__________________________________________________________________________________________________________
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, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 31, 2017, there were 221,444,368 shares of the registrant’s common stock outstanding.
_________________________________________________________________________________________________________
Lincoln National Corporation
Table of Contents
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PART I
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2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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3. |
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4. |
93 | ||||
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PART II
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1. |
94 | ||||
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1A. |
94 | ||||
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2. |
95 | ||||
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6. |
95 | ||||
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E-1 |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
LINCOLN NATIONAL CORPORATION
(in millions, except share data)
|
As of |
As of |
||||||
June 30, |
December 31, |
|||||||
|
2017 |
2016 |
||||||
|
(Unaudited) |
|||||||
ASSETS |
||||||||
Investments: |
||||||||
Available-for-sale securities, at fair value: |
||||||||
Fixed maturity securities (amortized cost: 2017 – $86,194; 2016 – $84,287) |
$ |
93,014 |
$ |
89,013 | ||||
Variable interest entities’ fixed maturity securities (amortized cost: 2017 – $0; 2016 – $200) |
- |
200 | ||||||
Equity securities (cost: 2017 – $262; 2016 – $260) |
275 | 275 | ||||||
Trading securities |
1,678 | 1,712 | ||||||
Mortgage loans on real estate |
10,023 | 9,889 | ||||||
Real estate |
23 | 24 | ||||||
Policy loans |
2,416 | 2,451 | ||||||
Derivative investments |
1,054 | 927 | ||||||
Other investments |
2,156 | 2,230 | ||||||
Total investments |
110,639 | 106,721 | ||||||
Cash and invested cash |
1,978 | 2,722 | ||||||
Deferred acquisition costs and value of business acquired |
8,555 | 9,134 | ||||||
Premiums and fees receivable |
365 | 430 | ||||||
Accrued investment income |
1,082 | 1,062 | ||||||
Reinsurance recoverables |
5,228 | 5,265 | ||||||
Funds withheld reinsurance assets |
607 | 617 | ||||||
Goodwill |
2,273 | 2,273 | ||||||
Other assets |
5,099 | 5,006 | ||||||
Separate account assets |
135,825 | 128,397 | ||||||
Total assets |
$ |
271,651 |
$ |
261,627 | ||||
|
||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Liabilities |
||||||||
Future contract benefits |
$ |
22,293 |
$ |
21,576 | ||||
Other contract holder funds |
79,216 | 78,903 | ||||||
Short-term debt |
450 |
- |
||||||
Long-term debt |
4,901 | 5,345 | ||||||
Reinsurance related embedded derivatives |
53 | 53 | ||||||
Funds withheld reinsurance liabilities |
1,862 | 1,976 | ||||||
Deferred gain on business sold through reinsurance |
2 | 24 | ||||||
Payables for collateral on investments |
4,952 | 4,995 | ||||||
Other liabilities |
6,101 | 5,880 | ||||||
Separate account liabilities |
135,825 | 128,397 | ||||||
Total liabilities |
255,655 | 247,149 | ||||||
|
||||||||
Contingencies and Commitments (See Note 8) |
||||||||
|
||||||||
Stockholders’ Equity |
||||||||
Preferred stock – 10,000,000 shares authorized |
- |
- |
||||||
Common stock – 800,000,000 shares authorized; 222,237,262 and 226,335,105 shares |
||||||||
issued and outstanding as of June 30, 2017, and December 31, 2016, respectively |
