Q1 2016_newV 2016

__________________________________________________________________________________________________________

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, 2016

 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 May 2, 2016, there were 239,007,140 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

43 

 

 

Forward-Looking Statements – Cautionary Language

43 

 

 

Introduction

44 

 

 

    Executive Summary

44 



 

    Critical Accounting Policies and Estimates

45 

 

 

Results of Consolidated Operations

46 

 

 

Results of Annuities

47 



 

Results of Retirement Plan Services

52 

 

 

Results of Life Insurance

58 

 

 

Results of Group Protection

63 



 

Results of Other Operations 

66 



 

Realized Gain (Loss) and Benefit Ratio Unlocking

68 



 

Consolidated Investments 

70 

 

 

Review of Consolidated Financial Condition

82 

 

 

   Liquidity and Capital Resources

82 



 

Other Matters

86 



 

   Other Factors Affecting Our Business

86 



 

   Recent Accounting Pronouncements

87 



 

3.

Quantitative and Qualitative Disclosures About Market Risk

87 



 

 

4.

Controls and Procedures

87 



 

 

PART II

 



 

 

1.

Legal Proceedings

90 



 

 

1A.

Risk Factors

90 



 

 

2.

Unregistered Sales of Equity Securities and Use of Proceeds

90 



 

 

6.

Exhibits

90 



 

 



Signatures

91 



 

 

 

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

 

 

March 31,

December 31,



 

2016

 

 

2015

 



(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value:

 

 

 

 

 

 

 

 

Fixed maturity securities (amortized cost:  2016 – $82,623; 2015 – $81,993)

 

$

88,064 

 

 

$

84,964 

 

Variable interest entities’ fixed maturity securities (amortized cost:  2016 – $597; 2015 – $596)

 

 

599 

 

 

 

598 

 

Equity securities (cost:  2016 – $231; 2015 – $226)

 

 

245 

 

 

 

237 

 

Trading securities

 

 

1,864 

 

 

 

1,854 

 

Mortgage loans on real estate

 

 

8,916 

 

 

 

8,678 

 

Real estate

 

 

17 

 

 

 

17 

 

Policy loans

 

 

2,533 

 

 

 

2,545 

 

Derivative investments

 

 

2,085 

 

 

 

1,537 

 

Other investments

 

 

2,048 

 

 

 

1,778 

 

Total investments

 

 

106,371 

 

 

 

102,208 

 

Cash and invested cash

 

 

3,177 

 

 

 

3,146 

 

Deferred acquisition costs and value of business acquired

 

 

8,984 

 

 

 

9,510 

 

Premiums and fees receivable

 

 

401 

 

 

 

376 

 

Accrued investment income

 

 

1,108 

 

 

 

1,070 

 

Reinsurance recoverables

 

 

5,597 

 

 

 

5,623 

 

Funds withheld reinsurance assets

 

 

630 

 

 

 

629 

 

Goodwill

 

 

2,273 

 

 

 

2,273 

 

Other assets

 

 

3,671 

 

 

 

3,454 

 

Separate account assets

 

 

123,506 

 

 

 

123,619 

 

Total assets

 

$

255,718 

 

 

$

251,908 

 



 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Future contract benefits

 

$

21,438 

 

 

$

20,708 

 

Other contract holder funds

 

 

77,475 

 

 

 

77,362 

 

Long-term debt

 

 

5,650 

 

 

 

5,553 

 

Reinsurance related embedded derivatives

 

 

111 

 

 

 

87 

 

Funds withheld reinsurance liabilities

 

 

597 

 

 

 

638 

 

Deferred gain on business sold through reinsurance

 

 

79 

 

 

 

98 

 

Payables for collateral on investments

 

 

5,017 

 

 

 

4,657 

 

Variable interest entities’ liabilities

 

 

 -

 

 

 

 

Other liabilities

 

 

7,187 

 

 

 

5,565 

 

Separate account liabilities

 

 

123,506 

 

 

 

123,619 

 

Total liabilities

 

 

241,060 

 

 

 

238,291 

 



 

 

 

 

 

 

 

 

Contingencies and Commitments (See Note 8)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock – 10,000,000 shares authorized

 

 

 -

 

 

 

 -

 

Common stock – 800,000,000 shares authorized; 239,005,252 and 243,835,893 shares

 

 

 

 

 

 

 

 

issued and outstanding as of March 31, 2016, and December 31, 2015, respectively

 

 

6,162 

 

 

 

6,298 

 

Retained earnings

 

 

6,565 

 

 

 

6,474 

 

Accumulated other comprehensive income (loss)

 

 

1,931 

 

