Q1 2018_Taxonomy2017

__________________________________________________________________________________________________________

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, 2018

 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 April 30, 2018, there were 218,706,881 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

48 



 

Results of Retirement Plan Services

53 

 

 

Results of Life Insurance

57 

 

 

Results of Group Protection

62 



 

Results of Other Operations 

65 



 

Realized Gain (Loss) and Benefit Ratio Unlocking

67 



 

Consolidated Investments 

69 

 

 

Review of Consolidated Financial Condition

81 

 

 

   Liquidity and Capital Resources

81 



 

3.

Quantitative and Qualitative Disclosures About Market Risk

85 



 

 

4.

Controls and Procedures

85 



 

 

PART II

 



 

 

1.

Legal Proceedings

86 



 

 

1A.

Risk Factors

86 



 

 

2.

Unregistered Sales of Equity Securities and Use of Proceeds

87 



 

 

5.

Other Information

87



 

 

6.

Exhibits

87 



 

 



Exhibit Index for the Report on Form 10-Q

88 



 

 

 

Signatures

89 



 

 

 

 

 





 

 


 



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,



 

2018

 

 

2017

 



(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value:

 

 

 

 

 

 

 

 

Fixed maturity securities (amortized cost:  2018 – $87,267; 2017 – $86,993)

 

$

92,059 

 

 

$

94,840 

 

Equity securities (cost:  2017 – $247)

 

 

 -

 

 

 

246 

 

Trading securities

 

 

1,553 

 

 

 

1,620 

 

Equity securities

 

 

112 

 

 

 

 -

 

Mortgage loans on real estate

 

 

11,047 

 

 

 

10,762 

 

Real estate

 

 

11 

 

 

 

11 

 

Policy loans

 

 

2,389 

 

 

 

2,399 

 

Derivative investments

 

 

827 

 

 

 

915 

 

Other investments

 

 

2,049 

 

 

 

2,296 

 

Total investments

 

 

110,047 

 

 

 

113,089 

 

Cash and invested cash

 

 

2,257 

 

 

 

1,628 

 

Deferred acquisition costs and value of business acquired

 

 

9,289 

 

 

 

8,403 

 

Premiums and fees receivable

 

 

480 

 

 

 

396 

 

Accrued investment income

 

 

1,137 

 

 

 

1,078 

 

Reinsurance recoverables

 

 

5,009 

 

 

 

4,907 

 

Funds withheld reinsurance assets

 

 

576 

 

 

 

593 

 

Goodwill

 

 

1,368 

 

 

 

1,368 

 

Other assets

 

 

6,313 

 

 

 

6,082 

 

Separate account assets

 

 

142,761 

 

 

 

144,219 

 

Total assets

 

$

279,237 

 

 

$

281,763 

 



 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Future contract benefits

 

$

22,923 

 

 

$

22,887 

 

Other contract holder funds

 

 

80,710 

 

 

 

80,209 

 

Short-term debt

 

 

250 

 

 

 

450 

 

Long-term debt

 

 

5,648 

 

 

 

4,894 

 

Reinsurance related embedded derivatives

 

 

34 

 

 

 

57 

 

Funds withheld reinsurance liabilities

 

 

1,726 

 

 

 

1,761 

 

Deferred gain on business sold through reinsurance

 

 

 

 

 

 

Payables for collateral on investments

 

 

4,265 

 

 

 

4,417 

 

Other liabilities

 

 

4,934 

 

 

 

5,546 

 

Separate account liabilities

 

 

142,761 

 

 

 

144,219 

 

Total liabilities

 

 

263,252 

 

 

 

264,441 

 



 

 

 

 

 

 

 

 

Contingencies and Commitments (See Note 10)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock – 10,000,000 shares authorized

 

 

 -

 

 

 

 -

 

Common stock – 800,000,000 shares authorized; 218,695,476 and 218,090,114 shares

 

 

 

 

 

 

 

 

issued and outstanding as of March 31, 2018, and December 31, 2017, respectively

 

 

5,700 

 

 

 

5,693 

 

Retained earnings

 

 

8,052 

 

 

 

8,399 

 

Accumulated other comprehensive income (loss)

 

 

2,233 

 

 

 

3,230 

 

Total stockholders’ equity

 

 

15,985 

 

 

 

17,322 

 

Total liabilities and stockholders’ equity

 

$

279,237 

 

 

$

281,763 

 



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,

 

 

2018

 

2017

 

Revenues

 

 

 

 

 

 

Insurance premiums

$

777

 

$

807

 

Fee income

 

1,456

 