5,774 | 5,869 | ||||||
Retained earnings |
7,511 | 7,043 | ||||||
Accumulated other comprehensive income (loss) |
2,711 | 1,566 | ||||||
Total stockholders’ equity |
15,996 | 14,478 | ||||||
Total liabilities and stockholders’ equity |
$ |
271,651 |
$ |
261,627 |
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, |
||||||||||
2017 |
2016 |
2017 |
2016 |
|||||||||
Revenues |
||||||||||||
Insurance premiums |
$ |
801 |
$ |
728 |
$ |
1,608 |
$ |
1,544 | ||||
Fee income |
1,393 | 1,288 | 2,747 | 2,523 | ||||||||
Net investment income |
1,262 | 1,199 | 2,499 | 2,371 | ||||||||
Realized gain (loss): |
||||||||||||
Total other-than-temporary impairment losses on securities |
(4 |
) |
(36 |
) |
(8 |
) |
(92 |
) |
||||
Portion of loss recognized in other comprehensive income |
- |
8 |
- |
28 | ||||||||
Net other-than-temporary impairment losses on securities |
||||||||||||
recognized in earnings |
(4 |
) |
(28 |
) |
(8 |
) |
(64 |
) |
||||
Realized gain (loss), excluding other-than-temporary |
||||||||||||
impairment losses on securities |
(6 |
) |
(17 |
) |
(41 |
) |
(95 |
) |
||||
Total realized gain (loss) |
(10 |
) |
(45 |
) |
(49 |
) |
(159 |
) |
||||
Amortization of deferred gain on business sold through reinsurance |
4 | 18 | 22 | 37 | ||||||||
Other revenues |
127 | 119 | 250 | 235 | ||||||||
Total revenues |
3,577 | 3,307 | 7,077 | 6,551 | ||||||||
Expenses |
||||||||||||
Interest credited |
646 | 639 | 1,293 | 1,272 | ||||||||
Benefits |
1,287 | 1,208 | 2,578 | 2,540 | ||||||||
Commissions and other expenses |
1,034 | 978 | 2,048 | 1,953 | ||||||||
Interest and debt expense |
63 | 68 | 127 | 136 | ||||||||
Strategic digitization expense |
14 |
- |
23 |
- |
||||||||
Total expenses |
3,044 | 2,893 | 6,069 | 5,901 | ||||||||
Income (loss) before taxes |
533 | 414 | 1,008 | 650 | ||||||||
Federal income tax expense (benefit) |
122 | 89 | 162 | 114 | ||||||||
Net income (loss) |
411 | 325 | 846 | 536 | ||||||||
Other comprehensive income (loss), net of tax |
864 | 1,264 | 1,145 | 2,350 | ||||||||
Comprehensive income (loss) |
$ |
1,275 |
$ |
1,589 |
$ |
1,991 |
$ |
2,886 | ||||
|
||||||||||||
Net Income (Loss) Per Common Share |
||||||||||||
Basic |
$ |
1.84 |
$ |
1.37 |
$ |
3.77 |
$ |
2.24 | ||||
Diluted |
1.81 | 1.35 | 3.70 | 2.18 | ||||||||
|
||||||||||||
Cash Dividends Declared Per Common Share |
$ |
0.29 |
$ |
0.25 |
$ |
0.58 |
$ |
0.50 |
See accompanying Notes to Consolidated Financial Statements
2
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in millions, except per share data)
|
||||||
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For the Six |
|||||
|
Months Ended |
|||||
|
June 30, |
|||||
|
2017 |
2016 |
||||
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Common Stock |
||||||
Balance as of beginning-of-year |
$ |
5,869 |
$ |
6,298 | ||
Stock compensation/issued for benefit plans |
58 | 11 | ||||
Retirement of common stock/cancellation of shares |
(153 |
) |
(303 |
) |
||
Balance as of end-of-period |
5,774 | 6,006 | ||||
|
||||||
Retained Earnings |
||||||
Balance as of beginning-of-year |
7,043 | 6,474 | ||||
Net income (loss) |
846 | 536 | ||||
Retirement of common stock |
(247 |
) |
(172 |
) |
||
Common stock dividends declared |
(131 |
) |
(119 |
) |
||
Balance as of end-of-period |
7,511 | 6,719 | ||||
|
||||||
Accumulated Other Comprehensive Income (Loss) |
||||||
Balance as of beginning-of-year |
1,566 | 845 | ||||
Other comprehensive income (loss), net of tax |
1,145 | 2,350 | ||||
Balance as of end-of-period |
2,711 | 3,195 | ||||