 

 

845 

 

Total stockholders’ equity

 

 

14,658 

 

 

 

13,617 

 

Total liabilities and stockholders’ equity

 

$

255,718 

 

 

$

251,908 

 



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,

 

 

2016

 

2015

 

Revenues

 

 

 

 

 

 

Insurance premiums

$

816

 

$

790

 

Fee income

 

1,235

 

 

1,222

 

Net investment income

 

1,172

 

 

1,187

 

Realized gain (loss):

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

(56

)

 

(20

)

Portion of loss recognized in other comprehensive income

 

20

 

 

7

 

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

 

(36

)

 

(13

)

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

 

(78

)

 

(35

)

Total realized gain (loss)

 

(114

)

 

(48

)

Amortization of deferred gain on business sold through reinsurance

 

18

 

 

18

 

Other revenues

 

116

 

 

135

 

Total revenues

 

3,243

 

 

3,304

 

Expenses

 

 

 

 

 

 

Interest credited

 

633

 

 

625

 

Benefits

 

1,331

 

 

1,236

 

Commissions and other expenses

 

976

 

 

1,013

 

Interest and debt expense

 

68

 

 

68

 

Total expenses

 

3,008

 

 

2,942

 

Income (loss) before taxes

 

235

 

 

362

 

Federal income tax expense (benefit)

 

27

 

 

62

 

Net income (loss)

 

208

 

 

300

 

Other comprehensive income (loss), net of tax

 

1,086

 

 

557

 

Comprehensive income (loss)

$

1,294

 

$

857

 



 

 

 

 

 

 

Net Income (Loss) Per Common Share

 

 

 

 

 

 

Basic

$

0.86

 

$

1.17

 

Diluted

 

0.82

 

 

1.15

 



 

 

 

 

 

 

Cash Dividends Declared Per Common Share

$

0.25

 

$

0.20

 









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,

 



2016

 

2015

 



 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Balance as of beginning-of-year

$

6,298

 

$

6,622

 

Stock compensation/issued for benefit plans

 

6

 

 

27

 

Retirement of common stock/cancellation of shares

 

(142

)

 

(156

)

Balance as of end-of-period

 

6,162

 

 

6,493

 



 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

Balance as of beginning-of-year

 

6,474

 

 

6,022

 

Net income (loss)

 

208

 

 

300

 

Retirement of common stock

 

(58

)

 

(194

)

Common stock dividends declared

 

(59

)

 

(51

)

Balance as of end-of-period

 

6,565

 

 

6,077

 



 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

Balance as of beginning-of-year

 

845

 

 

3,096

 

Other comprehensive income (loss), net of tax

 

1,086

 

 

557

 

Balance as of end-of-period

 

1,931

 

 

3,653

 

Total stockholders’ equity as of end-of-period

$

14,658

 

$

16,223

 











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,

 



2016

 

2015

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

$

208

 

$

300

 

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

 

5

 

 

(42

)

Trading securities purchases, sales and maturities, net

 

28

 

 

12

 

Change in premiums and fees receivable

 

(25

)

 

21

 

Change in accrued investment income

 

(38

)

 

(80

)

Change in future contract benefits and other contract holder funds

 

262

 

 

162

 

Change in reinsurance related assets and liabilities

 

(286

)

 

(178

)

Change in federal income tax accruals

 

(38

)

 

(28

)

Realized (gain) loss

 

114

 

 

48

 

Amortization of deferred gain on business sold through reinsurance

 

(18

)

 

(18

)

Other

 

83

 

 

99

 

Net cash provided by (used in) operating activities

 

295

 

 

296

 



 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of available-for-sale securities

 

(3,291

)

 

(2,629

)

Sales of available-for-sale securities

 

1,502

 

 

142

 

Maturities of available-for-sale securities

 

1,269

 

 

1,041

 

Purchases of other investments

 

(5,230

)

 

(3,646

)

Sales or maturities of other investments

 

4,713

 

 

3,455

 

Increase (decrease) in payables for collateral on investments

 

357

 

 

634

 

Other

 

(27

)

 

(32

)

Net cash provided by (used in) investing activities

 

(707

)

 

(1,035

)



 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Issuance of long-term debt, net of issuance costs

 

 -

 

 

298

 

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

 

2,672

 

 

2,464

 

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

 

(1,413

)

 

(1,408

)

Transfers to and from separate accounts, net

 

(549

)

 

(657

)

Common stock issued for benefit plans and excess tax benefits

 

(7

)

 

12

 

Repurchase of common stock

 

(200

)

 

(350

)

Dividends paid to common stockholders

 

(60

)

 

(52

)

Net cash provided by (used in) financing activities

 

443

 

 

307

 



 

 

 

 

 

 

Net increase (decrease) in cash and invested cash

 

31

 

 

(432

)

Cash and invested cash as of beginning-of-year

 

3,146

 

 

3,919

 

Cash and invested cash as of end-of-period

$

3,177

 

$

3,487

 



 

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, 2015 (“2015 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 2015 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, 2016, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016.  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 (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”) and the impact of the adoption on our financial statements:







 

 

 

Standard

Description

Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2014-16, 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. 