 

1,354

 

Net investment income

 

1,233

 

 

1,238

 

Realized gain (loss):

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

(2

)

 

(4

)

Portion of loss recognized in other comprehensive income

 

 -

 

 

 -

 

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

 

(2

)

 

(4

)

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

 

14

 

 

(35

)

Total realized gain (loss)

 

12

 

 

(39

)

Amortization of deferred gain on business sold through reinsurance

 

 -

 

 

18

 

Other revenues

 

131

 

 

122

 

Total revenues

 

3,609

 

 

3,500

 

Expenses

 

 

 

 

 

 

Interest credited

 

653

 

 

647

 

Benefits

 

1,358

 

 

1,290

 

Commissions and other expenses

 

1,057

 

 

1,015

 

Interest and debt expense

 

91

 

 

64

 

Strategic digitization expense

 

15

 

 

9

 

Total expenses

 

3,174

 

 

3,025

 

Income (loss) before taxes

 

435

 

 

475

 

Federal income tax expense (benefit)

 

68

 

 

40

 

Net income (loss)

 

367

 

 

435

 

Other comprehensive income (loss), net of tax

 

(1,639

)

 

281

 

  Comprehensive income (loss)

$

(1,272

)

$

716

 



 

 

 

 

 

 

Net Income (Loss) Per Common Share

 

 

 

 

 

 

Basic

$

1.68

 

$

1.93

 

Diluted

 

1.64

 

 

1.89

 



 

 

 

 

 

 

Cash Dividends Declared Per Common Share

$

0.33

 

$

0.29

 









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,

 



2018

 

2017

 



 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Balance as of beginning-of-year

$

5,693

 

$

5,869

 

Stock compensation/issued for benefit plans

 

7

 

 

44

 

Retirement of common stock/cancellation of shares

 

 -

 

 

(74

)

Balance as of end-of-period

 

5,700

 

 

5,839

 



 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

Balance as of beginning-of-year

 

8,399

 

 

7,043

 

Cumulative effect from adoption of new accounting standards

 

(642

)

 

 -

 

Net income (loss)

 

367

 

 

435

 

Retirement of common stock

 

 -

 

 

(126

)

Common stock dividends declared

 

(72

)

 

(65

)

Balance as of end-of-period

 

8,052

 

 

7,287

 



 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

Balance as of beginning-of-year

 

3,230

 

 

1,566

 

Cumulative effect from adoption of new accounting standards

 

642

 

 

 -

 

Other comprehensive income (loss), net of tax

 

(1,639

)

 

281

 

Balance as of end-of-period

 

2,233

 

 

1,847

 

Total stockholders’ equity as of end-of-period

$

15,985

 

$

14,973

 











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,

 



2018

 

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

$

367

 

$

435

 

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

 

6

 

 

15

 

Trading securities purchases, sales and maturities, net

 

39

 

 

23

 

Change in premiums and fees receivable

 

(84

)

 

(35

)

Change in accrued investment income

 

(59

)

 

(62

)

Change in future contract benefits and other contract holder funds

 

(104

)

 

(281

)

Change in reinsurance related assets and liabilities

 

(113

)

 

(13

)

Change in federal income tax accruals

 

68

 

 

40

 

Realized (gain) loss

 

(12

)

 

39

 

Amortization of deferred gain on business sold through reinsurance

 

 -

 

 

(18

)

Other

 

32

 

 

(34

)

Net cash provided by (used in) operating activities

 

140

 

 

109

 



 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of available-for-sale securities and equity securities

 

(2,020

)

 

(3,158

)

Sales of available-for-sale securities and equity securities

 

427

 

 

503

 

Maturities of available-for-sale securities

 

1,368

 

 

1,298

 

Purchases of alternative investments

 

(63

)

 

(53

)

Sales and repayments of alternative investments

 

31

 

 

53

 

Issuance of mortgage loans on real estate

 

(546

)

 

(341

)

Repayment and maturities of mortgage loans on real estate

 

261

 

 

229

 

Issuance and repayment of policy loans, net

 

11

 

 

18

 

Net change in collateral on investments, derivatives and related settlements

 

(32

)

 

(32

)

Other

 

(32

)

 

(16

)

Net cash provided by (used in) investing activities

 

(595

)

 

(1,499

)



 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Payment of long-term debt, including current maturities

 

(487

)

 

 -

 

Issuance of long-term debt, net of issuance costs

 

1,094

 

 

 -

 

Payment related to early extinguishment of debt

 

(23

)

 

 -

 

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

 

2,765

 

 

2,713

 

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

 