Total stockholders’ equity as of end-of-period |
$ |
15,996 |
$ |
15,920 |
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, |
|||||
|
2017 |
2016 |
||||
Cash Flows from Operating Activities |
||||||
Net income (loss) |
$ |
846 |
$ |
536 | ||
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 |
30 | (17 |
) |
|||
Trading securities purchases, sales and maturities, net |
60 | 113 | ||||
Change in premiums and fees receivable |
65 | 6 | ||||
Change in accrued investment income |
(20 |
) |
- |
|||
Change in future contract benefits and other contract holder funds |
(864 |
) |
5 | |||
Change in reinsurance related assets and liabilities |
(92 |
) |
(347 |
) |
||
Change in accrued expenses |
(96 |
) |
(180 |
) |
||
Change in federal income tax accruals |
162 | (3 |
) |
|||
Realized (gain) loss |
49 | 159 | ||||
Amortization of deferred gain on business sold through reinsurance |
(22 |
) |
(37 |
) |
||
Other |
84 | 301 | ||||
Net cash provided by (used in) operating activities |
202 | 536 | ||||
|
||||||
Cash Flows from Investing Activities |
||||||
Purchases of available-for-sale securities |
(5,513 |
) |
(5,727 |
) |
||
Sales of available-for-sale securities |
842 | 2,068 | ||||
Maturities of available-for-sale securities |
2,840 | 2,579 | ||||
Purchases of alternative investments |
(124 |
) |
(129 |
) |
||
Sales and repayments of alternative investments |
100 | 95 | ||||
Issuance of mortgage loans on real estate |
(705 |
) |
(956 |
) |
||
Repayment and maturities of mortgage loans on real estate |
571 | 376 | ||||
Issuance and repayment of policy loans, net |
34 | 38 | ||||
Net change in collateral on investments and derivatives |
(12 |
) |
1,474 | |||
Other |
(37 |
) |
(58 |
) |
||
Net cash provided by (used in) investing activities |
(2,004 |
) |
(240 |
) |
||
|
||||||
Cash Flows from Financing Activities |
||||||
Proceeds from sales leaseback transaction |
45 |
- |
||||
Deposits of fixed account values, including the fixed portion of variable |
5,216 | 5,015 | ||||
Withdrawals of fixed account values, including the fixed portion of variable |
(2,934 |
) |
(2,769 |
) |
||
Transfers to and from separate accounts, net |
(770 |
) |
(967 |
) |
||
Common stock issued for benefit plans |
33 | (11 |
) |
|||
Repurchase of common stock |
(400 |
) |
(475 |
) |
||
Dividends paid to common stockholders |
(132 |
) |
(122 |
) |
||
Net cash provided by (used in) financing activities |
1,058 | 671 | ||||
|
||||||
Net increase (decrease) in cash and invested cash |
(744 |
) |
967 | |||
Cash and invested cash as of beginning-of-year |
2,722 | 3,146 | ||||
Cash and invested cash as of end-of-period |
$ |
1,978 |
$ |
4,113 |
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 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, 2016 (“2016 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 condition, results of operations and cash flows, are summarized in our 2016 Form 10-K.
Certain amounts reported in prior year's consolidated financial statements have been reclassified to conform to the presentation adopted in the current year. Specifically, we reclassified cash flows from certain investing activities into their own respective line items within the Consolidated Statements of Cash Flows. Previously, these amounts were reported within purchases of other investments or sales or maturities of other investments line items, as applicable, within cash flows from investing activities. These reclassifications had no effect on net income (loss), net cash provided by (used in) investing activities, or stockholders’ equity for the prior year.
