__________________________________________________________________________________________________________
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, 2019
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.)
__________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
Common Stock |
LNC |
New York Stock Exchange |
Warrants, each to purchase one share of common stock |
LNC.WS |
New York Stock Exchange |
__________________________________
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 every Interactive Data File required to be submitted 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 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.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ 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 29, 2019, there were 202,343,277 shares of the registrant’s common stock outstanding.
_________________________________________________________________________________________________________
Lincoln National Corporation
Table of Contents
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PART I
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1. |
1 | ||||
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2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
46 | |||
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46 | |||
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47 | |||
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47 | |||
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48 | |||
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71 | |||
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83 | |||
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3. |
87 | ||||
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4. |
87 | ||||
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PART II
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1. |
88 | ||||
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1A. |
88 | ||||
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2. |
88 | ||||
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6. |
88 | ||||
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89 | ||||
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90 | ||||
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
LINCOLN NATIONAL CORPORATION
(in millions, except share data)
|
As of |
As of |
||||||
March 31, |
December 31, |
|||||||
|
2019 |
2018 |
||||||
|
(Unaudited) |
|||||||
ASSETS |
||||||||
Investments: |
||||||||
Fixed maturity available-for-sale securities, at fair value (amortized cost: 2019 – $92,894; 2018 – $92,429) |
$ |
98,050 |
$ |
94,024 | ||||
Trading securities |
3,314 | 1,950 | ||||||
Equity securities |
153 | 99 | ||||||
Mortgage loans on real estate |
13,997 | 13,260 | ||||||
Policy loans |
2,498 | 2,509 | ||||||
Derivative investments |
981 | 1,107 | ||||||
Other investments |
2,752 | 2,267 | ||||||
Total investments |
121,745 | 115,216 | ||||||
Cash and invested cash |
1,593 | 2,345 | ||||||
Deferred acquisition costs and value of business acquired |
9,441 | 10,264 | ||||||
Premiums and fees receivable |
607 | 570 | ||||||
Accrued investment income |
1,184 | 1,119 | ||||||
Reinsurance recoverables |
17,660 | 17,748 | ||||||
Funds withheld reinsurance assets |
549 | 557 | ||||||
Goodwill |
1,778 | 1,782 | ||||||
Other assets |
16,373 | 15,713 | ||||||
Separate account assets |
143,369 | 132,833 | ||||||
Total assets |
$ |
314,299 |
$ |
298,147 | ||||
|
||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Liabilities |
||||||||
Future contract benefits |
$ |
34,009 |
$ |
34,648 | ||||
Other contract holder funds |
93,959 | 91,233 | ||||||
Short-term debt |
300 |
- |
||||||
Long-term debt |
5,572 | 5,839 | ||||||
Reinsurance related embedded derivatives |
177 | 3 | ||||||
Funds withheld reinsurance liabilities |
1,762 | 1,740 | ||||||
Payables for collateral on investments |
5,362 | 4,805 | ||||||
Other liabilities |
13,372 | 12,696 | ||||||
Separate account liabilities |
143,369 | 132,833 | ||||||
Total liabilities |
297,882 | 283,797 | ||||||
|
||||||||
Contingencies and Commitments (See Note 11) |
||||||||
|
||||||||
Stockholders’ Equity |
||||||||
Preferred stock – 10,000,000 shares authorized |
- |
- |
||||||
Common stock – 800,000,000 shares authorized; 202,987,229 and 205,862,760 shares |
||||||||
issued and outstanding as of March 31, 2019, and December 31, 2018, respectively |
