not permitted. 

January 1, 2017

We will adopt the accounting guidance in this standard for non-insurance related products and services, and are currently evaluating the impact of adoption on our consolidated financial condition and results of operations.

ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity

This standard clarifies that when considering the nature of the host contract in a hybrid financial instrument issued in the form of a share; an entity must consider all of the stated and implied substantive terms of the hybrid instrument, including the embedded derivative feature that is being considered for separate accounting from the host contract.  Early adoption of this standard is permitted, and application is under a modified retrospective basis to existing hybrid financial instruments that are within the scope of the standard.

January 1, 2016

We are currently evaluating the impact of adopting this standard on our consolidated financial condition and results of operations.

ASU 2015-02, Amendments to the Consolidation Analysis

This standard is intended to improve consolidation accounting guidance related to limited partnerships, limited liability corporations and securitization structures.  The new standard includes changes to existing consolidation models that will eliminate the presumption that a general partner should consolidate a limited partnership, clarify when fees paid to a decision maker should be a factor in the variable interest entities (“VIEs”) consolidation evaluation and reduce the VIEs consolidation models from two to one by eliminating the indefinite deferral for certain investment funds.  Early adoption is permitted, including adoption in an interim period.

January 1, 2016

We are currently evaluating the impact of adopting this standard on our consolidated financial condition and results of operations.

ASU 2015-03,

Simplifying the Presentation of Debt Issuance Costs

Under current accounting guidance, debt issuance costs are recognized as a deferred charge in the balance sheet.  This amendment requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of that debt.  This standard does not change the recognition and measurement requirements related to debt issuance costs.  Early adoption of this standard is permitted, and retrospective application is required for all periods presented in the financial statements.

January 1, 2016

We will appropriately classify all of our debt issuance costs in accordance with this ASU as of the required effective date.

7


 

 

ASU 2015-05,

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

This standard clarifies the accounting requirements for recognizing cloud computing arrangements.  If an entity purchases a software license through a cloud computing arrangement, the software license should be accounted for in a manner consistent with the acquisition of other software licenses.  If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract.  Early adoption of this standard is permitted, and the amendments can be adopted either prospectively or retrospectively. 

January 1, 2016

We are currently evaluating the impact of adopting this standard on our consolidated financial condition and results of operations.

Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2015-07, Disclosures for Certain Investments That Calculate Net Asset Value per Share (or its Equivalent)

This standard removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient.  In addition, the standard also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient, and limits those disclosures only to those investments for which the practical expedient has been elected.  Early adoption is permitted, and the disclosures must be provided retrospectively for all periods presented in the financial statements.

January 1, 2016

We are currently evaluating these disclosure changes and will appropriately amend our financial statement disclosures in accordance with this standard as of the adoption date.

ASU 2015-09, Disclosures about Short-Duration Contracts

This standard enhances the disclosure requirements related to short-duration insurance contracts.  The new disclosure requirements focus on providing users of financial statements with more transparent information about an insurance entity’s (1) initial claims estimates and subsequent adjustments to those estimates, (2) methodologies and judgments in estimating claims, and (3) timing, frequency and severity of claims.  Early application of this standard is permitted, and retrospective application is required for each comparative period presented, except for those requirements that apply only to the current period.

Annual periods beginning January 1, 2016; interim and annual periods beginning January 1, 2017.

We are currently evaluating these disclosure changes and will provide the additional disclosures upon adoption.

  

3.  Variable Interest Entities

 

Consolidated VIEs

 

See Note 4 in our 2014 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, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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+

 

BB

 

 

Current rating of underlying reference obligations 

AA - B

 

AAA - CCC

 

 

Number of defaults in underlying reference obligations

 

 

 

Number of entities

123 

 

99 

 

 

Number of countries

20 

 

21 

 

 

 

8


 

 

The following summarizes the exposure of the CLN structures’ underlying reference obligations by industry and rating as of June 30, 2015:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

AA

 

A

 

BBB

 

BB

 

B

 

CCC

 

Total

 

Industry

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial intermediaries

0.0% 

 

2.1% 

 

5.4% 

 

3.1% 

 

0.0% 

 

0.0% 

 

0.0% 

 

10.6% 

 

Telecommunications

0.0% 

 

0.0% 

 

3.0% 

 

6.6% 

 

0.9% 

 

0.5% 

 

0.0% 

 

11.0% 

 

Oil and gas

0.3% 

 

2.1% 

 

1.3% 

 

3.4% 

 

0.9% 

 

0.0% 

 

0.0% 

 

8.0% 

 

Utilities

0.0% 

 

0.0% 

 

1.6% 

 

3.0% 

 

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% 

 

1.6% 

 

1.8% 

 

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% 

 

2.1% 

 