January 1, 2016

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

ASU 2015-02, Amendments to the Consolidation Analysis

This standard addresses consolidation accounting guidance related to limited partnerships, limited liability companies and securitization structures.  The new standard includes changes to existing consolidation models that eliminates the presumption that a general partner should consolidate a limited partnership, clarifies when fees paid to a decision maker should be a factor in the variable interest entities (“VIEs”) consolidation evaluation and reduces the VIE consolidation models from two to one by eliminating the indefinite deferral for certain investment funds. 

January 1, 2016

The adoption of this ASU did not have an effect on our consolidated financial condition or results of operations.  We have provided additional financial statement disclosures related to our limited partnerships in Note 3.  

ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs

   

Debt issuance costs were previously recognized as a deferred charge in the balance sheet.  This amendment requires the presentation of debt issuance costs 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.  Retrospective application of the amendments in this ASU is required. 

January 1, 2016

We have retrospectively reclassified approximately $29 million of our debt issuance costs from other assets to long-term debt on the Consolidated Balance Sheets as of December 31, 2015.  See ASU 2015-15 for debt issuance costs associated with line-of-credit arrangements.

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.  Software licenses purchased through cloud computing arrangements 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.

January 1, 2016

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

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 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. 

January 1, 2016

The adoption of this ASU did not result in a change to our financial statement disclosures.

ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements

Given the absence of authoritative accounting guidance in ASU 2015-03 related to debt issuance costs for line-of-credit arrangements, this standard clarifies that the SEC Staff would not object to an entity deferring and presenting these debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement.

January 1, 2016

The adoption of this ASU did not have an effect on our consolidated financial condition or 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 & ASU 2015-14, Revenue from Contracts with Customers; Deferral of the Effective Date

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.  After performing extensive outreach, the FASB decided to delay the effective date of ASU 2014-09 for one year.  Early application is permitted but only for annual reporting periods beginning after December 15, 2016. 

January 1, 2018

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 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 periods within annual periods beginning January 1, 2017

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

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities

These amendments require, among other things, the fair value measurement of investments in equity securities and certain other ownership interests that do not result in consolidation and are not accounted for under the equity method of accounting.  The change in fair value of the impacted investments in equity securities must be recognized in net income.  In addition, the amendments include certain enhancements to the presentation and disclosure requirements for financial assets and financial liabilities.  Early adoption of the ASU is generally not permitted, except as defined in the ASU.  The amendments should be adopted in the financial statements through a cumulative-effect adjustment to the beginning balance of retained earnings.

January 1, 2018

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

ASU 2016-02, Leases

This standard establishes a new accounting model for leases.  Lessees will recognize most leases on the balance as a right-of-use asset and a related lease liability.  The lease liability is measured as the present value of the lease payments over the lease term with the right-of-use asset measured at the lease liability amount and including adjustments for certain lease incentives and initial direct costs.  Lease expense recognition will continue to differentiate between finance leases and operating leases resulting in a similar pattern of lease expense recognition as under current GAAP.  This ASU permits a modified retrospective adoption approach which includes a number of optional practical expedients that entities may elect upon adoption.  Early adoption is permitted.

January 1, 2019

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

7


 

 

Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships 

The amendments clarify that a change in the counterparty to a derivative instrument identified in a hedging relationship in and of itself does not require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The ASU may be adopted prospectively or through a modified retrospective approach.  Early adoption is permitted.

January 1, 2017

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

ASU 2016-06, Contingent Put and Call Options in Debt Instruments

The amendments clarify the requirements for assessing whether contingent call and put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. Upon adoption of this ASU, entities will be required to assess embedded call and put options solely in accordance with the four-step decision sequence that was developed by the FASB Derivatives Implementation Group.  The ASU should be adopted based on a modified retrospective basis for existing debt instruments.  Early adoption is permitted. 

January 1, 2017

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

ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

These amendments clarify the implementation guidance on principal versus agent considerations in ASU 2014-09, including how an entity should identify the unit of accounting for the principal versus agent evaluation.  In addition, the amendments clarify how to apply the control principle to certain types of arrangements, such as service transactions by explaining what a principal controls before the good or service is transferred to the customer.  Transition requirements are consistent with ASU 2014-09.  