5,285 | 5,392 | ||||||
Retained earnings |
8,679 | 8,551 | ||||||
Accumulated other comprehensive income (loss) |
2,453 | 407 | ||||||
Total stockholders’ equity |
16,417 | 14,350 | ||||||
Total liabilities and stockholders’ equity |
$ |
314,299 |
$ |
298,147 |
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, |
|||||
2019 |
2018 |
|||||
Revenues |
||||||
Insurance premiums |
$ |
1,446 |
$ |
777 | ||
Fee income |
1,475 | 1,456 | ||||
Net investment income |
1,251 | 1,233 | ||||
Realized gain (loss): |
||||||
Total other-than-temporary impairment losses on securities |
(23 |
) |
(2 |
) |
||
Portion of loss recognized in other comprehensive income |
15 |
- |
||||
Net other-than-temporary impairment losses on securities recognized in earnings |
(8 |
) |
(2 |
) |
||
Realized gain (loss), excluding other-than-temporary impairment losses on securities |
(354 |
) |
14 | |||
Total realized gain (loss) |
(362 |
) |
12 | |||
Amortization of deferred gain on business sold through reinsurance |
8 |
- |
||||
Other revenues |
147 | 131 | ||||
Total revenues |
3,965 | 3,609 | ||||
Expenses |
||||||
Interest credited |
678 | 653 | ||||
Benefits |
1,757 | 1,358 | ||||
Commissions and other expenses |
1,176 | 1,057 | ||||
Interest and debt expense |
71 | 91 | ||||
Strategic digitization expense |
15 | 15 | ||||
Total expenses |
3,697 | 3,174 | ||||
Income (loss) before taxes |
268 | 435 | ||||
Federal income tax expense (benefit) |
16 | 68 | ||||
Net income (loss) |
252 | 367 | ||||
Other comprehensive income (loss), net of tax |
2,046 | (1,639 |
) |
|||
Comprehensive income (loss) |
$ |
2,298 |
$ |
(1,272 |
) |
|
|
||||||
Net Income (Loss) Per Common Share |
||||||
Basic |
$ |
1.23 |
$ |
1.68 | ||
Diluted |
1.22 | 1.64 | ||||
|
||||||
Cash Dividends Declared Per Common Share |
$ |
0.37 |
$ |
0.33 |
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, |
|||||
|
2019 |
2018 |
||||
|
||||||
Common Stock |
||||||
Balance as of beginning-of-year |
$ |
5,392 |
$ |
5,693 | ||
Stock compensation/issued for benefit plans |
(5 |
) |
7 | |||
Retirement of common stock/cancellation of shares |
(102 |
) |
- |
|||
Balance as of end-of-period |
5,285 | 5,700 | ||||
|
||||||
Retained Earnings |
||||||
Balance as of beginning-of-year |
8,551 | 8,399 | ||||
Cumulative effect from adoption of new accounting standards |
- |
(642 |
) |
|||
Net income (loss) |
252 | 367 | ||||
Retirement of common stock |
(48 |
) |
- |
|||
Common stock dividends declared |
(76 |
) |
(72 |
) |
||
Balance as of end-of-period |
8,679 | 8,052 | ||||
|
||||||
Accumulated Other Comprehensive Income (Loss) |
||||||
Balance as of beginning-of-year |
407 | 3,230 | ||||
Cumulative effect from adoption of new accounting standards |
- |
642 | ||||
Other comprehensive income (loss), net of tax |
2,046 | (1,639 |
) |
|||
Balance as of end-of-period |
2,453 | 2,233 | ||||
Total stockholders’ equity as of end-of-period |
$ |
16,417 |
$ |
15,985 |
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, |
|||||
|
2019 |
2018 |
||||
Cash Flows from Operating Activities |
||||||
Net income (loss) |
$ |
252 |
$ |
367 | ||
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 |
(70 |
) |
6 | |||
Trading securities purchases, sales and maturities, net |
(1,209 |
) |
39 | |||
Change in premiums and fees receivable |
(37 |
) |
(84 |
) |
||
Change in accrued investment income |
(65 |
) |
(59 |
) |
||
Change in future contract benefits and other contract holder funds |
(348 |
) |
(104 |
) |
||
Change in reinsurance related assets and liabilities |
(299 |
) |
(113 |
) |
||
Change in accrued expenses |
(56 |
) |
(41 |
) |
||
Change in federal income tax accruals |
16 | 68 | ||||
Realized (gain) loss |
362 | (12 |
) |
|||
Amortization of deferred gain on business sold through reinsurance |
(8 |
) |
- |
|||
Other |
131 | 73 | ||||
Net cash provided by (used in) operating activities |
(1,331 |
) |
140 | |||
|
||||||
Cash Flows from Investing Activities |
||||||
Purchases of available-for-sale securities and equity securities |
(4,404 |
) |
(2,020 |
) |
||
Sales of available-for-sale securities and equity securities |
2,381 | 427 | ||||
Maturities of available-for-sale securities |
1,456 | 1,368 | ||||
Purchases of alternative investments |
(174 |
) |
(63 |
) |
||
Sales and repayments of alternative investments |
32 | 31 | ||||
Issuance of mortgage loans on real estate |
(1,103 |
) |
(546 |
) |
||
Repayment and maturities of mortgage loans on real estate |