(1,498

)

 

(1,530

)

Transfers to and from separate accounts, net

 

(686

)

 

(356

)

Common stock issued for benefit plans

 

(9

)

 

29

 

Repurchase of common stock

 

 -

 

 

(200

)

Dividends paid to common stockholders

 

(72

)

 

(65

)

Net cash provided by (used in) financing activities

 

1,084

 

 

591

 



 

 

 

 

 

 

Net increase (decrease) in cash, invested cash and restricted cash

 

629

 

 

(799

)

Cash, invested cash and restricted cash as of beginning-of-year

 

1,628

 

 

2,722

 

Cash, invested cash and restricted cash as of end-of-period

$

2,257

 

$

1,923

 







 

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 15 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 primarily 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, 2017 (“2017 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 2017 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 months ended March 31, 2018, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018.  All material inter-company accounts and transactions have been eliminated in consolidation.







4


 

 

2.  New Accounting Standards



Adoption of New Accounting Standards



The following table provides a description of our adoption of new Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board and the impact of the adoption on our financial statements.  ASUs not listed below were assessed and determined to be either not applicable or not material in presentation or amount.







 

 

 

Standard

Description

Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2014-09, Revenue from Contracts with Customers and all related amendments

This standard establishes the core principle of recognizing revenue to depict the transfer of promised goods and services and defines a five-step process that systematically identifies the various components of the revenue recognition process, culminating with the recognition of revenue upon satisfaction of an entity’s performance obligation.  Although the standard and all related amendments supersede nearly all existing revenue recognition guidance under GAAP, the guidance does not amend the accounting for insurance and investment contracts recognized in accordance with Accounting Standards Codification (“ASC”) Topic 944, Financial Services – Insurance, leases, financial instruments and guarantees. 

January 1, 2018

We adopted the standard and all related amendments using the modified retrospective method.  Our primary sources of revenue are recognized in accordance with ASC Topic 944, Financial Services – Insurance; as such, revenue within the scope of the new standard primarily includes commissions and advisory fees earned by our broker dealer operation.  The adoption did not have a material impact on our consolidated financial condition, results of operations, stockholders’ equity or cash flows.  There were no material changes in the timing or measurement of revenues based upon the guidance.  As a result, there is no cumulative effect on retained earnings.  For more information, see Note 15.



 

 

 



 

 

 



 

 

 

Standard

Description

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 the period of the change in fair value.  In addition, the amendments include certain enhancements to the presentation and disclosure requirements for financial assets and financial liabilities.  The guidance does not apply to Federal Home Loan Bank (“FHLB”) Stock.  Early adoption of the ASU is generally not permitted, except as defined in the ASU.  The amendments were adopted in the financial statements through a cumulative-effect adjustment to the beginning balance of retained earnings in the period of adoption. 

January 1, 2018

At the time of adoption, we had equity securities classified as available-for-sale (“AFS”) with a total carrying value of $246 million.  We classified, prospectively, $110 million of equity securities within the scope of this ASU in a separate line on our Consolidated Balance Sheets.  The remaining securities, consisting of $136 million of FHLB stock, are classified in other investments on our Consolidated Balance Sheet and carried at cost. The cumulative-effect adjustment of adopting this ASU was $1 million.

ASU 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income

These amendments require a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects associated with the change in the federal corporate income tax rate in the Tax Cuts and Jobs Act (“Tax Act”) of 2017.  The amount of the reclassification is equal to the impact of the change in deferred taxes related to amounts recorded in accumulated other comprehensive income (loss) (“AOCI”) resulting from the change in the statutory corporate tax rate from 35% to 21%.  Early adoption is permitted and retrospective application is required. 

January 1, 2018

We retrospectively reclassified $641 million of stranded tax effects from AOCI to retained earnings in the period of adoption.



5


 

 

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 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 continue to gather information to determine our leases that are within the scope of this standard.  We do not expect there to be a significant difference in our pattern of lease expense recognition under this ASU.

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, mortgage loans and reinsurance recoverables.

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 2017-12, Targeted Improvements to Accounting for Hedging Activities

These amendments change both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.  These amendments retain the threshold of highly effective for hedging relationships, remove the requirement to bifurcate between the portions of the hedging relationship that are effective and ineffective, record hedge item and hedging instrument results in the same financial statement line item, require quantitative assessment initially for all hedging relationships unless the hedging relationship meets the definition of either the shortcut method or critical terms match method and allow the contractual specified index rate to be designated as the hedged risk in a cash flow hedge of interest rate risk of a variable rate financial instrument.  These amendments also eliminate the benchmark interest rate concept for variable rate instruments.  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. 