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, 2017, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017. 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 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. We adopted the guidance in this ASU prospectively. |
January 1, 2017 |
The adoption of this ASU did not have an effect on our consolidated financial condition or 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. We adopted this ASU using a modified retrospective basis applied to existing debt instruments. |
January 1, 2017 |
The adoption of this ASU did not have an effect on our consolidated financial condition or results of operations. |
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. |
January 1, 2018 |
Our primary revenue sources will continue to be recognized in accordance with ASC Topic 944, Financial Services – Insurance. Our analysis indicates that approximately $1 billion of our revenue reported in fee income and other revenue in our Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2016, is within the scope of this ASU. We continue to evaluate the impact of adopting this ASU on our consolidated financial condition and results of operations. |
6
Standard |
Description |
Projected Date of Adoption |
Effect on Financial Statements or Other Significant Matters |
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 hold equity securities and hybrid preferred securities classified as available-for-sale (“AFS”) securities that are currently measured at fair value with changes in fair value recognized through other comprehensive income (loss) (“OCI”). We are currently evaluating these two classifications of securities to determine those securities that meet the definition of an equity security as defined in this ASU. See Note 4 for details regarding our equity and hybrid preferred securities currently classified as AFS. |
ASU 2016-02, Leases |
This standard establishes a new accounting model for leases. Lessees will recognize most leases on the balance sheet 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 that includes a number of optional practical expedients that entities may elect upon adoption. Early adoption is permitted. |
January 1, 2019 |
We are currently identifying all of our leases that will be within the scope of this standard; as such, we continue to evaluate the quantitative impact of adopting this ASU on our Consolidated Balance Sheets. Based on our initial assessment, we do not expect there to be a significant difference in our pattern of lease expense recognition under this ASU. |
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 on our consolidated financial condition and results of operations. See comments under ASU 2014-09 for more information. |
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 on our consolidated financial condition and results of operations. See comments under ASU 2014-09 for more information. |
7
Standard |
Description |
Projected Date of Adoption |
Effect on Financial Statements or Other Significant Matters |
ASU 2016-12, Narrow Scope Improvements and Practical Expedients |
The standard update amends the revenue recognition guidance in ASU 2014-09 related to transition, collectability, noncash consideration and the presentation of sales and other similar taxes. The amendments clarify that, for a contract to be considered completed at transition, substantially all of the revenue must have been recognized under current GAAP. The amendments also clarify how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. Transition requirements are consistent with ASU 2014-09. |
January 1, 2018 |
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. See comments under ASU 2014-09 for more information. |
ASU 2016-13, Measurement of Credit Losses on Financial Instruments |
These amendments adopt a new model to measure and recognize credit losses for most financial assets. The method used to measure estimated credit losses for AFS debt securities will be unchanged from current GAAP; however, the amendments require credit losses to be recognized through an allowance rather than as a reduction to the amortized cost of those debt securities. The amendments will permit entities to recognize improvements in credit loss estimates on AFS debt securities by reducing the allowance account immediately through earnings. The amendments will be adopted through a cumulative effect adjustment to the beginning balance of retained earnings as of the first reporting period in which the amendments are effective. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. |
January 1, 2020 |
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations, with a primary focus on our fixed maturity securities (see Note 4). We currently reduce the amortized cost of the individual security when recognizing other-than-temporary impairment (“OTTI”) on these securities. Upon adoption of ASU 2016-13, we will no longer reduce the amortized cost of each individual security; rather we will establish a valuation allowance, and any declines or improvements in credit quality will be recognized through the valuation allowance. |
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments |
These amendments clarify the classification of eight specific cash flow issues in an entity’s statement of cash flows where it was determined by the FASB that there is diversity in practice. Early adoption of the amendments is permitted, and retrospective transition is required for each period presented in the statement of cash flows. |
January 1, 2018 |
We are currently evaluating these disclosure requirements and will amend classifications in our Consolidated Statements of Cash Flows upon adoption as applicable. |
ASU 2016-16, Intra-Entity Asset Transfers Other Than Inventory |
This amendment requires an entity to recognize current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs, thereby eliminating the current GAAP exception that prohibits the recognition of income taxes until the asset has been sold to an outside party. Early adoption is permitted as of the beginning of the annual reporting period for which financial statements have not been issued. |
January 1, 2018 |
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. |
8
Standard |
Description |
Projected Date of Adoption |
Effect on Financial Statements or Other Significant Matters |
ASU 2016-18, Restricted Cash |