242 | 261 | ||||
Issuance and repayment of policy loans, net |
11 | 11 | ||||
Net change in collateral on investments, derivatives and related settlements |
488 | (32 |
) |
|||
Other |
(62 |
) |
(32 |
) |
||
Net cash provided by (used in) investing activities |
(1,133 |
) |
(595 |
) |
||
|
||||||
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 |
4,042 | 2,765 | ||||
Withdrawals of fixed account values, including the fixed portion of variable |
(1,570 |
) |
(1,498 |
) |
||
Transfers to and from separate accounts, net |
(507 |
) |
(686 |
) |
||
Common stock issued for benefit plans |
(26 |
) |
(9 |
) |
||
Repurchase of common stock |
(150 |
) |
- |
|||
Dividends paid to common stockholders |
(77 |
) |
(72 |
) |
||
Net cash provided by (used in) financing activities |
1,712 | 1,084 | ||||
|
||||||
Net increase (decrease) in cash, invested cash and restricted cash |
(752 |
) |
629 | |||
Cash, invested cash and restricted cash as of beginning-of-year |
2,345 | 1,628 | ||||
Cash, invested cash and restricted cash as of end-of-period |
$ |
1,593 |
$ |
2,257 |
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 14 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. As discussed in Note 3, on May 1, 2018, LNC and The Lincoln National Life Insurance Company (“LNL”) completed the acquisition of Liberty Life Assurance Company of Boston (“Liberty Life”). 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, 2018 (“2018 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 2018 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, 2019, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019. 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 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 insignificant in presentation or amount.
|
|
|
|
Standard |
Description |
Date of Adoption |
Effect on Financial Statements or Other Significant Matters |
ASU 2016-02, Leases and all related amendments |
This standard establishes a new accounting model for leases. Lessees will recognize most leases on the balance sheet as a right-of-use (“ROU”) 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 ROU 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 adopted this standard and all related amendments, which resulted in the recognition of $207 million in ROU assets and $214 million in operating lease liabilities reported in other assets and other liabilities, respectively, on our Consolidated Balance Sheets as of January 1, 2019. Comparative periods continue to be measured and presented under historical guidance, and only the period of adoption is subject to this ASU. Also, on transition, we have elected not to reassess: 1) whether expired or existing contracts contain a lease under the new definition of a lease; 2) lease classification for expired or existing leases; and 3) whether previously capitalized initial direct costs would qualify for capitalization under this ASU. Additionally, there is not a significant difference in our pattern of lease expense recognition under this ASU, and there is no impact on cash flows. For more information, see Note 11. |
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 adopted the provisions of this ASU, which did not result in a change to our existing practices; therefore, no cumulative effect adjustment was recorded. As such, there was no impact 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 adopted the provisions of this ASU, which did not have an impact on our consolidated financial condition and results of operations. This ASU does result in our modification of certain hedge documentation and effectiveness methods, which we have reflected in applicable disclosures in Note 6. |
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 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 available-for-sale (“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 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts |
These amendments make changes to the accounting and reporting for long-duration contracts issued by an insurance entity that will significantly change how insurers account for long-duration contracts, including how they measure, recognize and make disclosures about insurance liabilities and deferred acquisition costs (“DAC”). Under this ASU, insurers will be required to review cash flow assumptions at least annually and update them if necessary. They also will have to make quarterly updates to the discount rate assumptions they use to measure the liability for future policyholder benefits. The ASU creates a new category of market risk benefits (i.e., features that protect the contract holder from capital market risk and expose the insurer to that risk) that insurers will have to measure at fair value. The ASU provides various transition methods by topic that entities may elect upon adoption. Early adoption is permitted. |