 

3. Acquisition



As previously announced, on May 1, 2018,  The Lincoln National Life Insurance Company (“LNL”) and LNC completed the previously disclosed acquisition of all of the issued and outstanding capital stock of Liberty Life Assurance Company of Boston (“Liberty Life”), which operated Liberty’s group benefits business (the “Liberty Group Business”) and individual life and individual and group annuity business (the “Liberty Life Business”).



The acquisition was completed pursuant to a Master Transaction Agreement (the “Master Transaction Agreement”) with Liberty Mutual Insurance Company (“LMIC”), Liberty Mutual Fire Insurance Company (together with LMIC, “Sellers”), for the limited purposes set forth therein, Liberty Mutual Group Inc. (“Liberty”), Protective Life Insurance Company (“Reinsurer”), and for the limited purposes set forth therein, Protective Life Corporation, which Master Transaction Agreement was attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 22, 2018.



Additionally, pursuant to the Master Transaction Agreement, Liberty Life entered into reinsurance agreements (the “Reinsurance Agreements”) and related ancillary documents with each of Reinsurer and Protective Life and Annuity Insurance Company (together with Reinsurer, “Reinsurers”) at the closing of the transaction.  On the terms and subject to the conditions of the Reinsurance Agreements, Liberty Life ceded to Reinsurers, effective as of May 1, certain insurance policies relating to the Liberty Life Business.  To support their obligations under the Reinsurance Agreements, Reinsurers have established trust accounts for the benefit of LNL.



4.  Variable Interest Entities



Consolidated VIEs



See Note 4 in our 2017 Form 10-K for a detailed discussion of our consolidated variable interest entities (“VIEs”), which information is incorporated herein by reference.



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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of March 31, 2018

 

 

As of December 31, 2017

 



 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 



 

of

 

 

Notional

 

Carrying

 

 

of

 

 

Notional

 

Carrying

 



Instruments

 

Amounts

 

Value

 

Instruments

 

Amounts

 

Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total return swap

 

 

 

 

 

562 

 

 

 -

 

 

 

 

 

 

573 

 

 

 -

 

Total assets

 

 

 

 

$

562 

 

$

 -

 

 

 

 

 

$

573 

 

$

 -

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of March 31, 2018 and December 31, 2017, there were no gains or losses for consolidated VIEs recognized on our Consolidated Statements of Comprehensive Income (Loss).



Unconsolidated VIEs



See Note 4 in our 2017 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 $1.6 billion and $1.5 billion as of March  31, 2018 and December 31, 2017, respectively.  Included in these carrying amounts are our investments in qualified affordable housing projects, which were $29 million and $31 million as of March  31, 2018, and December 31, 2017, 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 benefits of less than $1 million for the three months ended March 31, 2018 and 2017, 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 March 31, 2018.  



6


 

 

5.  Investments



AFS Securities



See Note 1 in our 2017 Form 10-K for information regarding our accounting policy relating to AFS securities, which also includes additional disclosures regarding our fair value measurements.  In addition, we adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, in 2018 that resulted in a new classification and measurement of our equity securities.  See Note 2 for additional information.



The amortized cost, gross unrealized gains, losses and other-than-temporary impairment (“OTTI”) and fair value of AFS securities (in millions) were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of March 31, 2018

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

76,036

 

$

4,647

 

$

932

 

$

(8

)

$

79,759

 

Asset-backed securities ("ABS")

 

868

 

 

46

 

 

8

 

 

(15

)

 

921

 

U.S. government bonds

 

373

 

 

31

 

 

3

 

 

 -

 

 

401

 

Foreign government bonds

 

394

 

 

46

 

 

 -

 

 

 -

 

 

440

 

Residential mortgage-backed securities ("RMBS")

 

3,291

 

 

132

 

 

72

 

 

(23

)

 

3,374

 

Commercial mortgage-backed securities ("CMBS")

 

669

 

 

5

 

 

14

 

 

(3

)

 

663

 

Collateralized loan obligations ("CLOs")

 

872

 

 

1

 

 

3

 

 

(5

)

 

875

 

State and municipal bonds

 

4,190

 

 

820

 

 

10

 

 

 -

 

 

5,000

 

Hybrid and redeemable preferred securities

 

574

 

 

72

 

 

20

 

 

 -

 

 

626

 

Total AFS securities

$

87,267

 

$

5,800

 

$

1,062

 

$

(54

)

$

92,059

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2017

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

75,701

 

$

6,862

 

$

354

 