This amendment requires that amounts generally described as restricted cash and restricted cash equivalents should be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Early adoption is permitted using a retrospective transition method applied to each period presented. |
January 1, 2018 |
We will provide these additional disclosures in our Consolidated Statements of Cash Flows upon the adoption date as applicable. |
ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers |
These amendments clarify 13 issues related to the adoption of ASU 2014-09. The most significant issue of these amendments for us is the clarification that all contracts within the scope of Topic 944 are excluded from the scope of ASU 2014-09, rather than just insurance contracts as described in ASU 2014-09. Transition requirements are consistent with ASU 2014-09. |
January 1, 2018 |
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. See comments under ASU 2014-09 for more information. |
ASU 2017-04, Simplifying the Test for Goodwill Impairment |
These amendments eliminate the requirement in current GAAP to perform Step 2 of the goodwill impairment test in favor of only applying Step 1. Under Step 1, the fair value of the reporting unit is compared with its carrying value, and an impairment charge is recognized when the carrying value exceeds the reporting unit’s fair value. An entity still has the option to first perform a qualitative assessment of an individual reporting unit to determine if the quantitative assessment in Step 1 is necessary. ASU 2017-04 should be adopted prospectively, and early adoption is permitted on impairment testing dates after January 1, 2017. |
Impairment tests performed after January 1, 2020 |
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. |
ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost |
These amendments require that an entity report the service cost component of employee pension and postretirement benefit plans in the same line item as other compensation costs from services rendered by the applicable employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. ASU 2017-07 requires retrospective adoption related to the presentation of net periodic pension cost and postretirement benefit cost. |
January 1, 2018 |
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. |
ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities |
These amendments require an entity to shorten the amortization period for certain callable debt securities held at a premium so that the premium is amortized to the earliest call date. Early adoption is permitted, and the ASU requires adoption under a modified retrospective basis through a cumulative-effect adjustment to the beginning balance of retained earnings. |
January 1, 2019 |
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. |
ASU 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting |
These amendments provide guidance when changes to the terms or conditions of a share-based payment award would require modification accounting. An entity should account for the effects of a modification unless the following are the same immediately before and after the modification: (a) the fair value of the award, (b) the vesting conditions of the award and (c) the classification of the award as an equity instrument or a liability instrument. These amendments are to be applied prospectively to awards modified on or after the effective date. Early adoption is permitted. |
January 1, 2018 |
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. |
9
3. Variable Interest Entities (“VIEs”)
Consolidated VIEs
See Note 4 in our 2016 Form 10-K for a detailed discussion of our consolidated VIEs, which information is incorporated herein by reference.
As of March 2017 and December 2016, our $200 million and $400 million credit-linked notes (“CLNs”) matured, respectively, and we no longer reflect the assets and liabilities associated with these VIEs on our Consolidated Balance Sheets or recognize the results of operations of these VIEs on our Consolidated Statements of Comprehensive Income (Loss). We no longer have any exposure related to these VIEs.
Asset and liability information (dollars in millions) for the consolidated VIEs included on our Consolidated Balance Sheets was as follows:
|
||||||||||||||||||||||
|
As of June 30, 2017 |
As of December 31, 2016 |
||||||||||||||||||||
|
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 |
$ |
- |
$ |
- |
N/A |
$ |
- |
$ |
200 | ||||||||||||
Total return swap |
1 | 542 |
- |
1 | 533 |
- |
||||||||||||||||
Credit default swaps |
- |
- |
- |
1 | 200 |
- |
||||||||||||||||
Total assets |
1 |
$ |
542 |
$ |
- |
2 |
$ |
733 |
$ |
200 | ||||||||||||
|
(1) |
Reported in variable interest entities’ fixed maturity securities on our Consolidated Balance Sheets. |
As of June 30, 2017, and December 31, 2016, we did not recognize any liabilities from consolidated VIEs on our Consolidated Balance Sheets. We did hold one contingent forward instrument as of December 31, 2016; however, the instrument had a zero notional and carrying value.
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, |
|||||||||||
|
2017 |
2016 |
2017 |
2016 |
|||||||||
Non-Qualifying Hedges |
|||||||||||||
Credit default swaps |
$ |
- |
$ |
(1 |
) |
$ |
- |
$ |
5 | ||||
Contingent forwards |
- |
- |
- |
- |
|||||||||
Total non-qualifying hedges (1) |
$ |
- |
$ |
(1 |
) |
$ |
- |
$ |
5 |
(1) |
Reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). |
Unconsolidated VIEs
See Note 4 in our 2016 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 $1.4 billion and $1.3 billion as of June 30, 2017, and December 31, 2016, respectively. Included in these carrying amounts are our investments in qualified affordable housing projects, which were $34 million and $37 million as of June 30, 2017, and December 31, 2016, respectively. We do not have any contingent commitments to provide additional capital funding to these qualified affordable housing projects. We received returns from these qualified affordable housing projects in the form of income tax credits and other tax
10
benefits of $2 million for the six months ended June 30, 2017, and 2016, respectively, which were recognized in federal income tax expense (benefit) on our Consolidated Statements of Comprehensive Income (Loss).
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 June 30, 2017.