0.7% 

 

0.0% 

 

0.0% 

 

0.0% 

 

2.8% 

 

Sovereign

0.0% 

 

0.7% 

 

1.6% 

 

0.7% 

 

0.3% 

 

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% 

 

0.5% 

 

1.1% 

 

1.4% 

 

0.0% 

 

0.0% 

 

3.0% 

 

Other

0.0% 

 

4.1% 

 

14.2% 

 

17.4% 

 

5.8% 

 

0.7% 

 

0.3% 

 

42.5% 

 

Total

0.6% 

 

12.9% 

 

36.8% 

 

38.1% 

 

10.1% 

 

1.2% 

 

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, 2015

 

 

As of December 31, 2014

 

 

 

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

 

 

$

 -

 

$

598 

 

Total return swap

 

 

 

 

 

438 

 

 

 -

 

 

 

 

 

 

423 

 

 

 -

 

Total assets (1)

 

 

 

 

$

438 

 

$

598 

 

 

 

 

 

$

423 

 

$

598 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualifying hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps

 

 

 

 

$

600 

 

$

 

 

 

 

 

$

600 

 

$

13 

 

Contingent forwards

 

 

 

 

 

 -

 

 

 -

 

 

 

 

 

 

 -

 

 

 -

 

Total liabilities (2)

 

 

 

 

$

600 

 

$

 

 

 

 

 

$

600 

 

$

13 

 

 

(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 underlying these VIEs, see Note 4.

 

As described more fully in Note 1 of our 2014 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, 2015.  

 

9


 

 

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,

 

 

 

2015

 

2014

 

2015

 

2014

 

Non-Qualifying Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps

 

$

 

$

12 

 

$

10 

 

$

17 

 

Contingent forwards

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Total non-qualifying hedges (1)

 

$

 

$

12 

 

$

10 

 

$

17 

 

 

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

 

Unconsolidated VIEs

 

See Note 4 in our 2014 Form 10-K for a detailed discussion of our unconsolidated VIEs, which information is incorporated herein by reference.

 

Qualified Affordable Housing Projects

 

We invest in certain limited partnerships (“LPs”) that operate qualified affordable housing projects that we have concluded are VIEs.  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.  We receive returns from the LPs in the form of income tax credits and other tax benefits, which are recognized in federal income tax expense (benefit) on our Consolidated Statements of Comprehensive Income (Loss) and were less than $1 million for the six months ended June 30, 2015 and 2014.  The carrying amount of our investments in qualified affordable housing projects is recognized in other investments on our Consolidated Balance Sheets and was $54 million and $60 million as of June 30, 2015, and December 31, 2014, respectively.  Our exposure to loss is limited to the capital we invest in the LPs, and we do not have any contingent commitments to provide additional capital funding to these LPs.  There have been no indicators of impairment that would require us to recognize an impairment loss related to these LPs due to forfeiture, ineligibility of tax credits or for any other circumstances as of June 30, 2015.

 

4.  Investments

 

AFS Securities

 

See Note 1 in our 2014 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 June 30, 2015

 

 

Amortized

 

Gross Unrealized

 

Fair

 

 

Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

69,149

 

$

4,859

 

$

968

 

$

4

 

$

73,036

 

Asset-backed securities ("ABS")

 

1,087

 

 

50

 

 

19

 

 

(15

)

 

1,133

 

U.S. government bonds

 

388

 

 

42

 

 

2

 

 

 -

 

 

428

 

Foreign government bonds

 

472

 

 

68

 

 

 -

 

 

 -

 

 

540

 

Residential mortgage-backed securities ("RMBS")

 

3,815

 

 

222

 

 

24

 

 

(17

)

 

4,030

 

Commercial mortgage-backed securities ("CMBS")

 

432

 

 

17

 

 

3

 

 

 -

 

 

446

 

Collateralized loan obligations ("CLOs")

 

496

 

 

2

 

 

1

 

 

(2

)

 

499

 

State and municipal bonds

 

3,781

 

 

651

 

 

14

 

 

 -

 

 

4,418

 

Hybrid and redeemable preferred securities

 

836

 

 

97

 

 

41

 

 

 -

 

 

892

 

VIEs’ fixed maturity securities

 

593

 

 

5

 

 

 -

 

 

 -

 

 

598

 

Total fixed maturity securities

 

81,049

 

 

6,013

 

 

1,072

 

 

(30

)

 

86,020

 

Equity securities

 

213

 

 

15

 

 

1

 

 

 -

 

 

227

 

Total AFS securities

$

81,262

 

$

6,028

 

$

1,073

 

$

(30

)

$

86,247

 

 

10


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

 

Amortized

 

Gross Unrealized

 

Fair

 

 

Cost

 

Gains