$

(7

)

$

82,216

 

ABS

 

903

 

 

51

 

 

7

 

 

(27

)

 

974

 

U.S. government bonds

 

527

 

 

41

 

 

1

 

 

 -

 

 

567

 

Foreign government bonds

 

395

 

 

56

 

 

 -

 

 

 -

 

 

451

 

RMBS

 

3,327

 

 

155

 

 

39

 

 

(22

)

 

3,465

 

CMBS

 

590

 

 

10

 

 

2

 

 

(2

)

 

600

 

CLOs

 

803

 

 

2

 

 

2

 

 

(5

)

 

808

 

State and municipal bonds

 

4,172

 

 

953

 

 

6

 

 

 -

 

 

5,119

 

Hybrid and redeemable preferred securities

 

575

 

 

87

 

 

22

 

 

 -

 

 

640

 

Total fixed maturity securities

 

86,993

 

 

8,217

 

 

433

 

 

(63

)

 

94,840

 

Equity AFS securities

 

247

 

 

16

 

 

17

 

 

 -

 

 

246

 

Total AFS securities

$

87,240

 

$

8,233

 

$

450

 

$

(63

)

$

95,086

 



(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.



7


 

 

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of March 31, 2018, were as follows:





 

 

 

 

 

 



 

 

 

 

 

 



Amortized

 

Fair

 



Cost

 

Value

 

Due in one year or less

$

3,468 

 

$

3,503 

 

Due after one year through five years

 

18,142 

 

 

18,473 

 

Due after five years through ten years

 

16,434 

 

 

16,626 

 

Due after ten years

 

43,523 

 

 

47,624 

 

Subtotal

 

81,567 

 

 

86,226 

 

Structured securities (ABS, MBS, CLOs)

 

5,700 

 

 

5,833 

 

Total fixed maturity AFS securities

$

87,267 

 

$

92,059 

 



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 other comprehensive income (loss) (“OCI”), of AFS securities (dollars in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of March 31, 2018

 

 

Less Than or Equal

 

Greater Than

 

 

 

 

 

 

 

 



to Twelve Months

 

Twelve Months

 

Total

 



 

 

Gross 

 

 

 

Gross 

 

 

 

 

 

Gross 

 

 

 

Unrealized

 

Unrealized

 

 

 

Unrealized



Fair

Losses and

Fair

Losses and

Fair

 

Losses and



Value

 

OTTI

 

Value

 

OTTI

 

Value

 

 

OTTI

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

20,141 

 

$

510 

 

$

4,547 

 

$

424 

 

$

24,688 

 

 

$

934 

 

ABS

 

107 

 

 

 

 

141 

 

 

14 

 

 

248 

 

 

 

16 

 

U.S. government bonds

 

100 

 

 

 

 

18 

 

 

 

 

118 

 

 

 

 

RMBS

 

700 

 

 

20 

 

 

608 

 

 

53 

 

 

1,308 

 

 

 

73 

 

CMBS

 

450 

 

 

10 

 

 

59 

 

 

 

 

509 

 

 

 

14 

 

CLOs

 

547 

 

 

 

 

75 

 

 

 -

 

 

622 

 

 

 

 

State and municipal bonds

 

107 

 

 

 

 

100 

 

 

 

 

207 

 

 

 

10 

 

Hybrid and redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

preferred securities

 

36 

 

 

 

 

124 

 

 

19 

 

 

160 

 

 

 

20 

 

Total AFS securities

$

22,188 

 

$

549 

 

$

5,672 

 

$

524 

 

$

27,860 

 

 

$

1,073 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total number of AFS securities in an unrealized loss position

 

 

 

 

 

 

 

 

 

 

 

 

2,208 

 





8


 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2017

 

 

Less Than or Equal

 

Greater Than

 

 

 

 

 

 

 

 



to Twelve Months

 

Twelve Months

 

Total

 



 

 

Gross 

 

 

 

Gross 

 

 

 

 

 

Gross 

 

 

 

Unrealized

 

Unrealized

 

 

 

Unrealized



Fair

Losses and

Fair

Losses and

Fair

 

Losses and



Value

 

OTTI

 

Value

 

OTTI

 

Value

 

 

OTTI

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

4,854 

 

$

68 

 

$

4,893 

 

$

288 

 

$

9,747 

 

 

$

356 

 

ABS

 

62 

 

 

 

 

151 

 

 

15 

 

 

213 

 

 

 

16 

 

U.S. government bonds

 

156 

 

 

 -

 

 

19 

 

 

 

 

175 

 

 

 

 

RMBS