January 1, 2018

We are currently evaluating the impact of adopting this ASU, in coordination with ASU 2014-09, on our consolidated financial condition and results of operations.

ASU 2016-09, Improvements to Employee Share-based Payment Accounting

These amendments to current accounting guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled rather than through additional paid in capital in the equity section of the balance sheet. The amendments also permit an employer to repurchase an employee’s shares at the maximum statutory tax rate in the employee’s applicable jurisdiction for tax withholding purposes without triggering liability accounting.  Finally, the amendments permit entities to make a one-time accounting policy election to account for forfeitures as they occur.  Specific adoption methods depend on the issue being adopted and range from prospective to retrospective adoption.  Early adoption is permitted, however all amendments must be adopted in the same period.     

January 1, 2017

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

ASU 2016-10, Identifying Performance Obligations and Licensing

These amendments clarify, among other things, the accounting guidance in ASU 2014-09 regarding how an entity will determine whether promised goods or services are separately identifiable, which is an important consideration in determining whether to account for goods or services as a separate performance obligation.   Transition requirements are consistent with ASU 2014-09.

January 1, 2018

We are currently evaluating the impact of adopting this ASU, in coordination with ASU 2014-09, on our consolidated financial condition and results of operations.



  



8


 

 

3.  Variable Interest Entities



Consolidated VIEs



See Note 4 in our 2015 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, 2016:





 

 

 

 

 



 

 

 

 

 



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 

A-

 

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 

 

 



The following summarizes the exposure of the CLN structures’ underlying reference obligations by industry and rating as of March 31, 2016:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



AAA

 

AA

 

A

 

BBB

 

BB

 

B

 

CCC

 

Total

 

Industry

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial intermediaries

0.0% 

 

2.1% 

 

5.4% 

 

3.0% 

 

0.0% 

 

0.0% 

 

0.0% 

 

10.5% 

 

Telecommunications

0.0% 

 

0.0% 

 

2.4% 

 

7.2% 

 

0.9% 

 

0.5% 

 

0.0% 

 

11.0% 

 

Oil and gas

0.3% 

 

1.0% 

 

1.4% 

 

4.1% 

 

1.2% 

 

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% 

 

2.6% 

 

0.9% 

 

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% 

 

1.6% 

 

1.4% 

 

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% 

 

1.2% 

 

1.0% 

 

0.7% 

 

0.3% 

 

0.0% 

 

0.0% 

 

3.2% 

 

Conglomerates

0.0% 

 

2.0% 

 

1.2% 

 

0.0% 

 

0.0% 

 

0.0% 

 

0.0% 

 

3.2% 

 

Forest products

0.0% 

 

0.0% 

 

0.5% 

 

1.1% 

 

1.5% 

 

0.0% 

 

0.0% 

 

3.1% 

 

Other

0.0% 

 

4.1% 

 

14.4% 

 

17.6% 

 

5.4% 

 

0.7% 

 

0.4% 

 

42.6% 

 

Total

0.6% 

 

12.0% 

 

36.0% 

 

39.7% 

 

10.1% 

 

1.2% 

 

0.4% 

 

100.0% 

 



9


 

 

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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of March 31, 2016

 

 

As of December 31, 2015

 



 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 



 

of

 

 

Notional

 

Carrying

 

 

of

 

 

Notional

 

Carrying

 



Instruments

 

Amounts

 

Value

 

Instruments

 

Amounts

 

Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed credit card loans (1)

 

 

N/A

 

 

$

 -

 

$

599 

 

 

 

N/A

 

 

$

 -

 

$

598 

 

Total return swap

 

 

 

 

 

476 

 

 

 -

 

 

 

 

 

 

479 

 

 

 -

 

Credit default swaps (2)

 

 

 

 

 

600 

 

 

 

 

 

 -

 

 

 

 -

 

 

 -

 

Total assets

 

 

 

 

$

1,076 

 

$

601 

 

 

 

 

 

$

479 

 

$

598 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualifying hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps

 

 

 -

 

 

$

 -

 

$

 -

 

 

 

 

 

$

600 

 

$

 

Contingent forwards

 

 

 

 

 

 -

 

 

 -

 

 

 

 

 

 

 -

 

 

 -

 

Total liabilities (3)

 

 

 

 

$

 -

 

$

 -

 

 

 

 

 

$

600 

 

$

 



(1)

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

(2)

Reported in other investments on our Consolidated Balance Sheets.