January 1, 2021 |
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. |
On May 1, 2018, we completed the acquisition of 100% of the capital stock of Liberty Life, which operates a group benefits business (“Liberty Group Business”) and individual life and individual and group annuity business (the “Liberty Life Business”), from Liberty Mutual Insurance Company in a transaction accounted for under the acquisition method of accounting pursuant to Business Combinations Topic 805 (“Topic 805”). The acquisition expanded the scale and capabilities of the Group Protection business while further diversifying the Company’s sources of earnings.
In connection with the acquisition and pursuant to the Master Transaction Agreement (“MTA”), dated January 18, 2018, which was attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 22, 2018, Liberty Life sold the Liberty Life Business on May 1, 2018, by entering into reinsurance agreements and related ancillary documents (including administrative services agreements and transition services agreements) with Protective Life Insurance Company and its wholly-owned subsidiary, Protective Life and Annuity Insurance Company (together with Protective Life Insurance Company, “Protective”), providing for the reinsurance and administration of the Liberty Life Business.
The acquisition date fair values of certain assets and liabilities, including future contract benefits, intangible assets and related weighted average expected lives, commercial mortgage loans, reinsurance recoverables and deferred income taxes, are provisional and subject to
7
revision within one year of the acquisition date. Since the May 1, 2018 acquisition date, we have adjusted provisional assets acquired by $(5) million and provisional liabilities acquired by $23 million for an increase in provisional goodwill of $28 million. Under the terms of the MTA, a final balance sheet will be agreed upon at a later date. As such, our estimates of fair values are pending finalization, which may result in adjustments to goodwill. The following table presents the preliminary fair values (in millions) of the net assets acquired related to the Liberty Group Business as of March 31, 2019:
|
|||
|
Preliminary |
||
|
Fair Value |
||
Assets |
|||
Investments |
$ |
2,493 | |
Mortgage loans on real estate |
658 | ||
Cash and invested cash |
107 | ||
Reinsurance recoverables |
76 | ||
Premiums and fees receivable |
83 | ||
Accrued investment income |
24 | ||
Other intangible assets acquired |
640 | ||
Other assets acquired |
142 | ||
Separate account assets |
99 | ||
Total assets acquired |
$ |
4,322 | |
|
|||
Liabilities |
|||
Future contract benefits |
$ |
2,930 | |
Other contract holder funds |
46 | ||
Other liabilities acquired |
140 | ||
Separate account liabilities |
99 | ||
Total liabilities assumed |
$ |
3,215 | |
|
|||
Net identifiable assets acquired |
$ |
1,107 | |
Goodwill |
410 | ||
Net assets acquired |
$ |
1,517 |
Financial Information
The following unaudited pro forma condensed consolidated results of operations of the Company assume that the acquisition of Liberty Life was completed on January 1, 2017 (in millions):
|
|||||
|
For the Three |
||||
|
Months Ended |
||||
|
March 31, |
||||
|
2018 |
||||
Revenue |
$ |
4,165 | |||
Net income |
378 |
Pro forma adjustments include the revenue and net income of the acquired business for each period as well as amortization of identifiable intangible assets acquired and the fair value adjustment to acquired insurance reserves and investments. Other pro forma adjustments include the incremental increase to interest expense attributable to financing the acquisition, and the impact of reflecting acquisition and integration costs and investment expenses directly attributable to the business combination in 2017 instead of in 2018. Pro forma adjustments do not include retrospective adjustments to defer and amortize acquisition costs as would be recorded under our accounting policy.