4. Investments
AFS Securities
See Note 1 in our 2016 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, 2017 |
||||||||||||||
|
Amortized |
Gross Unrealized |
Fair |
||||||||||||
|
Cost |
Gains |
Losses |
OTTI (1) |
Value |
||||||||||
Fixed maturity securities: |
|||||||||||||||
Corporate bonds |
$ |
74,934 |
$ |
6,108 |
$ |
500 |
$ |
(6 |
) |
$ |
80,548 | ||||
Asset-backed securities ("ABS") |
996 | 46 | 12 | (20 |
) |
1,050 | |||||||||
U.S. government bonds |
536 | 44 | 2 |
- |
578 | ||||||||||
Foreign government bonds |
397 | 58 |
- |
- |
455 | ||||||||||
Residential mortgage-backed securities ("RMBS") |
3,412 | 160 | 38 | (18 |
) |
3,552 | |||||||||
Commercial mortgage-backed securities ("CMBS") |
466 | 10 | 2 | (2 |
) |
476 | |||||||||
Collateralized loan obligations ("CLOs") |
697 | 4 | 2 | (4 |
) |
703 | |||||||||
State and municipal bonds |
4,172 | 850 | 12 |
- |
5,010 | ||||||||||
Hybrid and redeemable preferred securities |
584 | 85 | 27 |
- |
642 | ||||||||||
Total fixed maturity securities |
86,194 | 7,365 | 595 | (50 |
) |
93,014 | |||||||||
Equity securities |
262 | 19 | 6 |
- |
275 | ||||||||||
Total AFS securities |
$ |
86,456 |
$ |
7,384 |
$ |
601 |
$ |
(50 |
) |
$ |
93,289 |
|
|||||||||||||||
|
As of December 31, 2016 |
||||||||||||||
|
Amortized |
Gross Unrealized |
Fair |
||||||||||||
|
Cost |
Gains |
Losses |
OTTI (1) |
Value |
||||||||||
Fixed maturity securities: |
|||||||||||||||
Corporate bonds |
$ |
73,275 |
$ |
4,754 |
$ |
970 |
$ |
(5 |
) |
$ |
77,064 | ||||
ABS |
1,047 | 39 | 14 | (13 |
) |
1,085 | |||||||||
U.S. government bonds |
384 | 37 | 2 |
- |
419 | ||||||||||
Foreign government bonds |
449 | 58 | 1 |
- |
506 | ||||||||||
RMBS |
3,534 | 147 | 73 | (6 |
) |
3,614 | |||||||||
CMBS |
345 | 8 | 4 | (1 |
) |
350 | |||||||||
CLOs |
742 | 1 | 3 | (4 |
) |
744 | |||||||||
State and municipal bonds |
3,929 | 718 | 20 |
- |
4,627 | ||||||||||
Hybrid and redeemable preferred securities |
582 | 70 | 48 |
- |
604 | ||||||||||
VIEs’ fixed maturity securities |
200 |
- |
- |
- |
200 | ||||||||||
Total fixed maturity securities |
84,487 | 5,832 | 1,135 | (29 |
) |
89,213 | |||||||||
Equity securities |
260 | 19 | 4 |
- |
275 | ||||||||||
Total AFS securities |
$ |
84,747 |
$ |
5,851 |
$ |
1,139 |
$ |
(29 |
) |
$ |
89,488 |
(1) |
Includes unrealized (gains) and losses on impaired securities related to changes in the fair value of such securities subsequent to the impairment measurement date. |
11
The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of June 30, 2017, were as follows:
|
||||||
|
Amortized |
Fair |
||||
|
Cost |
Value |
||||
Due in one year or less |
$ |
3,559 |
$ |
3,750 | ||
Due after one year through five years |
16,854 | 18,006 | ||||
Due after five years through ten years |
15,756 | 16,742 | ||||
Due after ten years |
44,454 | 48,735 | ||||
Subtotal |
80,623 | 87,233 | ||||
Structured securities (ABS, MBS, CLOs) |
5,571 | 5,781 | ||||
Total fixed maturity AFS securities |
$ |
86,194 |
$ |
93,014 |
Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.
The fair value and gross unrealized losses, including the portion of OTTI recognized in OCI, of AFS securities (dollars in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
|
|||||||||||||||||||
|
As of June 30, 2017 |
||||||||||||||||||
Less Than or Equal |
Greater Than |
||||||||||||||||||
|
to Twelve Months |
Twelve Months |