(3)

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 2015 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, 2016.  



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,

 

 



 

2016

 

2015

 

 

Non-Qualifying Hedges

 

 

 

 

 

 

 

 

Credit default swaps

 

$

 

$

 

 

Contingent forwards

 

 

 -

 

 

 -

 

 

Total non-qualifying hedges (1)

 

$

 

$

 

 



(1)

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



Unconsolidated VIEs



See Note 4 in our 2015 Form 10-K for a detailed discussion of our unconsolidated VIEs, which information is incorporated herein by reference.



Limited Partnerships and Limited Liability Companies



We invest in certain limited partnerships (“LPs”) and limited liability companies (“LLCs”), including qualified affordable housing projects, that we have concluded are VIEs.  We do not hold any substantive kick-out or participation rights in the LPs and LLCs, and we do not receive any performance fees or decision maker fees from the LPs and LLCs.  Based on our analysis of the LPs and LLCs, we are not the primary beneficiary of the VIEs as we do not have the power to direct the most significant activities of the LPs and LLCs. 



The carrying amounts of our investments in the LPs and LLCs are recognized in other investments on our Consolidated Balance Sheets and were $1.2 billion as of March 31, 2016, and December 31, 2015.  Included in these carrying amounts are our investments in qualified affordable housing projects, which were $45 million and $47 million as of March 31, 2016, and December 31, 2015, respectively.  We do not have any contingent commitments to provide additional capital funding to these qualified affordable housing projects.  We receive returns from these qualified affordable housing projects 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 three months ended March 31, 2016 and 2015.

10


 

 

Our exposure to loss is limited to the capital we invest in the LPs and LLCs, and there have been no indicators of impairment that would require us to recognize an impairment loss related to the LPs and LLCs as of March 31, 2016. 



4.  Investments



AFS Securities



See Note 1 in our 2015 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 and losses, OTTI and fair value of AFS securities (in millions) were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of March 31, 2016

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

71,706

 

$

5,516

 

$

1,304

 

$

21

 

$

75,897

 

Asset-backed securities ("ABS")

 

1,029

 

 

44

 

 

21

 

 

(7

)

 

1,059

 

U.S. government bonds

 

387

 

 

64

 

 

1

 

 

 -

 

 

450

 

Foreign government bonds

 

463

 

 

69

 

 

 -

 

 

 -

 

 

532

 

Residential mortgage-backed securities ("RMBS")

 

3,505

 

 

208

 

 

35

 

 

(1

)

 

3,679

 

Commercial mortgage-backed securities ("CMBS")

 

336

 

 

10

 

 

 -

 

 

(3

)

 

349

 

Collateralized loan obligations ("CLOs")

 

627

 

 

3

 

 

3

 

 

(1

)

 

628

 

State and municipal bonds

 

3,873

 

 

881

 

 

9

 

 

1

 

 

4,744

 

Hybrid and redeemable preferred securities

 

697

 

 

81

 

 

52

 

 

 -

 

 

726

 

VIEs’ fixed maturity securities

 

597

 

 

2

 

 

 -

 

 

 -

 

 

599

 

Total fixed maturity securities

 

83,220

 

 

6,878

 

 

1,425

 

 

10

 

 

88,663

 

Equity securities

 

231

 

 

20

 

 

6

 

 

 -

 

 

245

 

Total AFS securities

$

83,451

 

$

6,898

 

$

1,431

 

$

10

 

$

88,908

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2015

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

70,993

 

$

3,924

 

$

1,984

 

$

2

 

$

72,931

 

ABS

 

1,064

 

 

41

 

 

17

 

 

(13

)

 

1,101

 

U.S. government bonds

 

386

 

 

45

 

 

2

 

 

 -

 

 

429

 

Foreign government bonds

 

464

 

 

61

 

 

1

 

 

 -

 

 

524

 

RMBS

 

3,566

 

 

186

 

 

36

 

 

(12

)

 

3,728

 

CMBS

 

364

 

 

10

 

 

2

 

 

(4

)

 

376

 

CLOs

 

588

 

 

1

 

 

3

 

 

(3

)

 

589

 

State and municipal bonds

 

3,806

 

 

686

 

 

12

 

 

 -

 

 

4,480

 

Hybrid and redeemable preferred securities

 

762

 

 

88

 

 

44

 

 

 -

 

 

806

 

VIEs’ fixed maturity securities

 

596

 

 

2

 

 

 -

 

 

 -

 

 

598

 

Total fixed maturity securities

 

82,589

 

 

5,044

 

 

2,101

 

 

(30

)

 

85,562

 

Equity securities