8
4. Variable Interest Entities
Consolidated VIEs
Asset information (dollars in millions) for the consolidated variable interest entities (“VIEs”) included on our Consolidated Balance Sheets was as follows:
|
||||||||||||||||||||||
|
||||||||||||||||||||||
|
As of March 31, 2019 |
As of December 31, 2018 |
||||||||||||||||||||
|
Number |
Number |
||||||||||||||||||||
|
of |
Notional |
Carrying |
of |
Notional |
Carrying |
||||||||||||||||
|
Instruments |
Amounts |
Value |
Instruments |
Amounts |
Value |
||||||||||||||||
Assets |
||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||
Total return swap |
1 |
$ |
587 |
$ |
- |
1 |
$ |
600 |
$ |
- |
||||||||||||
Total assets |
1 |
$ |
587 |
$ |
- |
1 |
$ |
600 |
$ |
- |
||||||||||||
|
As of March 31, 2019, and December 31, 2018, there were no gains or losses for consolidated VIEs recognized on our Consolidated Statements of Comprehensive Income (Loss).
Unconsolidated VIEs
Structured Securities
Through our investment activities, we make passive investments in structured securities issued by VIEs for which we are not the manager. These structured securities include our asset-backed securities (“ABS”), residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and collateralized loan obligations (“CLOs”). We have not provided financial or other support with respect to these VIEs other than our original investment. We have determined that we are not the primary beneficiary of these VIEs due to the relative size of our investment in comparison to the principal amount of the structured securities issued by the VIEs and the level of credit subordination that reduces our obligation to absorb losses or right to receive benefits. Our maximum exposure to loss on these structured securities is limited to the amortized cost for these investments. We recognize our variable interest in these VIEs at fair value on our Consolidated Balance Sheets. For information about these structured securities, see Note 5.
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 $1.8 billion and $1.7 billion as of March 31, 2019, and December 31, 2018, respectively. Included in these carrying amounts are our investments in qualified affordable housing projects, which were $18 million and $20 million as of March 31, 2019, and December 31, 2018, 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, 2019 and 2018, 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, 2019.
9
5. Investments
Fixed Maturity AFS Securities
The amortized cost, gross unrealized gains, losses and other-than-temporary impairment (“OTTI”) and fair value of fixed maturity AFS securities (in millions) were as follows:
|
|||||||||||||||
|
As of March 31, 2019 |
||||||||||||||
|
Amortized |
Gross Unrealized |
Fair |
||||||||||||
|
Cost |
Gains |
Losses |
OTTI (1) |
Value |
||||||||||
Fixed maturity AFS securities: |
|||||||||||||||
Corporate bonds |
$ |
79,243 |
$ |
4,813 |
$ |
838 |
$ |
10 |
$ |
83,208 | |||||
ABS |
990 | 46 | 6 | (17 |
) |
1,047 | |||||||||
U.S. government bonds |
387 | 37 | 1 |
- |
423 | ||||||||||
Foreign government bonds |
403 | 50 |
- |
- |
453 | ||||||||||
RMBS |
3,296 | 142 | 42 | (18 |
) |
3,414 | |||||||||
CMBS |
868 | 16 | 3 | (4 |
) |
885 | |||||||||
CLOs |
2,439 | 4 | 11 | (5 |
) |
2,437 | |||||||||
State and municipal bonds |
4,687 | 890 | 8 |
- |
5,569 | ||||||||||
Hybrid and redeemable preferred securities |
581 | 57 | 24 |
- |
614 | ||||||||||
Total fixed maturity AFS securities |
$ |
92,894 |
$ |
6,055 |
$ |
933 |
$ |
(34 |
) |
$ |
98,050 |
|
|||||||||||||||
|
As of December 31, 2018 |
||||||||||||||
|
Amortized |
Gross Unrealized |
Fair |
||||||||||||
|
Cost |
Gains |
Losses |
OTTI (1) |
Value |
||||||||||
Fixed maturity AFS securities: |
|||||||||||||||
Corporate bonds |
$ |
79,623 |
$ |
2,980 |
$ |
2,263 |
$ |
(8 |
) |
$ |
80,348 | ||||
ABS |
916 | 42 | 6 | (14 |
) |
966 | |||||||||
U.S. government bonds |
390 | 29 | 2 |
- |
417 | ||||||||||
Foreign government bonds |
406 | 42 |
- |
- |
448 | ||||||||||
RMBS |
3,308 | 118 | 67 | (14 |
) |
3,373 | |||||||||
CMBS |
811 | 6 | 16 | (3 |
) |
804 | |||||||||
CLOs |
1,746 | 3 | 24 | (5 |
) |
1,730 | |||||||||
State and municipal bonds |
4,647 | 716 | 18 |
- |
5,345 | ||||||||||
Hybrid and redeemable preferred securities |
582 | 45 | 34 |
- |
593 | ||||||||||
Total fixed maturity AFS securities |
$ |
92,429 |
$ |
3,981 |
$ |
2,430 |
$ |
(44 |
) |
$ |
94,024 |
(1) |
Includes unrealized (gains) and losses on credit-impaired securities related to changes in the fair value of such securities subsequent to the impairment measurement date. |
The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of March 31, 2019, were as follows:
|
||||||
|
Amortized |
Fair |
||||
|
Cost |
Value |
||||
Due in one year or less |
$ |
3,610 |
$ |
3,614 | ||
Due after one year through five years |
16,276 | 16,590 | ||||
Due after five years through ten years |
17,902 | 18,499 | ||||
Due after ten years |
47,513 | 51,564 | ||||
Subtotal |
85,301 | 90,267 | ||||
Structured securities (ABS, MBS, CLOs) |
7,593 | 7,783 | ||||
Total fixed maturity AFS securities |
$ |
92,894 |
$ |
98,050 |
Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.
10
The fair value and gross unrealized losses, including the portion of OTTI recognized in other comprehensive income (loss) (“OCI”), of fixed maturity 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, 2019 |
||||||||||||||||||
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 |
$ |
4,831 |
$ |
164 |
$ |
14,492 |
$ |
692 |
$ |
19,323 |
$ |
856 | |||||||
ABS |
74 | 1 | 176 | 13 | 250 | 14 | |||||||||||||
U.S. government bonds |
6 |
- |
28 | 1 | 34 | 1 | |||||||||||||
RMBS |
55 | 1 | 942 | 42 | 997 | 43 | |||||||||||||
CMBS |
10 |
- |
297 | 3 | 307 | 3 | |||||||||||||
CLOs |
771 | 5 | 281 | 6 | 1,052 | 11 | |||||||||||||
State and municipal bonds |
156 | 1 | 135 | 7 | 291 | 8 | |||||||||||||
Hybrid and redeemable |
|||||||||||||||||||
preferred securities |
12 | 2 | 151 | 22 | 163 | 24 | |||||||||||||
Total fixed maturity AFS securities |
$ |
5,915 |
$ |
174 |
$ |
16,502 |
$ |
786 |
$ |
22,417 |
$ |
960 | |||||||
|
|||||||||||||||||||
Total number of fixed maturity AFS securities in an unrealized loss position |
1,881 |
|
|||||||||||||||||||
|
As of December 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 |